Abstract
In the long-term, crude oil prices may impact the economic stability and sustainability of many countries, especially those depending on oil imports. This study thus suggests an alternative model for accurately forecasting oil prices while reflecting structural changes in the oil market by using a Bayesian approach. The prior information is derived from the recent and expected structure of the oil market, using a subjective approach, and then updated with available market data. The model includes as independent variables factors affecting oil prices, such as world oil demand and supply, the financial situation, upstream costs, and geopolitical events. To test the model’s forecasting performance, it is compared with other models, including a linear ordinary least squares model and a neural network model. The proposed model outperforms on the forecasting performance test even though the neural network model shows the best results on a goodness-of-fit test. The results show that the crude oil price is estimated to increase to $169.3/Bbl by 2040.
Highlights
Oil prices and oil price volatility both play important roles in affecting the global economy, the effects are asymmetric depending on periods, regions, sectors, reason of oil shock, and others
The general relationship between the crude oil price and world oil demand is that an increase in oil demand causes oil prices to rise while a decrease in oil demand leads to an oil price fall
This study developed a model to forecast long-term oil prices that takes into account changes in the oil market and can inform government policies and business decision-making
Summary
Oil prices and oil price volatility both play important roles in affecting the global economy, the effects are asymmetric depending on periods, regions, sectors, reason of oil shock, and others. Sadorsky [1], Barsky and Kilian [2], Kilian [3], Segal [4], Morana [5], and Kilian and Murphy [6] present a good account of these different views. Through this debate, several studies found that higher oil prices have an adverse impact on the global economy [5,7,8]. In order to make appropriate decisions about the direction of economic policy, it is important to accurately forecast future oil prices with effective models [11]
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