Reasonable Predictions of Oil Prices: Why is it So Difficult?

Abstract

The beginning of the 21st century was marked with another petroleum boom and bust cycle. Oil prices were hovering around $18-20/bbl through most of the 1990s, after which crude prices collapsed to $10/bbl in 1998 and 1999. Soon thereafter oil prices began a steady and, at times, sharp rise on the way to $147/bbl in July 2008. This climb was followed by an abrupt decline after the onset of the global “Lehman” economic crises in September 2008 driving down the crude oil price to as low as $32/bbl in December 2008. After a relatively swift recovery, another oil shock “market share” took place in 2014-2016; average oil prices plunged from $108/bbl in the second quarter of 2014 to $30/bbl in the first quarter of 2016. Brent started 2018 with an average price of $69/bbl in January reaching up to $85/bbl during October 2018; since then, however, oil prices were dwindling from $80/bbl to $51/bbl by 2018 year-end. The 2019 started with Brent oil prices around the $55-$65/bbl range. The rapid increase in the oil price and its sudden and dramatic decline raises a fundamental question about the oil industry: Why is it so difficult to accurately predict the price of oil?