Econometric models for oil price forecasting: a critical survey

Authors: Frey G., Manera M., Markandya A., Scarpa E.

Journal: CESifo Forum

Publisher: CESifo

Year: 2009

Volume: 1

Pages: 29-44

ISSN: 1615-245X



In the last two years the price of oil and its fluctuations have reached levels never recorded in the history of international oil markets. In 2007, the West Texas Intermediate (WTI) oil price, one of the most important benchmarks for crude oil prices, averaged around 72 $/b, while in 2008 the WTI price was around 100 $/b, with an increase of nearly 38 percent over the previous year. Within the past six months, WTI daily spot prices ranged from almost 150 $/b in early July to about 30 $/b towards the end of 2008. The determinants of past, current, and future levels of the price of oil and its fluctuations have been the subject of analysis by academics and energy experts, given the relevance of crude oil in the worldwide economy. Although the share of liquid fuels in marketed world energy consumption is expected to decline from 37 percent in 2005 to 33 percent in 2030, and projected high oil prices will induce many consumers to switch from liquid fuels when feasible, oil will remain the most important source of energy, and liquid fuel consumption is expected to increase at an average annual rate of 1.2 percent from 2005 to 2030 (EIA 2008). The crucial question of whether oil prices will rise in the future or will decline again is timely. According to EIA (2009), for example, under current economic and world crude oil supply assumptions, WTI prices are expected to average 43 $/b in 2009 and 55 $/b in 2010.The possibility of a milder recession or a faster economic recovery, lower non-OPEC production in response to current low oil prices and financial market constraints, and more aggressive action to lower production by OPEC countries could result in a faster and stronger recovery in oil prices. Consequently, it is extremely important for economists to provide accurate answers to the complex problem of forecasting oil prices. This study aims at investigating the existing econometric literature on forecasting oil prices. In particular, we (i) develop a taxonomy of econometric models for oil price forecasting; (ii) provide a critical interpretation of the different methodologies; and (iii) offer a comprehensive interpretation and justification of the heterogeneous empirical findings in published oil price forecasts. The paper is structured as follows: we first introduce the historical framework which is necessary to understand oil price dynamics. The following section discusses and critically evaluates the different econometric models for oil price forecasting proposed in the literature. Finally we comment on alternative criteria for evaluating and comparing different forecasting models for oil prices. (more on