2
$\begingroup$

What is the best way to model fossil fuel prices? I am trying to build an energy-economic model and changes in fuel prices are an important part of the model. I need to know how to model them. Any ideas?

I would like to forecast the changes in fossil fuel price (oil and gas basically). As this is part of an energy model which takes into account those economical trends

$\endgroup$
2
  • $\begingroup$ An energy economic model seems interesting. Can you describe it a little more? $\endgroup$ – Fix.B. Mar 30 '16 at 22:28
  • $\begingroup$ Yes I would like to forecast the changes in fossil fuel price (oil and Gas basically) ? As this is part of an energy model which takes into account those economical trends. $\endgroup$ – JZF Mar 31 '16 at 7:50
2
$\begingroup$

You are not going to be able to forecast oil and gas prices with any useful accuracy at all. Lots of people try, and as far as we know, every one of them has failed. If anyone has ever succeeded, then they've become extremely rich through it, and they're not telling anyone the secret. If you did succeed, then your energy economics model would be completely irrelevant to you, as you'd be too busy trading the oil market, and eyeing up which tropical island you should buy next.

The best you can hope for is consistency in your model. And then sensitivity-test your model based on a broad range of assumptions.
For example, my usual 95% credible range for the price of a barrel of oil in 2030 is USD(2016) 5-500.

So, what do you look for, for consistency? Demand and supply. Have short-run and long-run curves for both. If you're forecasting more than five years ahead, you must have some kind of uptake model for substitutes too, as well as short-run and long-run supply curves for them. Depending on how complex your model is, you might want to model storage too, particularly if modelling in less than 5-year time steps.

$\endgroup$
1
$\begingroup$

Principles to take into account:

A) Price elasticity: Demand for fuel is very inelastic because its relatively hard to store and the machinery installed to use it is very much fixed. Therefore, the price is likely to vary a lot with supply and demand changes.

B) Exogenous shocks: To a large extent, the price of fuel is determined by shocks that are mostly exogenous to most world economies. These are political shocks in countries that are big oil suppliers, like Venezuela or Nigeria o Iran. These might decide to produce more or less depending on their own political issues, regardless of profitability or the state of the world economy.

C) Large macro impact: The "stagflation" episodes of the 70's and 80's in the Us can be attributed to shocks to the price of oil. Apparently, in those times the Us economy could be measurably impacted by changes in the international price of oil.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.