by Open Science Repository Economics
(January, 2013)
Abstract: Most energy-consuming economic activities in the world are dependent on the energy source from crude oil. And one of the characteristics of the price of crude oil is its high scale of wavering that can directly or indirectly affect the economic progress of both oil exporter and importer nations. The main aim of this study is to assess the fluctuations of monthly average price of crude oil and its shock at the international market using the daily recorded data from 1st Jan 2003 to 30th Nov 2011 from OPEC. Autoregressive Moving Average model with exogenous inputs model (ARMAX) is used as an empirical model. The result of the study reveals that the ARMAX (2,0) discrete stochastic model captures the fluctuation of the log-transformed monthly mean price with exogenous inputs of annual-time specific effects. This shows that once the price of the crude oil is set, its effect goes up to two month. In normal conditions we expect that the price shock is higher at higher price of the commodity. However, astonishingly, the monthly average price of crude oil and the price shock at the international market are found to be uncorrelated. The ARIMAX (2,2,1) discrete stochastic model captures the fluctuation of the log-transformed price shock on crude oil with harmonic variations of sine wave of amplitude $1.35 month after month. In general, the problem of handling the fluctuation of the price of crude oil at the international market is not only attributed to unorthodoxies from the mean but also problems of price shocks emanating from unknown factors from either exporters or importer nations.
Keywords: Galton distribution, price of crude oil, price shock, ARMAX models.