In modern world, oil is considered as the prime energy source. According to the statistics, in 2003, the daily consumption of crude oil was estimated to be around 87 million barrels- higher than any other source of energy (Ramirez et. al, 2003, pp. 583). A major portion of the world's energy consumption comes in the form of natural gas and crude oil. Sudden fluctuations in oil prices are believed to have a major impact on the economy. Predicting oil prices with accuracy plays a vital role in determining the economic stability of a country. Crude oil is regarded as one of the most important resource in today's world (Hyne, 2001, pp. 11).
Forecasting oil prices plays a vital role in the economic growth and stability of a country. Petroleum is a vital resource and affects the price fluctuations of other commodities as well. For instance, if the petroleum prices go up it is often followed by an increase in food items, transportation etc. Many third world countries rely on the petroleum taxes for their survival. In the recent years, the fluctuations in oil prices led to inflation and economic instability in many parts of the world. The effects of such fluctuations were also evident in the developed world i.e. United States, England etc. Different models are used for its prediction. However, there seems to be a growing disagreement among professionals on the best method to predict oil prices.
Due to the vitality of the issue, many theories and models have been put forward for predicting crude oil prices. However, the supply-demand relationship is the prime factor in determining crude oil prices in the long run (Hagen & Stevens, 1995, pp. 127, pp. 861). Another major attribute of petroleum is its affect on the gold price, exchange rates and stock prices in a country. Also, political instability and unseen natural disasters are also believed to influence oil prices around the world. In recent years, the fluctuations in oil prices have been attributed to a variety of driving factors mentioned above.
For the determination of crude oil prices, different econometric and statistical techniques have been used in the past. Some of the most common techniques include: GARCH/ARCH, linear regression and Vector auto-regression (VAR) models (Margulies et. al, 2005, pp. 376). A decent econometric model to predict crude oil prices was put forward by Huntington in 1994. On the ...