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Forecasting Long-Term Crude Oil Prices Using a Bayesian Model with Informative Priors

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  • Chul-Yong Lee

    () (Korea Energy Economics Institute (KEEI), 405-11 Jongga-ro, Jung-gu, Ulsan 44543, Korea)

  • Sung-Yoon Huh

    () (Haas School of Business, University of California Berkeley, 2220 Piedmont Avenue, Berkeley, CA 94720, USA)

Abstract

In the long-term, crude oil prices may impact the economic stability and sustainability of many countries, especially those depending on oil imports. This study thus suggests an alternative model for accurately forecasting oil prices while reflecting structural changes in the oil market by using a Bayesian approach. The prior information is derived from the recent and expected structure of the oil market, using a subjective approach, and then updated with available market data. The model includes as independent variables factors affecting oil prices, such as world oil demand and supply, the financial situation, upstream costs, and geopolitical events. To test the model’s forecasting performance, it is compared with other models, including a linear ordinary least squares model and a neural network model. The proposed model outperforms on the forecasting performance test even though the neural network model shows the best results on a goodness-of-fit test. The results show that the crude oil price is estimated to increase to $169.3/Bbl by 2040.

Suggested Citation

  • Chul-Yong Lee & Sung-Yoon Huh, 2017. "Forecasting Long-Term Crude Oil Prices Using a Bayesian Model with Informative Priors," Sustainability, MDPI, Open Access Journal, vol. 9(2), pages 1-15, January.
  • Handle: RePEc:gam:jsusta:v:9:y:2017:i:2:p:190-:d:88968
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    Cited by:

    1. repec:eee:eneeco:v:65:y:2017:i:c:p:219-227 is not listed on IDEAS
    2. repec:eee:eneeco:v:72:y:2018:i:c:p:341-355 is not listed on IDEAS
    3. repec:gam:jsusta:v:10:y:2018:i:3:p:697-:d:134713 is not listed on IDEAS
    4. Danish A. Alvi, 2018. "Application of Probabilistic Graphical Models in Forecasting Crude Oil Price," Papers 1804.10869, arXiv.org.

    More about this item

    Keywords

    Bayesian estimation; oil price; forecasting model; informative priors;

    JEL classification:

    • Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics
    • Q0 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q3 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

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