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A Short-Run Crude Oil Price Forecast Model with Ratchet Effect


  • Michael Ye


  • John Zyren
  • Carol Blumberg
  • Joanne Shore


From 1992 through early 2004, crude oil prices were predictable by using OECD’s relative inventories and OPEC’s excess production capacity. However, since 2004, estimated inventories and excess production capacity under-predict crude oil prices. Using 3-D graphical analyzes, three regimes are identified in crude oil markets during the period from January 1992 to December 2007, reflecting market conditions and OPEC policy changes. These graphics show the changing relationship between crude oil price, inventories and excess production capacity. To reflect this, a ratchet variable, derived from cumulative excess production capacity, is incorporated into the forecasting model to reflect the changing behavior on both demand and supply sides. This model provides improved forecasts for the post Gulf War I time period over models without the ratchet mechanism. Copyright International Atlantic Economic Society 2009

Suggested Citation

  • Michael Ye & John Zyren & Carol Blumberg & Joanne Shore, 2009. "A Short-Run Crude Oil Price Forecast Model with Ratchet Effect," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 37(1), pages 37-50, March.
  • Handle: RePEc:kap:atlecj:v:37:y:2009:i:1:p:37-50
    DOI: 10.1007/s11293-008-9158-2

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    References listed on IDEAS

    1. Williams,Jeffrey C. & Wright,Brian D., 2005. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521023399, May.
    2. James Duesenberry, 1973. "Some Observations on Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(2), pages 508-514.
    3. Robert K. Kaufmann, Stephane Dees, Pavlos Karadeloglou and Marcelo Sanchez, 2004. "Does OPEC Matter? An Econometric Analysis of Oil Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 67-90.
    4. Jared Enzler & Lewis Johnson & John Paulus, 1976. "Some Problems of Money Demand," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(1), pages 261-282.
    5. Stephen G. Powell, 1990. "The Target Capacity-Utilization Model of OPEC and the Dynamics of the World Oil Market," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 27-64.
    6. Carol Dahl & Mine Yucel, 1991. "Testing Alternative Hypotheses of Oil Producer Behavior," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 117-138.
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    8. Avinash K. Dixit & Robert S. Pindyck, 1998. "Expandability, Reversibility, and Optimal Capacity Choice," NBER Working Papers 6373, National Bureau of Economic Research, Inc.
    9. Duesenberry, James S, 1974. "Alternatives to Monetary Policy," American Economic Review, American Economic Association, vol. 64(2), pages 105-111, May.
    10. Sadorsky, Perry, 2000. "The empirical relationship between energy futures prices and exchange rates," Energy Economics, Elsevier, vol. 22(2), pages 253-266, April.
    11. Stevens, Thomas H. & Adams, Gail, 1986. "Testing For Changes In The Price Elasticity Of Residential Electricity Demand," Northeastern Journal of Agricultural and Resource Economics, Northeastern Agricultural and Resource Economics Association, vol. 15(2), October.
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    Cited by:

    1. Prat, Georges & Uctum, Remzi, 2011. "Modelling oil price expectations: Evidence from survey data," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(3), pages 236-247, June.
    2. He, Kaijian & Yu, Lean & Lai, Kin Keung, 2012. "Crude oil price analysis and forecasting using wavelet decomposed ensemble model," Energy, Elsevier, vol. 46(1), pages 564-574.
    3. Michael Ye & John Zyren & Joanne Shore & Thomas Lee, 2010. "Crude Oil Futures as an Indicator of Market Changes: A Graphical Analysis," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 16(3), pages 257-268, August.
    4. He, Angela W.W. & Kwok, Jerry T.K. & Wan, Alan T.K., 2010. "An empirical model of daily highs and lows of West Texas Intermediate crude oil prices," Energy Economics, Elsevier, vol. 32(6), pages 1499-1506, November.

    More about this item


    Crude oil prices; Crude oil inventory; Crude oil excess production capacity; Duesenberry ratchet effect; Q00 Agriculture and Natural Resources;

    JEL classification:

    • Q00 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - General


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