A Theoretical Framework for Crude Oil Price Evolution: Insights from the Financial Crisis and Beyond

This study develops a theoretical model to understand the dynamics of crude oil prices, integrating Keynesian insights on imperfect competition and long-memory volatility through the FIGARCH framework. The model incorporates both demand and supply-side factors, with a particular focus on firm expectations and production costs, to explain price fluctuations. By calibrating the model to historical oil price data, we examine how demand dynamics, driven by expectations of future demand and current production costs, influence oil price movements. The study highlights the limitations of relying solely on demand as a predictor for price changes, particularly in the context of global disruptions such as the COVID-19 pandemic. Our results reveal that the exclusion of supply-side factors, including production costs and geopolitical risks, leads to significant discrepancies in price predictions, especially during periods of crisis. The findings emphasize the need for a more comprehensive approach to modeling oil prices, incorporating both demand and supply dynamics, to better capture market behavior during times of global shocks.