Oil price - June 2009

Under the framework of economics as classical mechanics, this post illustrates that prices for commodities have been evolving around robust linear trends. Therefore, these prices are in larger part are driven by forces with partly predetermined future. Same one can say about orbits of planets, which are also fluctuating around their theoretical trajectories and are prone to sudden changes, sometimes major.

According to our estimates made in March 2009 [1] and in this new blog (oil price), oil price will be growing at a high rate and will reach the level of $80-$90 by the end of 2009. In Figure 1, this prediction corresponds to the line with red circles intersecting red trend line (see details of the procedures in [2,3]. (Here we consider oil price and motor fuel price in the USA as equivalents.) This was a very conservative prediction. Actually, oil price should likely to increase at the same or slightly lower rate than it was falling between July 2008 and February 2009, i.e. from $145 to ~$45 by 7 months.

According to recent observations of oil prices (currently at the level of $70 per barrel), we can expect that a less conservative prediction is more likely. The rate of oil price growth is better fit by the rate of the previously observed fall. So, a new prediction shown in Figure 2 expresses this faster growth. The level of $80 to $90 can be reached in few months and than oil price will likely break the trends line (red solid) and rise above $100 by the end of 2009. Then it must drop back to the trends (~$80) with gradual decline to the level of $50 in 2015.

Effectively, the prediction is the same except it is compressed in time now.

Figure 1. Prediction of the evolution of the price index for motor fuel (read oil) relative to the core CPI. Black line - actual measurements, black line with red circles - the prediction from March 2009 to December 2009. Solid red line - new trend of the difference of the core CPI and the index for motor fuel.

Figure 2. Same as in Figure 1 for a less conservative prediction. Oil price will break the level of $80 to $90 and will reach the level above $100 by the end of 2009. Then oil price will be gradually declining to ~$50 on 2015.

1. Kitov, I., Kitov, O., (2009). A fair price for motor fuel in the United States, MPRA Paper 15039, University Library of Munich, Germany, http://mpra.ub.uni-muenchen.de/15039/01/MPRA_paper_15039.pdf

2. Kitov, I., Kitov, O., (2008). Long-Term Linear Trends In Consumer Price Indices, Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(2(4)_Summ), pp. 101-112.

3. Kitov, I., Kitov, O., (2009). Apples and oranges: relative growth rate of consumer price indices, MPRA Paper 13587, University Library of Munich, Germany, mpra.ub.uni-muenchen.de/13587/01/MPRA_paper_13587.pdf