Crude oil and motor fuel: Fair price revisited

TL;DR

This paper revisits a model of motor fuel and crude oil prices, confirming its accuracy in predicting price trends and deviations, and forecasts a significant decline in prices over the next decade.

Contribution

It validates a linear trend model for fuel and oil prices, demonstrating its predictive power and the transient nature of deviations from the trend.

Findings

Model accurately predicted 2009 price increase

Price deviations are transient and revert to the trend

Forecasts a decline to $30 per barrel in 5-8 years

Abstract

In April 2009, we introduced a model representing the evolution of motor fuel price (a subcategory of the consumer price index of transportation) relative to the overall CPI as a linear function of time. Under our framework, all price deviations from the linear trend are transient and the price must promptly return to the trend. Specifically, the model predicted that "the price for motor fuel in the US will also grow by 50% by the end of 2009. Oil price is expected to rise by ~50% as well, from its current value of ~$50 per barrel". The behavior of actual price has shown that this prediction is accurate in both amplitude and trajectory shape. Hence, one can conclude that the concept of price decomposition into a short-term (oscillating) and long-term (linear trend) components is valid. According to the model, the price of motor fuel and crude oil will be falling to the level of $30 per barrel during the next 5 to 8 years.