In economic terms, Oil price fluctuation is the ebb and flow of how much oil manufacturers need to sell their petroleum products for to make a profit. Like any commodity, the price of a barrel of oil can be volatile, and it can seem to ebb and flow on a dime. Whether you’re filling up your car or heating your home, oil prices are in flux, and it can be difficult to understand why.
The main reason for this volatility is that oil prices are influenced by supply and demand. When demand is high and the supply is low, prices soar. But if demand is low and the supply is high, prices fall. This is because both demand and supply are inelastic to price changes in the short run; they only respond slowly, and large price shifts are needed for them to adjust.
Another factor is the cost of production. It’s less expensive to extract oil from the Middle East, but it can be more costly to get it from places such as the tar sands in Canada. And finally, political instability can also affect the price of oil. When Hurricane Katrina affected 20% of the US oil supply in 2005, it caused the price of a barrel to spike by $13.
However, not all these events are equally influential in their effect on prices. The aim of this article is to analyze the influence mechanism of various oil price fluctuations by constructing a nonlinearity autoregressive distribute lag (NARDL) model with dummy variables. The result shows that the NARDL model is able to capture the dynamic evolution of the different crude oil price fluctuation sources, as well as their correlations with different crude oil prices.
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