The Oil Energy Price Cycle in Economic Activities: A Stochastic Model

In the past, significant research has been conducted on the relationship between energy consumption and economic activities; a number of these articles have discussed the effects and shocks of energy prices in relation to economic growth. However, to date there has been little in the way of substantive research pertaining to the cycle of energy prices, and the related causality with economic activities. This study attempts to develop an integrated model to forecast the cycle of energy prices with respect to the level of economic activity. There are two cycles during the research period, and the values of the mean absolute percentage error (MAPE) are 5.7429% and 3.5844%, respectively, while the overall value of MAPE for the forecasting model in the third cycle is 3.0056%. All the values are less than 10%, which indicates that the stochastic model developed in this work can produce accurate predictions. Furthermore, the results show that the oil price cycle and economic activities have bi-directional causality in the short run, and that the upwards (downwards) cycle of oil prices is accompanied by expansion (contraction) of economic activities, and vice versa, with a co-movement trend in the long run. Conceptually, the model developed in this work is useful with regard to forecasting the level of economic activities using the oil price cycle, as most economic activities depend on energy.