CHAPTER ONE
INTRODUCTION
BACKGROUND OF THE STUDY
The importance of energy is obvious but our understanding of its supply-demand and trading links is definitely not good enough. In macroeconomic or
business cycle theories energy is either neglected or treated as an exogenous source of shocks. Therefore there is neither general explanatory theory about
the role of energy in economic system nor much theory about its price formation, even though historical examples (oil shocks in the 1970s-1980s) show the
reasonable necessity of such theories and much available data allow for the research to be done. Among the energy sources oil is proved to be the most efficient
concerning concentration of pure energy and convenience of usage and transportation. More than 40% of the world energy consumption is satisfied
with oil, and in the transportation sector it, in fact, does not have other competitors: 93% of transport fuels are based on oil. In addition to that, plastics and
fibers used by practically each individual are products of petrochemical industry. It is not difficult to deduct that crude oil prices have a huge influence on the
world economy and, being highly uncertain and volatile, are a source of economic and political risks and instability. The main purpose of this thesis is trying
to investigate what drives crude oil prices and which modeling method is able to give a good price forecast. Broad literature concerning modeling of oil prices
can be divided into two streams by treatment of oil: either it is an industrial product with respective supply-demand links or an underlying financial asset
broadly used to price various traded derivatives. Clearly the two approaches use completely different methods to assess oil price behavior. But no matter
which approach is chosen it is important to understand that oil possesses unique properties emerging from specifics of petroleum industry and oil consumption.
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