Structural equation modelling

Abstract

We studied the relationship between the change in the price of oil and some of its determinants, using the structural equation model. The demand for oil is confirmed to be inelastic to the change in oil price during our sampling period. Economic activity is found to be the most significant factor in explaining the dynamics of oil price. Wars and political tension, among the largest oil producing countries and neighbouring countries, are found to have a significant indirect effect on the price of oil through their effect on oil supply, but no significant direct effect was confirmed by the SEM.