Friday, September 01, 2017

15. Paper (2015): A VAR Model to Investigate The Volatility of Line-Pipe Steel Prices Using Oil Price as Referred Currency

The volatility of steel prices and international currency is an element that affects actual project costs. This situation can be mitigated by considering risk contingency as a fixed percentage of the total budget and/or by inputting an inflation factor into the cost estimation. These methods have not overcome the root problem, however, which is the volatility and declining trend of US dollar purchasing power as base currency. As a result, an alternative currency with more reliable value as a cost reference is needed as a comparison of using gold equivalency as an alternative currency for cost estimation (Asmoro, 2013).

This paper will explore the potential for oil as a referred currency to be used in investigating the price volatility of selected steels, i.e. hot rolled coil (HRC) and billet as main material components in oil and gas pipeline projects. The reliability of oil in terms of purchasing power compared to the US dollar and inflation will be discussed along with how oil equivalency can be applied for selected steels to develop an oil-based forecasting model using a statistical VAR (Vector Auto-Regressive) model. VAR model is widely used to analyse multivariate time series data such as domestic product and oil price. 

These methods might change the paradigm for estimating the material costs of pipeline projects and could be developed for and applied to other projects since steels are heavily used in all major construction projects.

Keywords: Line-pipe steel prices, oil price, VAR model, multivariate time series data, US dollar, purchasing power, oil equivalency, cost estimation, pipeline project

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