Question

How do firms use regression analysis to evaluate the impact of oil prices on profitability or the effect of general economic growth on sales?

Answer 1

Regression analysis is a statistical tool used to estimate the relationship between two or more variables. It is used to check the influence of the independent variables on the dependent variables.

The firms use regression analysis to evaluate the impact of oil prices on profitability or the effect of general economic growth on sales. Regression analysis is a tool used to analyse the impact of changes in oil prices on the performance and profitability of the oil and gas companies. To analyse the relationship of change in prices and  impact on profitability, company uses the comparative regression analysis including the Panel data analysis. Here, the sample is collected of same industry companies of a particular time period. The data is collected over the time on these sample companies and regression is run over the two dimensions that is cross sectional and longitudnal.

Panel data regression model looks like . In the expression y is the dependent variable and x is the independent variable, a and b are coefficient, i and t are indices of individuals and time.

Thus, regression analysis including the panel data set help the oil and gas companies to analyse the impact of changes in oil prices on its profitability. The study shows that when the prices of oil fall down, the oil companies can recover by considering the variables like efficient use of asset, high solency rates, significant cash flow or stock turnover. Company may defer essential investments to recover from the fall of prices.