Purpose: The aim of this paper is to identify the general understanding on the price formation of crude oil in the short and the long run relationship.
Design/methodology/approach: The data has been collected from secondary sources on domestic oil prices foreign oil prices and exchange rate from 1981 to 2017 and analyzed the data in Eviews, first checked the normality of the data through augmented dickey fuller test and then applied the Johansen co-integration Test and generate the dummy for capturing the outliers.
Findings: Through the empirics of the study, it is analyzed that foreign oil prices, exchange rate, inflation, import, export and balance of payment influence the oil prices in short as well as in the long run.
Research limitations/implications: A major limitation of the study was the constraint related to the availability of data, so data was taken since 1981 to 2017.
Practical implications: It is suggested that governments should pay attention to macro variables and controlled them so that in the future we could save us from a big threat of economic loss in the form of high oil prices.
Social implications: High oil prices, with its kinds of impacts, affect the society and its activities and therefore must be controlled it in a better way if an economy needs to prosper.
Key words: domestic oil prices, international oil prices, exchange rate, co-integration, unit root test.
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