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A general equilibrium model of the oil market

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  • Anton Nakov

    ()
    (Banco Central Europeo)

  • Galo Nuño

    ()
    (Banco de España)

Abstract

We present a general equilibrium model of the global oil market, in which the oil price, oil production, and consumption, are jointly determined as outcomes of the optimizing decisions of oil importers and oil exporters. On the supply side the oil market is modelled as a dominant firm – Saudi Aramco – with competitive fringe. We establish that a dominant firm may exist as long as it enjoys a cost advantage over the fringe. We provide an expression for the optimal markup and compute the spare capacity maintained by such a firm. The model produces plausible dynamics in response to oil supply and oil demand shocks. In particular, it reproduces successfully the jump in oil output of Saudi Aramco following the output collapse of Iraq and Kuwait during the first Gulf War, explaining it as the profit-maximizing response of the dominant firm. Oil taxes and subsidies affect the oil price and welfare through their effect on the trade-off between oil production efficiency and oil market competition.

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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1125.

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Length: 36 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:bde:wpaper:1125

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Keywords: oil price; oil production; dominant firm; Saudi Aramco; oil tax;

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  1. Kim, In-Moo & Loungani, Prakash, 1992. "The role of energy in real business cycle models," Journal of Monetary Economics, Elsevier, Elsevier, vol. 29(2), pages 173-189, April.
  2. Leduc, Sylvain & Sill, Keith, 2004. "A quantitative analysis of oil-price shocks, systematic monetary policy, and economic downturns," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(4), pages 781-808, May.
  3. Barsky, Robert & Kilian, Lutz, 2004. "Oil and the Macroeconomy Since the 1970s," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4496, C.E.P.R. Discussion Papers.
  4. Sylvain Leduc & Keith Sill, 2006. "Monetary policy, oil shocks, and TFP: accounting for the decline in U.S. volatility," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 873, Board of Governors of the Federal Reserve System (U.S.).
  5. James L. Smith, 2009. "World Oil: Market or Mayhem?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 23(3), pages 145-64, Summer.
  6. Anton Nakov & Andrea Pescatori, 2010. "Monetary Policy Trade-Offs with a Dominant Oil Producer," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 42(1), pages 1-32, 02.
  7. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, American Economic Association, vol. 99(3), pages 1053-69, June.
  8. Robert B. Barsky & Lutz Kilian, 2002. "Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 2001, Volume 16, pages 137-198 National Bureau of Economic Research, Inc.
  9. Pedro A. Almoguera & Christopher C. Douglas & Ana María Herrera, 2011. "Testing for the cartel in OPEC: non-cooperative collusion or just non-cooperative?," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 27(1), pages 144-168, Spring.
  10. Task Force of the Monetary Policy Committee of the ESCB, 2010. "Energy markets and the euro area macroeconomy," Occasional Paper Series 113, European Central Bank.
  11. Backus, David K. & Crucini, Mario J., 2000. "Oil prices and the terms of trade," Journal of International Economics, Elsevier, Elsevier, vol. 50(1), pages 185-213, February.
  12. Lutz Kilian, 2008. "The Economic Effects of Energy Price Shocks," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 46(4), pages 871-909, December.
  13. Litzenberger, Robert H & Rabinowitz, Nir, 1995. " Backwardation in Oil Futures Markets: Theory and Empirical Evidence," Journal of Finance, American Finance Association, American Finance Association, vol. 50(5), pages 1517-45, December.
  14. Alhajji, A. F. & Huettner, David, 2000. "OPEC and other commodity cartels: a comparison," Energy Policy, Elsevier, Elsevier, vol. 28(15), pages 1151-1164, December.
  15. M. A. Adelman, 1986. "The Competitive Floor to World Oil Prices," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 4), pages 9-31.
  16. Salant, Stephen W, 1976. "Exhaustible Resources and Industrial Structure: A Nash-Cournot Approach to the World Oil Market," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(5), pages 1079-93, October.
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