Saudi Aramco and the oil market
AbstractWe 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 dynamic 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. JEL Classification: E32, Q43
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Bibliographic InfoPaper provided by European Central Bank in its series Working Paper Series with number 1354.
Date of creation: Jun 2011
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Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-06-25 (All new papers)
- NEP-ARA-2011-06-25 (MENA - Middle East & North Africa)
- NEP-CWA-2011-06-25 (Central & Western Asia)
- NEP-ENE-2011-06-25 (Energy Economics)
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