Crude Oil Price Fluctuations and Saudi Arabian Behaviour

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Crude Oil Price Fluctuations and Saudi Arabian Behaviour

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Roberto A. De Santis

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Roberto A. de Santis

Abstract

This study seeks to explain why crude oil prices fluctuate, the main cause being the quota regime, which characterises the OPEC agreements. Given that the Saudi oil supply is inelastic in the short term, a shock in the oil market is accommodated by an immediate price change. In contrast, a dominant firm behaviour in the long term causes an output change, which is accompanied by a smaller price change. This explains why oil prices overshoot. The results of a general equilibrium model applied to Saudi Arabia support this analysis. They also indicate that Saudi Arabia does not have any incentive in altering the crude oil market equilibrium with either positive or negative supply shocks; and that its behaviour is asymmetric in the presence of world demand shocks, having an incentive (disincentive) in intervening if a negative (positive) demand shock hits the crude oil market. A second set of simulations is designed to understand what might be a correct OECD policy to lower prices. A tax cut would worsen the situation, whereas policies which can increase the price elasticity of demand seem to be very effective.

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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1014.

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Length: 46 pages
Date of creation: Oct 2000
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Handle: RePEc:kie:kieliw:1014

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Article
- De Santis, Roberto A., 2003. "Crude oil price fluctuations and Saudi Arabia's behaviour," Energy Economics, Elsevier, vol. 25(2), pages 155-173, March. [Downloadable!] (restricted)

Find related papers by JEL classification:
D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

References listed on IDEAS
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Renou-Maissant, Patricia, 1999. "Interfuel competition in the industrial sector of seven OECD countries," Energy Policy, Elsevier, vol. 27(2), pages 99-110, February. [Downloadable!] (restricted)
Stiglitz, Joseph E, 1976. "Monopoly and the Rate of Extraction of Exhaustible Resources," American Economic Review, American Economic Association, vol. 66(4), pages 655-61, September. [Downloadable!] (restricted)
Nourah A. Al-Yousef, 1998. "Economic Models of OPEC Behaviour and the Role of Saudi Arabia," Surrey Energy Economics Centre (SEEC), Department of Economics Discussion Papers (SEEDS) 94, Surrey Energy Economics Centre (SEEC), Department of Economics, University of Surrey.
Neumayer, Eric, 2000. " Scarce or Abundant? The Economics of Natural Resource Availability," Journal of Economic Surveys, Blackwell Publishing, vol. 14(3), pages 307-35, July. [Downloadable!] (restricted)
Adelman, M. A., 1978. "Constraints on the world oil monopoly price," Resources and Energy, Elsevier, vol. 1(1), pages 3-19, September. [Downloadable!] (restricted)

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