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OPEC's kinked demand curve

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  • Vatter, Marc H.

Abstract

Asymmetric effects of oil prices on the macroeconomy imply multiple equilibrium prices for OPEC. I estimate world demand for crude oil, non-OPEC supply, and the effects of changes in price on world GDP using quarterly data covering 1973 to 2010. If OPEC's marginal cost is $20/bbl in 2014:III, and its discount rate is zero, estimated equilibrium prices are $44–88/bbl. Multiple equilibria incent OPEC to tolerate unstable prices, which, because of the asymmetry, lower world GDP. Both policies that increase responsiveness to price and policies that lower net demand to OPEC narrow and lower the range of equilibrium prices, but the former are more effective at doing so. OPEC responds to changes in the discount rate in the opposite way from competitive producers, so policies that secure oil-related property rights in OPEC countries and other policies that lower OPEC's discount rate narrow and lower the range of equilibrium prices. Monetary policy is more effective at accelerating or slowing macroeconomic activity the larger is OPEC's market share.

Suggested Citation

  • Vatter, Marc H., 2017. "OPEC's kinked demand curve," Energy Economics, Elsevier, vol. 63(C), pages 272-287.
    • Handle: RePEc:eee:eneeco:v:63:y:2017:i:c:p:272-287
    DOI: 10.1016/j.eneco.2017.02.010
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    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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