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A World Equilibrium Model of the Oil Market

Author

Listed:
  • Gideon Bornstein
  • Per Krusell
  • Sergio Rebelo

Abstract

We use new, comprehensive micro data on oil fields to build and estimate a structural model of the oil industry embedded in a general equilibrium model of the world economy. In the model, firms that belong to Organization of the Petroleum Exporting Countries (OPEC) act as a cartel. The remaining firms are a competitive fringe. We use the model to study the macroeconomic impact of the advent of fracking. Fracking weakens the OPEC cartel, leading to a large long-run decline in oil prices. Fracking also reduces the volatility of oil prices in the long run because fracking firms can respond more quickly to changes in oil demand.

Suggested Citation

  • Gideon Bornstein & Per Krusell & Sergio Rebelo, 2023. "A World Equilibrium Model of the Oil Market," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(1), pages 132-164.
    • Handle: RePEc:oup:restud:v:90:y:2023:i:1:p:132-164.
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    File URL: http://hdl.handle.net/10.1093/restud/rdac019
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