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A general equilibrium model of the oil market

Author

Listed:
  • 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.

Suggested Citation

  • Anton Nakov & Galo Nuño, 2011. "A general equilibrium model of the oil market," Working Papers 1125, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:1125
    as

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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/11/Fich/dt1125e.pdf
    File Function: First version, October 2011
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    References listed on IDEAS

    as
    1. Backus, David K. & Crucini, Mario J., 2000. "Oil prices and the terms of trade," Journal of International Economics, Elsevier, vol. 50(1), pages 185-213, February.
    2. Anton Nakov & Andrea Pescatori, 2010. "Monetary Policy Trade-Offs with a Dominant Oil Producer," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(1), pages 1-32, February.
    3. Alhajji, A. F. & Huettner, David, 2000. "OPEC and other commodity cartels: a comparison," Energy Policy, Elsevier, vol. 28(15), pages 1151-1164, December.
    4. Lutz Kilian, 2008. "The Economic Effects of Energy Price Shocks," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 871-909, December.
    5. Sylvain Leduc & Keith Sill, 2007. "Monetary Policy, Oil Shocks, and TFP: Accounting for the Decline in U.S. Volatility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(4), pages 595-614, October.
    6. 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.
    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, vol. 99(3), pages 1053-1069, June.
    8. Kim, In-Moo & Loungani, Prakash, 1992. "The role of energy in real business cycle models," Journal of Monetary Economics, Elsevier, vol. 29(2), pages 173-189, April.
    9. Robert B. Barsky & Lutz Kilian, 2004. "Oil and the Macroeconomy Since the 1970s," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 115-134, Fall.
    10. James L. Smith, 2009. "World Oil: Market or Mayhem?," Journal of Economic Perspectives, American Economic Association, vol. 23(3), pages 145-164, Summer.
    11. Leduc, Sylvain & Sill, Keith, 2004. "A quantitative analysis of oil-price shocks, systematic monetary policy, and economic downturns," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 781-808, May.
    12. 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, vol. 84(5), pages 1079-1093, October.
    13. Robert B. Barsky & Lutz Kilian, 2002. "Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative," NBER Chapters,in: NBER Macroeconomics Annual 2001, Volume 16, pages 137-198 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Archanskaïa, Elizaveta & Creel, Jérôme & Hubert, Paul, 2012. "The nature of oil shocks and the global economy," Energy Policy, Elsevier, vol. 42(C), pages 509-520.
    2. Cunado, Juncal & Jo, Soojin & Perez de Gracia, Fernando, 2015. "Macroeconomic impacts of oil price shocks in Asian economies," Energy Policy, Elsevier, vol. 86(C), pages 867-879.

    More about this item

    Keywords

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

    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

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