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Lags, Costs and Shocks: An Equilibrium Model of the Oil Industry

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  • Bornstein, Gideon
  • Krusell, Per
  • Rebelo, S�rgio

Abstract

We use a new micro data set to compile some key facts about the oil market and estimate a structural industry equilibrium model that is consistent with these facts. We find that demand and supply shocks contribute equally to the volatility of oil prices but that the volatility of investment by oil firms is driven mostly by demand shocks. Our model predicts that the advent of fracking will eventually result in a large reduction in oil price volatility.

Suggested Citation

  • Bornstein, Gideon & Krusell, Per & Rebelo, S�rgio, 2017. "Lags, Costs and Shocks: An Equilibrium Model of the Oil Industry," CEPR Discussion Papers 12047, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12047
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    Cited by:

    1. John Hassler & Per Krusell & Conny Olovsson, 2018. "The Consequences of Uncertainty: Climate Sensitivity and Economic Sensitivity to the Climate," Annual Review of Economics, Annual Reviews, vol. 10(1), pages 189-205, August.
    2. Conny Olovsson, 2019. "Oil prices in a general equilibrium model with precautionary demand for oil," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 1-17, April.
    3. Lutz Kilian & Xiaoqing Zhou, 2018. "Structural Interpretation of Vector Autoregressions with Incomplete Identification: Revisiting the Role of Oil Supply and Demand Shocks: Comment," CESifo Working Paper Series 7166, CESifo.
    4. Maghyereh, Aktham & Abdoh, Hussein, 2020. "Asymmetric effects of oil price uncertainty on corporate investment," Energy Economics, Elsevier, vol. 86(C).
    5. Kim, Gil & Vera, David, 2019. "Recent drivers of the real oil price: Revisiting and extending Kilian's (2009) findings," Energy Economics, Elsevier, vol. 82(C), pages 201-210.
    6. van den Bijgaart, Inge & Rodriguez, Mauricio, 2020. "Closing wells; fossil exploration and abandonment in the energy transition," Working Papers in Economics 789, University of Gothenburg, Department of Economics.
    7. Foroni, Claudia & Stracca, Livio, 2019. "Much ado about nothing? The shale oil revolution and the global supply curve," Working Paper Series 2309, European Central Bank.
    8. Kleinberg, R.L. & Paltsev, S. & Ebinger, C.K.E. & Hobbs, D.A. & Boersma, T., 2018. "Tight oil market dynamics: Benchmarks, breakeven points, and inelasticities," Energy Economics, Elsevier, vol. 70(C), pages 70-83.
    9. Ferriani, Fabrizio & Natoli, Filippo & Veronese, Giovanni & Zeni, Federica, 2018. "Futures risk premia in the era of shale oil," MPRA Paper 89097, University Library of Munich, Germany.
    10. Ready, Robert C., 2018. "Oil consumption, economic growth, and oil futures: The impact of long-run oil supply uncertainty on asset prices," Journal of Monetary Economics, Elsevier, vol. 94(C), pages 1-26.
    11. Kilian, Lutz & Zhou, Xiaoqing, 2018. "Structural Interpretation of Vector Autoregressions with Incomplete Information: Revisiting the Role of Oil Supply and Demand Shocks: Comment," CEPR Discussion Papers 13068, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    commodities; Oil; volatility;
    All these keywords.

    JEL classification:

    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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