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Saudi Aramco and the oil market

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  • Nakov, Anton
  • Nuño, Galo

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 dynamic 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. JEL Classification: E32, Q43

Suggested Citation

  • Nakov, Anton & Nuño, Galo, 2011. "Saudi Aramco and the oil market," Working Paper Series 1354, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20111354
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1354.pdf
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    Cited by:

    1. Cifarelli, Giulio & Paesani, Paolo, 2017. "On the difficulty of interpreting market behaviour in an uncertain world: the case of oil futures pricing between 2003 and 2016," MPRA Paper 84009, University Library of Munich, Germany.

    More about this item

    Keywords

    dominant firm; Oil Price; oil production; oil tax; Saudi Aramco;

    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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