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What the Iran War Teaches Us about the Price Elasticity of Oil Supply

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Abstract

We draw on evidence from the 2026 Iran War to assess the validity of estimates of the short-run price elasticity of oil supply reported in the literature. Our analysis confirms that the one-month and one-quarter U.S. oil supply elasticity is effectively zero, consistent with estimates in Newell and Prest (2019). The data strongly reject the much higher elasticity estimates reported by more recent studies. This finding is consistent with evidence from surveys of oil company executives and with industry data about how long it takes to complete a well and start pumping oil. It is also consistent with theoretical arguments that the short-run oil supply elasticity is zero if adjusting oil production is costly, as is the case in practice. Our results have important implications for the construction and credibility of structural VAR models of the global oil market.

Suggested Citation

  • Lutz Kilian & Kunal Patel, 2026. "What the Iran War Teaches Us about the Price Elasticity of Oil Supply," Working Papers 2625, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:103623
    DOI: 10.24149/wp2625
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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