Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153788
Authors: 
Nakov, Anton
Nuño, Galo
Year of Publication: 
2011
Series/Report no.: 
ECB Working Paper 1354
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.
Subjects: 
dominant firm
Oil Price
oil production
oil tax
Saudi Aramco
JEL: 
E32
Q43
Document Type: 
Working Paper

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