OPEC and Demand Response to Crude Oil Prices

Talat Genc
Authors registered in the RePEc Author Service: Murat Genc

No 1701, Working Papers from University of Guelph, Department of Economics and Finance

Abstract: This paper investigates demand response to crude oil price movements before and during the recent global financial and economic crisis. It employs several market power indices to structurally estimate price elasticities. A newly developed market power index for crude oil markets is implemented. In this approach OPEC is the central player and acts as a dominant producer in the global oil market. Although our price elasticity predictions for pre-crisis period fall in a range reported in the literature, our estimates for post-crisis largely deviate from the ones reported before. In fact, we find that demand for crude oil surprisingly changes behavior and turns out to be elastic during the financial crisis. Furthermore, demand response to crude oil prices have almost doubled during the crisis. This severe change in price response can be associated with record price levels caused by supply shortages and surge in alternative energy resources. The key advantages of this methodology over the existing literature are that it estimates price elasticity using a competition framework without specifying demand/supply function(s), and utilizes commonly observable market variables that can be applied to any admissible data frequency.

Keywords: Price elasticity of demand; crude oil; global financial/economic crisis; Brent benchmark; market power; GMM estimation (search for similar items in EconPapers)
JEL-codes: D22 L13 Q35 Q41 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2017
New Economics Papers: this item is included in nep-ene
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Citations: View citations in EconPapers (13)

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Journal Article: OPEC and demand response to crude oil prices (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:gue:guelph:2017-01

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