OPECs Impact on Oil Price Volatility: The Role of Spare Capacity

Axel Pierru, James L. Smith, and Tamim Zamrik
Authors registered in the RePEc Author Service: James L. Smith and Axel Pierru

The Energy Journal, 2018, vol. Volume 39, issue Number 2

Abstract: OPEC claims to hold and use spare production capacity to stabilize the crude oil market. We study the impact of that buffer on the volatility of oil prices. After estimating the stochastic process that generates shocks to demand and supply, and assessing OPEC's limited ability to accurately measure and offset those shocks, we find that OPEC's use of spare capacity has reduced price volatility, perhaps by as much as half. We also apply the principle of revealed preference to infer the implicit loss function that rationalizes OPEC's investment in spare capacity and compare it to other estimates of the cost of crude oil supply shortfalls. That comparison suggests that OPEC's buffer capacity was in line with global macroeconomic needs.

JEL-codes: F0 (search for similar items in EconPapers)
Date: 2018
References: Add references at CitEc
Citations: View citations in EconPapers (21)

Downloads: (external link)
http://www.iaee.org/en/publications/ejarticle.aspx?id=3057 (text/html)
Access to full text is restricted to IAEE members and subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aen:journl:ej39-2-pierru

Ordering information: This journal article can be ordered from
http://www.iaee.org/en/publications/ejsearch.aspx

Access Statistics for this article

More articles in The Energy Journal from International Association for Energy Economics Contact information at EDIRC.
Bibliographic data for series maintained by David Williams ().