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The opportunity cost of domestic oil consumption for an oil exporter: Illustration for Saudi Arabia

Fatih Karanfil () and Axel Pierru ()

Energy Economics, 2021, vol. 96, issue C

Abstract: We develop a partial equilibrium framework to assess the opportunity cost of domestic oil consumption for an oil-exporting country. We show that the opportunity cost depends on various factors, including the constraints to which the oil producer is subject and the domestic oil pricing scheme. Moreover, through an application of the envelope theorem, we assess net welfare gains that can be generated from a reform of the domestic oil price. Our results show that the most efficient pricing policy is to set the domestic price equal to the opportunity cost. A numerical illustration for Saudi Arabia is provided to demonstrate the practical value of the proposed framework. Our findings can inform public decision-making for projects and policies that impact oil demand.

Keywords: Opportunity cost; Shadow price; Domestic pricing; Welfare; Oil (search for similar items in EconPapers)
JEL-codes: E6 Q3 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:96:y:2021:i:c:s0140988321000669

DOI: 10.1016/j.eneco.2021.105161

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Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

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