Saudi Aramco and the oil market

Anton Nakov and Galo Nuño Barrau

No 1354, Working Paper Series from European Central Bank

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. JEL Classification: E32, Q43

Keywords: dominant firm; Oil Price; oil production; oil tax; Saudi Aramco (search for similar items in EconPapers)
Date: 2011-06
New Economics Papers: this item is included in nep-ara, nep-cwa and nep-ene
Note: 374708
References: View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20111354

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