The Opportunity Cost of Domestic Oil Consumption for an Oil Exporter: Illustration for Saudi Arabia

Fatih Karanfil and Axel Pierru

Discussion Papers from King Abdullah Petroleum Studies and Research Center

Abstract: When appraising investment projects from a public perspective, a barrel of oil displaced from or added to domestic consumption has to be valued at its opportunity cost. This paper develops a partial-equilibrium framework to assess the opportunity cost of domestic oil consumption for an oil-exporting country. The framework takes into account that (i) the usual ‘small economy’ assumption does not necessarily hold, (ii) the domestic oil price can be set either at a fixed level or as a function of the international price, and (iii) oil production, level of exports, or domestic consumption can be constrained. We derive the opportunity cost for each case considered and a formula quantifying the net welfare gains from reforming the domestic oil price

Keywords: Dometic Pricing; Oil; Opportunity Cost; Shadow Price; Saudi Arabia (search for similar items in EconPapers)
Pages: 27
Date: 2020-03-01
New Economics Papers: this item is included in nep-ara, nep-ene and nep-int
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Citations: View citations in EconPapers (1)

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https://www.kapsarc.org/research/publications/the- ... on-for-saudi-arabia/ First version, 2020

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Journal Article: The opportunity cost of domestic oil consumption for an oil exporter: Illustration for Saudi Arabia (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:prc:dpaper:ks--2020-dp05

DOI: 10.30573/KS--2020-DP05

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