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

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  • Fatih Karanfil
  • Axel Pierru

    (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

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  • Fatih Karanfil & Axel Pierru, 2020. "The Opportunity Cost of Domestic Oil Consumption for an Oil Exporter: Illustration for Saudi Arabia," Discussion Papers ks--2020-dp05, King Abdullah Petroleum Studies and Research Center.
    • Handle: RePEc:prc:dpaper:ks--2020-dp05
    DOI: 10.30573/KS--2020-DP05
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    4. Durand-Lasserve, Olivier & Almutairi, Hossa & Aljarboua, Abdullah & Pierru, Axel & Pradhan, Shreekar & Murphy, Frederic, 2023. "Hard-linking a top-down economic model with a bottom-up energy system for an oil-exporting country with price controls," Energy, Elsevier, vol. 266(C).

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    More about this item

    Keywords

    Dometic Pricing; Oil; Opportunity Cost; Shadow Price; Saudi Arabia;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • Q3 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation

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