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

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  • Karanfil, Fatih
  • Pierru, Axel

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.

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  • Karanfil, Fatih & Pierru, Axel, 2021. "The opportunity cost of domestic oil consumption for an oil exporter: Illustration for Saudi Arabia," Energy Economics, Elsevier, vol. 96(C).
    • Handle: RePEc:eee:eneeco:v:96:y:2021:i:c:s0140988321000669
    DOI: 10.1016/j.eneco.2021.105161
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    More about this item

    Keywords

    Opportunity cost; Shadow price; Domestic pricing; Welfare; Oil;
    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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