IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/23423.html
   My bibliography  Save this paper

A World Equilibrium Model of the Oil Market

Author

Listed:
  • Gideon Bornstein
  • Per Krusell
  • Sergio Rebelo

Abstract

We use new, comprehensive micro data on oil fields to build and estimate a structural model of the oil industry embedded in a general equilibrium model of the world economy. In the model, firms that belong to OPEC act as a cartel. The remaining firms are a competitive fringe. We use the model to study the macroeconomic impact of the advent of fracking. Fracking weakens the OPEC cartel, leading to a large long-run decline in oil prices. Fracking also reduces the volatility of oil prices in the long run because fracking firms can respond more quickly to changes in oil demand.

Suggested Citation

  • Gideon Bornstein & Per Krusell & Sergio Rebelo, 2017. "A World Equilibrium Model of the Oil Market," NBER Working Papers 23423, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:23423
    Note: EFG
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w23423.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. repec:oup:qjecon:v:132:y:2016:i:1:p:103-155. is not listed on IDEAS
    2. Alquist, Ron & Kilian, Lutz & Vigfusson, Robert J., 2013. "Forecasting the Price of Oil," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 427-507, Elsevier.
    3. Robert B. Barsky & Lutz Kilian, 2004. "Oil and the Macroeconomy Since the 1970s," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 115-134, Fall.
    4. Lutz Kilian, 2016. "The Impact of the Shale Oil Revolution on U.S. Oil and Gasoline Prices," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 10(2), pages 185-205.
    5. Rouwenhorst, K. Geert, 1991. "Time to build and aggregate fluctuations : A reconsideration," Journal of Monetary Economics, Elsevier, vol. 27(2), pages 241-254, April.
    6. Ryan Kellogg, 2014. "The Effect of Uncertainty on Investment: Evidence from Texas Oil Drilling," American Economic Review, American Economic Association, vol. 104(6), pages 1698-1734, June.
    7. Lutz Kilian, 2008. "The Economic Effects of Energy Price Shocks," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 871-909, December.
    8. Angus Deaton, 1999. "Commodity Prices and Growth in Africa," Journal of Economic Perspectives, American Economic Association, vol. 13(3), pages 23-40, Summer.
    9. Angus Deaton & Guy Laroque, 1992. "On the Behaviour of Commodity Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(1), pages 1-23.
    10. Francesco Lippi & Andrea Nobili, 2012. "Oil And The Macroeconomy: A Quantitative Structural Analysis," Journal of the European Economic Association, European Economic Association, vol. 10(5), pages 1059-1083, October.
    11. David I. Harvey & Neil M. Kellard & Jakob B. Madsen & Mark E. Wohar, 2010. "The Prebisch-Singer Hypothesis: Four Centuries of Evidence," The Review of Economics and Statistics, MIT Press, vol. 92(2), pages 367-377, May.
    12. Finn, Mary G, 2000. "Perfect Competition and the Effects of Energy Price Increases on Economic Activity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 400-416, August.
    13. Rotemberg, Julio J & Woodford, Michael, 1996. "Imperfect Competition and the Effects of Energy Price Increases on Economic Activity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 550-577, November.
    14. Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, vol. 113(2), pages 363-398, April.
    15. Leduc, Sylvain & Sill, Keith, 2004. "A quantitative analysis of oil-price shocks, systematic monetary policy, and economic downturns," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 781-808, May.
    16. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-1069, June.
    17. Rabah Arezki & Valerie A. Ramey & Liugang Sheng, 2017. "News Shocks in Open Economies: Evidence from Giant Oil Discoveries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(1), pages 103-155.
    18. Backus, David K. & Crucini, Mario J., 2000. "Oil prices and the terms of trade," Journal of International Economics, Elsevier, vol. 50(1), pages 185-213, February.
    19. John Hassler & Per Krusell & Conny Olovsson, 2010. "Oil Monopoly and the Climate," American Economic Review, American Economic Association, vol. 100(2), pages 460-464, May.
    20. Marc Nerlove, 1958. "Adaptive Expectations and Cobweb Phenomena," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 72(2), pages 227-240.
    21. Soren T. Anderson & Ryan Kellogg & Stephen W. Salant, 2018. "Hotelling under Pressure," Journal of Political Economy, University of Chicago Press, vol. 126(3), pages 984-1026.
    22. Harold Hotelling, 1931. "The Economics of Exhaustible Resources," Journal of Political Economy, University of Chicago Press, vol. 39(2), pages 137-137.
    23. Kim, In-Moo & Loungani, Prakash, 1992. "The role of energy in real business cycle models," Journal of Monetary Economics, Elsevier, vol. 29(2), pages 173-189, April.
    24. Robert B. Barsky & Lutz Kilian, 2002. "Do We Really Know That Oil Caused the Great Stagflation? A Monetary Alternative," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 137-198, National Bureau of Economic Research, Inc.
    25. Richard G. Newell & Brian C. Prest & Ashley Vissing, 2016. "Trophy Hunting vs. Manufacturing Energy: The Price-Responsiveness of Shale Gas," NBER Working Papers 22532, National Bureau of Economic Research, Inc.
    26. Lutz Kilian, 2014. "Oil Price Shocks: Causes and Consequences," Annual Review of Resource Economics, Annual Reviews, vol. 6(1), pages 133-154, October.
    27. Olovsson, Conny, 2016. "Oil prices in a real-businesscycle model with precautionary demand for oil," Working Paper Series 332, Sveriges Riksbank (Central Bank of Sweden).
    28. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-248, April.
    29. Lutz Kilian & Daniel P. Murphy, 2014. "The Role Of Inventories And Speculative Trading In The Global Market For Crude Oil," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 29(3), pages 454-478, April.
    30. V. V. Chari & Lawrence J. Christiano, 2014. "The Optimal Extraction of Exhaustible Resources," Economic Policy Paper 14-5, Federal Reserve Bank of Minneapolis.
    31. Adao, Bernardino & Narajabad, Borghan & Temzelides, Ted, 2012. "Renewable Technology Adoption and the Macroeconomy," Working Papers 14-007, Rice University, Department of Economics.
    32. Bodenstein, Martin & Erceg, Christopher J. & Guerrieri, Luca, 2011. "Oil shocks and external adjustment," Journal of International Economics, Elsevier, vol. 83(2), pages 168-184, March.
    33. Mordecai Ezekiel, 1938. "The Cobweb Theorem," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 52(2), pages 255-280.
    34. Stiglitz, Joseph E, 1976. "Monopoly and the Rate of Extraction of Exhaustible Resources," American Economic Review, American Economic Association, vol. 66(4), pages 655-661, September.
    35. Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
    36. Erik Gilje & Robert Ready & Nikolai Roussanov, 2016. "Fracking, Drilling, and Asset Pricing: Estimating the Economic Benefits of the Shale Revolution," NBER Working Papers 22914, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. John Hassler & Per Krusell & Conny Olovsson, 2018. "The Consequences of Uncertainty: Climate Sensitivity and Economic Sensitivity to the Climate," Annual Review of Economics, Annual Reviews, vol. 10(1), pages 189-205, August.
    2. Conny Olovsson, 2019. "Oil prices in a general equilibrium model with precautionary demand for oil," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 1-17, April.
    3. Lutz Kilian & Xiaoqing Zhou, 2018. "Structural Interpretation of Vector Autoregressions with Incomplete Identification: Revisiting the Role of Oil Supply and Demand Shocks: Comment," CESifo Working Paper Series 7166, CESifo.
    4. Maghyereh, Aktham & Abdoh, Hussein, 2020. "Asymmetric effects of oil price uncertainty on corporate investment," Energy Economics, Elsevier, vol. 86(C).
    5. Kim, Gil & Vera, David, 2019. "Recent drivers of the real oil price: Revisiting and extending Kilian's (2009) findings," Energy Economics, Elsevier, vol. 82(C), pages 201-210.
    6. Franz Hamann, 2018. "Natural Resources and Sovereign Risk in Emerging Economies: A Curse and a Blessing," Working Papers 2018-32, Federal Reserve Bank of St. Louis, revised 17 Mar 2023.
    7. van den Bijgaart, Inge & Rodriguez, Mauricio, 2020. "Closing wells; fossil exploration and abandonment in the energy transition," Working Papers in Economics 789, University of Gothenburg, Department of Economics.
    8. Foroni, Claudia & Stracca, Livio, 2019. "Much ado about nothing? The shale oil revolution and the global supply curve," Working Paper Series 2309, European Central Bank.
    9. Kleinberg, R.L. & Paltsev, S. & Ebinger, C.K.E. & Hobbs, D.A. & Boersma, T., 2018. "Tight oil market dynamics: Benchmarks, breakeven points, and inelasticities," Energy Economics, Elsevier, vol. 70(C), pages 70-83.
    10. Ferriani, Fabrizio & Natoli, Filippo & Veronese, Giovanni & Zeni, Federica, 2018. "Futures risk premia in the era of shale oil," MPRA Paper 89097, University Library of Munich, Germany.
    11. Ready, Robert C., 2018. "Oil consumption, economic growth, and oil futures: The impact of long-run oil supply uncertainty on asset prices," Journal of Monetary Economics, Elsevier, vol. 94(C), pages 1-26.
    12. Kilian, Lutz & Zhou, Xiaoqing, 2018. "Structural Interpretation of Vector Autoregressions with Incomplete Information: Revisiting the Role of Oil Supply and Demand S," CEPR Discussion Papers 13068, C.E.P.R. Discussion Papers.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rebelo, Sérgio & Krusell, Per & Bornstein, Gideon, 2017. "Lags, Costs and Shocks: An Equilibrium Model of the Oil Industry," CEPR Discussion Papers 12047, C.E.P.R. Discussion Papers.
    2. Lang, Korbinian & Auer, Benjamin R., 2020. "The economic and financial properties of crude oil: A review," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    3. Conny Olovsson, 2019. "Oil prices in a general equilibrium model with precautionary demand for oil," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 1-17, April.
    4. Herrera, Ana María & Karaki, Mohamad B. & Rangaraju, Sandeep Kumar, 2019. "Oil price shocks and U.S. economic activity," Energy Policy, Elsevier, vol. 129(C), pages 89-99.
    5. Kilian, Lutz, 2010. "Oil price volatility: Origins and effects," WTO Staff Working Papers ERSD-2010-02, World Trade Organization (WTO), Economic Research and Statistics Division.
    6. Christiane Baumeister & Gert Peersman, 2013. "Time-Varying Effects of Oil Supply Shocks on the US Economy," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(4), pages 1-28, October.
    7. Francesca Rondina, 2017. "The Impact of Oil Price Changes in a New Keynesian Model of the U.S. Economy," Working Papers 1709E, University of Ottawa, Department of Economics.
    8. Gnimassoun, Blaise & Joëts, Marc & Razafindrabe, Tovonony, 2017. "On the link between current account and oil price fluctuations in diversified economies: The case of Canada," International Economics, Elsevier, vol. 152(C), pages 63-78.
    9. Lutz Kilian, 2008. "The Economic Effects of Energy Price Shocks," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 871-909, December.
    10. Munechika Katayama, 2013. "Declining Effects of Oil Price Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(6), pages 977-1016, September.
    11. Lutz Kilian & Xiaoqing Zhou, 2023. "The Econometrics of Oil Market VAR Models," Advances in Econometrics, in: Essays in Honor of Joon Y. Park: Econometric Methodology in Empirical Applications, volume 45, pages 65-95, Emerald Group Publishing Limited.
    12. Lorusso, Marco & Pieroni, Luca, 2018. "Causes and consequences of oil price shocks on the UK economy," Economic Modelling, Elsevier, vol. 72(C), pages 223-236.
    13. Chen, Natalie & Graham, Liam & Oswald, Andrew J, 2007. "Oil Prices, Profits, and Recessions : An Inquiry Using Terrorism as an Instrumental Variable," The Warwick Economics Research Paper Series (TWERPS) 809, University of Warwick, Department of Economics.
    14. Amir Yaron & Steffen Hitzemann, 2017. "Welfare Costs of Oil Shocks," 2017 Meeting Papers 1381, Society for Economic Dynamics.
    15. Lutz Kilian, 2014. "Oil Price Shocks: Causes and Consequences," Annual Review of Resource Economics, Annual Reviews, vol. 6(1), pages 133-154, October.
    16. John Baffes & M. Ayhan Kose & Franziska Ohnsorge & Marc Stocker, 2015. "The Great Plunge in Oil Prices: Causes, Consequences, and Policy Responses," Policy Research Notes (PRNs) 94725, The World Bank.
    17. Maravalle, Alessandro, 2012. "The role of the trade channel in the propagation of oil supply shocks," Energy Economics, Elsevier, vol. 34(6), pages 2135-2147.
    18. Fédéric Holm-Hadulla & Kirstin Hubrich, 2017. "Macroeconomic Implications of Oil Price Fluctuations : A Regime-Switching Framework for the Euro Area," Finance and Economics Discussion Series 2017-063, Board of Governors of the Federal Reserve System (U.S.).
    19. Joëts, Marc & Mignon, Valérie & Razafindrabe, Tovonony, 2017. "Does the volatility of commodity prices reflect macroeconomic uncertainty?," Energy Economics, Elsevier, vol. 68(C), pages 313-326.
    20. Naohisa Hirakata & Nao Sudo, 2009. "Accounting for Oil Price Variation and Weakening Impact of the Oil Crisis," IMES Discussion Paper Series 09-E-01, Institute for Monetary and Economic Studies, Bank of Japan.

    More about this item

    JEL classification:

    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:23423. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.