Crude Oil Price Fluctuations and Saudi Arabian Behaviour

No 1014, Kiel Working Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: This study seeks to explain why crude oil prices fluctuate, the main cause being the quota regime, which characterises the OPEC agreements. Given that the Saudi oil supply is inelastic in the short term, a shock in the oil market is accommodated by an immediate price change. In contrast, a dominant firm behaviour in the long term causes an output change, which is accompanied by a smaller price change. This explains why oil prices overshoot. The results of a general equilibrium model applied to Saudi Arabia support this analysis. They also indicate that Saudi Arabia does not have any incentive in altering the crude oil market equilibrium with either positive or negative supply shocks; and that its behaviour is asymmetric in the presence of world demand shocks, having an incentive (disincentive) in intervening if a negative (positive) demand shock hits the crude oil market. A second set of simulations is designed to understand what might be a correct OECD policy to lower prices. A tax cut would worsen the situation, whereas policies which can increase the price elasticity of demand seem to be very effective.

Keywords: Crude oil prices; OPEC countries; export quota; computable general equilibrium (search for similar items in EconPapers)
JEL-codes: D58 F13 Q40 (search for similar items in EconPapers)
Date: 2000
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Journal Article: Crude oil price fluctuations and Saudi Arabia's behaviour (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1014

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