A World Equilibrium Model of the Oil Market

Gideon Bornstein; Per Krusell; Sergio Rebelo

doi:10.3386/w23423

A World Equilibrium Model of the Oil Market

Gideon Bornstein, Per Krusell & Sergio Rebelo

Working Paper 23423

DOI 10.3386/w23423

Issue Date May 2017

Revision Date January 2021

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.

An earlier version of this paper was circulated under the title "Lags, Costs, and Shocks: An Equilibrium Model of the Oil Industry." We thank Hilde Bjornland, Craig Burnside, Mario Crucini, Wei Cui, Jésus Fernández-Villaverde, Matteo Iacoviello, Ravi Jaganathan, Ryan Kellogg, Lutz Kilian, Markus Kirchner, Laura Murphy, Valerie Ramey, and Rob Vigfusson for their comments.. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
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A World Equilibrium Model of the Oil Market

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