DP12047 Lags, Costs and Shocks: An Equilibrium Model of the Oil Industry

Author(s): Gideon Bornstein, Per Krusell, Sérgio Rebelo
Publication Date: May 2017
Keyword(s): commodities, Oil, volatility
JEL(s): Q4
Programme Areas: International Macroeconomics and Finance, Macroeconomics and Growth
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12047

We use a new micro data set to compile some key facts about the oil market and estimate a structural industry equilibrium model that is consistent with these facts. We find that demand and supply shocks contribute equally to the volatility of oil prices but that the volatility of investment by oil firms is driven mostly by demand shocks. Our model predicts that the advent of fracking will eventually result in a large reduction in oil price volatility.