Discussion Paper Details

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

Author(s): Gideon Bornstein, Per Krusell and SÚrgio Rebelo

Publication Date: May 2017

Keyword(s): commodities, Oil and volatility

Programme Area(s): International Macroeconomics and Finance and Macroeconomics and Growth

Abstract: 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.

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Bibliographic Reference

Bornstein, G, Krusell, P and Rebelo, S. 2017. 'Lags, Costs and Shocks: An Equilibrium Model of the Oil Industry'. London, Centre for Economic Policy Research.