Saudi Arabia and the Oil Market

Authors


  • Anton Nakov thanks the European Central Bank for its hospitality during the first drafts of this article. The views expressed here are those of the authors and do not necessarily coincide with the views of the the Eurosystem or the Federal Reserve System. We have benefited from comments and suggestions by Dirk Krueger, Lutz Kilian, Rafael Domenech, Alessia Campolmi and conference participants at ESSIM, Computing in Economics and Finance, Dynare, and seminar participants at Milano-Bicocca, ECB and BBVA.

Abstract

In this study, we document two features that have made Saudi Arabia different from other oil producers. First, it has typically maintained ample spare capacity. Second, its production has been quite volatile even though it has witnessed few domestic shocks. These features can be rationalised in a general equilibrium model in which the oil market is modelled as a dominant producer with a competitive fringe. We show that the net welfare effect of oil tariffs on consumers is null. The reason is that Saudi Arabia's monopolistic rents fall entirely on fringe producers.

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