Econonomics of Energy and Environmental Policy

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OPEC’s Pursuit of Market Stability

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We investigate attempts by the Organization of Petroleum Exporting Countries (OPEC) to stabilize the price of oil during the past fifty years. We first develop a novel decomposition of shifts in global demand and non-OPEC supply. This decomposition provides a fresh perspective on the debate over the relative importance of demand versus supply factors as determinants of previous price movements. When factoring in OPEC’s production, the analysis suggests market stabilization efforts by OPEC. Using more detailed monthly data available only since 2001, we extend and refine Pierru, Smith, and Zamrik’s (2018) analysis of OPEC’s management of spare capacity to offset shocks to demand and supply. Although OPEC’s attempt to identify and offset shocks has not been perfect, we nevertheless conclude that, overall, OPEC’s use of spare capacity has achieved a significant reduction in the volatility of the price of oil. This has been particularly true during the recent OPEC+ period. We also provide an estimate of welfare gains to the global economy that result from OPEC’s effort to reduce price volatility and show how these gains have been distributed geographically.
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Keywords: OPEC, spare capacity, oil, price volatility, demand and supply shocks

DOI: 10.5547/2160-5890.9.2.apie

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Published in Volume 9, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.


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