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The World Oil Market: An Examination Using Small-Scale Models

This article presents the results of a series of exercises in the use of small-scale models to explain the spot price of crude oil. Small scale modeling-the use of a limited number of equations-involves a number of disadvantages: many interesting questions will have to be ignored and often a sense of realism may be sacrificed. However, small-scale models are an essential part of economic research. Compared to large, multi-equation models, small-scale models are often transparent-causal relations are clearly visible. In addition, small-scale models can often be easily updated and reexamined in the light of new information or assumptions. This is particularly important in policy-making when time and clear communication are at a premium.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Energy Modeling – Energy Data, Modeling, and Policy Analysis

JEL Codes: Q43: Energy and the Macroeconomy, Q38: Nonrenewable Resources and Conservation: Government Policy, Q41: Energy: Demand and Supply; Prices, D58: Computable and Other Applied General Equilibrium Models, Q02: Commodity Markets, D47: Market Design

Keywords: World oil markets, Small-scale models, OPEC, Price shocks

DOI: 10.5547/ISSN0195-6574-EJ-Vol9-No3-2

Published in Volume 9, Number 3 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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