Abstract
We use new, comprehensive micro data on oil fields to build and estimate a structural model of the oil industry embedded in a general equilibrium model of the world economy. In the model, firms that belong to Organization of the Petroleum Exporting Countries (OPEC) act as a cartel. The remaining firms are a competitive fringe. We use the model to study the macroeconomic impact of the advent of fracking. Fracking weakens the OPEC cartel, leading to a large long-run decline in oil prices. Fracking also reduces the volatility of oil prices in the long run because fracking firms can respond more quickly to changes in oil demand.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 132-164 |
| Number of pages | 33 |
| Journal | Review of Economic Studies |
| Volume | 90 |
| Issue number | 1 |
| DOIs | |
| State | Published - Jan 2023 |
Funding
An earlier version of this article was circulated under the title "Lags, Costs, and Shocks: An Equilibrium Model of the Oil Industry." We thank the editor, Dirk Krueger, four anonymous referees, and Hilde Bjornland, Craig Burnside, Mario Crucini, Wei Cui, Jésus Fernández-Villaverde, Matteo Iacoviello, Ravi Jaganathan, Ryan Kellogg, Lutz Kilian, Markus Kirchner, Laura Murphy, Valerie Ramey, and Rob Vigfusson for their comments.
Keywords
- Commodities
- Fracking
- Oil
- Q4
- Volatility
ASJC Scopus subject areas
- Economics and Econometrics