Saudi Arabia and the Oil Market

Abstract

In this paper we document two features that have made Saudi Arabia dierent 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 eect of oil taris on consumers is null. The reason is that Saudi Arabias's monopolistic rents fall entirely on fringe producers. Saudi Arabia is one of the largest players in the global oil market: it produces more than a tenth of the world's oil output and owns a quarter of the world's proven reserves. The Kingdom is also a key OPEC member, typically playing a central role in OPEC's decision-making. Indeed, authors such as Mabro (1975) have gone so far as to claim that 'OPEC is Saudi Arabia'. And according to Adelman (1995), 'the Saudis have acted as what they are: the leading …rm in the world oil market'. Are these claims exaggerations? In this paper we document two features that have made Saudi Arabia dierent from the rest of producers. First, it systematically restricts its production. In fact, its spare capacity is much larger than the aggregate spare capacity of the rest of world producers. Second, its production is quite volatile. The variance of Saudi oil output has been very high compared to that of the rest of producers, even though the Kingdom itself has witnessed few domestic shocks aecting oil production directly. We show that one can rationalise the behaviour of Saudi Arabia as that of a dominant producer with competitive fringe. In the spirit of Salant (1976), we build an industrial organization model into a general equilibrium framework, assuming that the dominant supplier internalises a la Stackelberg the behavioural � Anton Nakov thanks the European Central Bank for its hospitality during the …rst drafts of this paper. The views expressed here are those of the authors and do not necessarily coincide with the views of the the Eurosystem or the Federal