Abstract
This Selected Issues paper on Saudi Arabia assesses Saudi Arabia’s role in the oil market and global economy. Saudi Arabia, the world’s largest producer and exporter of oil, has long played a systemically important role in the global oil market. Short-term fluctuations in Saudi Arabia’s oil production have partially reflected attempts to stabilize the global oil market. Saudi Arabia has on several occasions used its systemic role to raise production to fill global demand gaps created by large supply disturbances. The authorities have made significant investments in higher education to enable productive private-sector employment for new Saudi labor force entrants.
Assessing Saudi Arabia’s Systemic Role in the Oil Market and Global Economy1
Oil remains the most important energy source in the global economy, accounting for approximately one third of total global energy consumption. Consequently, it comes as no surprise that disturbances in the oil market have the potential to significantly impact global economic activity. Saudi Arabia, the world’s largest producer and exporter of oil, has long played a systemically important role in the global oil market. In particular, with its unique ability to relatively quickly raise production due to its sizable spare capacity, Saudi Arabia is a stabilizing force in case of oil supply disturbances. This chapter attempts to quantify the importance of Saudi Arabia for the global economy, using both event studies and model simulations.
A. A Historic Perspective of Saudi Arabia in the Global Oil Market
1. Saudi Arabia is a central player in the global oil market. Over the period 1990–2011, Saudi Arabia produced over 78 billion barrels of oil (approximately 13 percent of global supply). This is significantly more than both Russia and the U.S. which come in second and third place with cumulative production levels of 70 and 60 billion barrels, respectively (see Table 1). Moreover, Saudi Arabia accounts for 16 percent of global proven reserves, lagging only Venezuela at 18 percent. However, Venezuelan reserves are generally viewed as less easily accessible and more costly to extract. Finally, and perhaps more importantly, Saudi Arabia has the ability over a short amount of time to substantially increase its supply to the global oil market. With a spare production capacity of over 2 million barrels per day (mbd), Saudi Arabia accounts for over 50 percent of global spare production capacity and can raise global oil production by over 2 percent within 30 days (roughly equivalent to Korea’s total consumption).2 In addition, to ensure smooth delivery of crude exports in case of transportation disruptions or other market disturbances, Saudi Arabia keeps large quantities of oil in storage facilities in the Mediterranean, northern Europe, and Asia to meet customer demand.
Saudi Arabia’s Role in the Global Oil Market
Saudi Arabia’s Role in the Global Oil Market
| Cumulative Production (1990–2012) | Average Spare Capacity (2012) | Reserves (2012) | ||||
|---|---|---|---|---|---|---|
| Billon barrels | Percent of global supply | Million barrels/day | Percent of global supply | Billion barrels | Percent of global reserves | |
| Saudi Arabia | 78.0 | 12.7 | 2.0 | 2.2 | 265.9 | 15.9 |
| Russia | 69.9 | 11.4 | … | … | 87.2 | 5.2 |
| US | 60.2 | 9.8 | … | … | 35.0 | 2.1 |
| Iran | 32.4 | 5.3 | 0.3 | 0.3 | 157.0 | 9.4 |
| China | 28.5 | 4.7 | … | … | 17.3 | 1.0 |
| Mexico | 27.6 | 4.5 | … | … | 11.4 | 0.7 |
| Venezuela | 26.0 | 4.2 | 0.1 | 0.1 | 297.6 | 17.8 |
| Canada | 22.1 | 3.6 | … | … | 173.9 | 10.4 |
| Norway | 21.6 | 3.5 | … | … | 7.5 | 0.4 |
| U.A.E | 21.4 | 3.5 | 0.1 | 0.1 | 97.8 | 5.9 |
| Nigeria | 18.1 | 3.0 | 0.4 | 0.5 | 37.2 | 2.2 |
| Kuwait | 18.0 | 2.9 | 0.1 | 0.1 | 101.5 | 6.1 |
| United Kingdom | 16.6 | 2.7 | … | … | 3.1 | 0.2 |
| Iraq | 14.7 | 2.4 | 0.2 | 0.2 | 150.0 | 9.0 |
| OPEC | 251.8 | 41.1 | 3.6 | 4.0 | 1211.9 | 72.6 |
| Global | 612.1 | 100.0 | 3.6 | 4.0 | 1668.9 | 100.0 |
Saudi Arabia’s Role in the Global Oil Market
| Cumulative Production (1990–2012) | Average Spare Capacity (2012) | Reserves (2012) | ||||
|---|---|---|---|---|---|---|
| Billon barrels | Percent of global supply | Million barrels/day | Percent of global supply | Billion barrels | Percent of global reserves | |
| Saudi Arabia | 78.0 | 12.7 | 2.0 | 2.2 | 265.9 | 15.9 |
| Russia | 69.9 | 11.4 | … | … | 87.2 | 5.2 |
| US | 60.2 | 9.8 | … | … | 35.0 | 2.1 |
| Iran | 32.4 | 5.3 | 0.3 | 0.3 | 157.0 | 9.4 |
| China | 28.5 | 4.7 | … | … | 17.3 | 1.0 |
| Mexico | 27.6 | 4.5 | … | … | 11.4 | 0.7 |
| Venezuela | 26.0 | 4.2 | 0.1 | 0.1 | 297.6 | 17.8 |
| Canada | 22.1 | 3.6 | … | … | 173.9 | 10.4 |
| Norway | 21.6 | 3.5 | … | … | 7.5 | 0.4 |
| U.A.E | 21.4 | 3.5 | 0.1 | 0.1 | 97.8 | 5.9 |
| Nigeria | 18.1 | 3.0 | 0.4 | 0.5 | 37.2 | 2.2 |
| Kuwait | 18.0 | 2.9 | 0.1 | 0.1 | 101.5 | 6.1 |
| United Kingdom | 16.6 | 2.7 | … | … | 3.1 | 0.2 |
| Iraq | 14.7 | 2.4 | 0.2 | 0.2 | 150.0 | 9.0 |
| OPEC | 251.8 | 41.1 | 3.6 | 4.0 | 1211.9 | 72.6 |
| Global | 612.1 | 100.0 | 3.6 | 4.0 | 1668.9 | 100.0 |
2. Over the past four decades, swings in Saudi Arabia’s oil production and changing export patterns have reflected evolving policy objectives as well as global demand and supply trends (Figure 1).
1970s: Tripling of oil production and changing ownership of the oil industry. Crude oil production in Saudi Arabia increased from 3.8 mbd in 1970 to close to 10 mbd in 1980. This sharp increase in production coincided with: (i) the return to public ownership of the oil industry; (ii) rising oil prices; and (iii) large investments to boost capacity. Consequently, Saudi Arabia’s share of the global oil market rose from less than 7 percent in 1970 to 16 percent in 1980.
1980s: Falling global oil demand and Saudi Arabia’s role as swing producer. As the United States and Europe entered into severe recessions in the early 1980s, global energy demand fell. Reduced demand for oil put downward pressure on prices and OPEC assigned production quotas to its members. However, the strategy was largely unsuccessful as several OPEC members continued to produce above their assigned quotas. Saudi Arabia, on the other hand, was committed to its role as swing producer and to OPEC’s official price system. As a result, the country bore the brunt of the cutback in production. Indeed, Saudi oil production fell by over 60 percent between 1981 and 1985. In September 1985, Saudi Arabia abandoned its role as a swing producer and raised output, contributing to a sharp fall in oil prices. Following the 1985–86 episode, Saudi Arabia also shifted to a policy focused on protecting and expanding its global market share, and abandoned the official pricing system of OPEC in favor of a more market-oriented pricing method.3
1990s and 2000s: Rising energy demand from developing Asia. From the mid 1990s, Saudi Arabia’s pattern of oil exports changed substantially along with rising energy demand from developing Asia. During the 1970s, Europe accounted for about 44 percent of Saudi oil exports, while Asia accounted for 30 percent. In the 2000s, however, Asia accounted for over 55 percent of Saudi Arabia’s oil exports while Europe’s share dropped to 15 percent.
Saudi Crude Oil Production, 1962–2012
(Million barrels per day)
Citation: IMF Staff Country Reports 2013, 230; 10.5089/9781484362419.002.A001
Source: Haver.Saudi Crude Oil Production, 1962–2012
(Million barrels per day)
Citation: IMF Staff Country Reports 2013, 230; 10.5089/9781484362419.002.A001
Source: Haver.Saudi Crude Oil Production, 1962–2012
(Million barrels per day)
Citation: IMF Staff Country Reports 2013, 230; 10.5089/9781484362419.002.A001
Source: Haver.3. Short-term fluctuations in Saudi Arabia’s oil production have partially reflected attempts to stabilize the global oil market. Saudi Arabia has on several occasions used its systemic role to raise production to fill global demand gaps created by large supply disturbances.
The First Gulf War (1990–91): The First Gulf War, which started in August 1990, resulted in a significant disruption to global oil supply. The combined output of Iraq and Kuwait fell from 4.8 to 0.4 mbd between 1990:Q2 and 1991:Q1, corresponding to a loss of 6.5 percent of global oil supply (Figure 2). The resulting demand gap, which was also driven by rising oil demand, was largely filled by Saudi Arabia which gradually raised its production from 5.4 to 8.2 mbd over the same time period, replacing almost two thirds of the combined output loss of Kuwait and Iraq. Nevertheless, global oil supply fell by 2.5 mbd in 1990:Q3 (3.7 percent of global supply) and the average oil price had doubled by the end of the year.
The Venezuelan Strike and the Second Gulf War (2002-2003): There were two consecutive oil supply disturbances in 2003: (i) the Venezuelan general strike from December 2002 to February 2003, and (ii) the second Gulf War starting at the end of March 2003. The loss in Venezuelan production (from 2002:Q3 to 2003:1) amounted to about 1.2 mbd, accounting for about 1.6 percent of global oil supply (Figure 3). At the same time global demand rose significantly. As a result, oil prices rose by over 16 percent in the first quarter of 2003. The gap was partially filled by a 1.1 mbd increase in Saudi Arabian production, a draw down in inventories of 1.3 mbd, and higher production by other producers. Although, the impact of the Second Gulf War on global supply was more severe—a 1.8 mbd loss in Iraqi production or 2.3 percent of global supply—the loss in production was to a large extent offset by: (i) the recovery of Venezuelan production; (ii) continued high Saudi production; and (iii) a substantial drop in global demand. Perhaps not surprisingly, oil prices fell back close to levels seen before the Venezuelan strike.
The Libyan unrest (2011): By the third quarter of 2011, the unrest in Libya had resulted in a loss of production of about 1.5 mbd (about 1.8 percent of global supply) (Figure 4). European refineries were particularly hard hit as a large share of Libyan oil was exported to Europe. To fill the consequent demand gap, Saudi Arabia responded not only by gradually raising production by over 1 mbd, but also by introducing a new oil blend tailored to European refineries. Other OPEC producer increased their production levels as well by an additional 1 mbd. Nevertheless, oil prices rose from $85/barrel to $110/barrel by the second quarter of 2011, an increase of 29 percent.
The Global Oil Market and the First Gulf War, 1990–911
Citation: IMF Staff Country Reports 2013, 230; 10.5089/9781484362419.002.A001
Sources: IEA; and IMF staff calculations.1Excess demand is calculated as the gap between global demand and pre-shock supply less the output loss of Kuwait and Iraq in the current quarter.The Global Oil Market and the First Gulf War, 1990–911
Citation: IMF Staff Country Reports 2013, 230; 10.5089/9781484362419.002.A001
Sources: IEA; and IMF staff calculations.1Excess demand is calculated as the gap between global demand and pre-shock supply less the output loss of Kuwait and Iraq in the current quarter.The Global Oil Market and the First Gulf War, 1990–911
Citation: IMF Staff Country Reports 2013, 230; 10.5089/9781484362419.002.A001
Sources: IEA; and IMF staff calculations.1Excess demand is calculated as the gap between global demand and pre-shock supply less the output loss of Kuwait and Iraq in the current quarter.
The Venezuelan General Strike and the Second Gulf War, 2002–03
Citation: IMF Staff Country Reports 2013, 230; 10.5089/9781484362419.002.A001
Sources: IEA; and IMF staff calculations.1Excess demand is calculated as the gap between global demand and pre-shock supply less the output loss of Kuwait and Iraq in the current quarter.The Venezuelan General Strike and the Second Gulf War, 2002–03
Citation: IMF Staff Country Reports 2013, 230; 10.5089/9781484362419.002.A001
Sources: IEA; and IMF staff calculations.1Excess demand is calculated as the gap between global demand and pre-shock supply less the output loss of Kuwait and Iraq in the current quarter.The Venezuelan General Strike and the Second Gulf War, 2002–03
Citation: IMF Staff Country Reports 2013, 230; 10.5089/9781484362419.002.A001
Sources: IEA; and IMF staff calculations.1Excess demand is calculated as the gap between global demand and pre-shock supply less the output loss of Kuwait and Iraq in the current quarter.
The Libyan Crisis, 2010–11
Citation: IMF Staff Country Reports 2013, 230; 10.5089/9781484362419.002.A001
Sources: IEA; and IMF staff calculations.The Libyan Crisis, 2010–11
Citation: IMF Staff Country Reports 2013, 230; 10.5089/9781484362419.002.A001
Sources: IEA; and IMF staff calculations.The Libyan Crisis, 2010–11
Citation: IMF Staff Country Reports 2013, 230; 10.5089/9781484362419.002.A001
Sources: IEA; and IMF staff calculations.4. Saudi Arabia’s response during 2011 also appears to have been associated with reduced oil price volatility. Oil price volatility spiked at four different points during 2011 (Figure 5).4 As oil prices continued to rise and the unrest in the region escalated, volatility rose sharply in February. Volatility fell back in March following two months of sustained increases in Saudi exports (0.95 mbd). The second spike occurred in May as worries about the euro area crisis worsened. The subsequent reduction in volatility in June coincided with a 0.54 mbd increase in Saudi exports. Although the volatility drop in August was not associated with a rise in Saudi exports, the sharp fall in volatility in November followed a marked increase in Saudi exports of 0.8 mbd.5
Oil Price Volatility, 2011
(30-day standard deviation of detrended oil prices)
Citation: IMF Staff Country Reports 2013, 230; 10.5089/9781484362419.002.A001
Sources: Bloomberg; JODI; and IMF staff calculations.Oil Price Volatility, 2011
(30-day standard deviation of detrended oil prices)
Citation: IMF Staff Country Reports 2013, 230; 10.5089/9781484362419.002.A001
Sources: Bloomberg; JODI; and IMF staff calculations.Oil Price Volatility, 2011
(30-day standard deviation of detrended oil prices)
Citation: IMF Staff Country Reports 2013, 230; 10.5089/9781484362419.002.A001
Sources: Bloomberg; JODI; and IMF staff calculations.B. Quantifying Saudi Arabia’s Systemic Role in the Current Global Environment6
5. Model simulations can help us better understand Saudi Arabia’s stabilizing role in the current global environment. The event studies above illustrated how Saudi Arabia responded to supply disturbances in the past. However, since there are multiple factors simultaneously impacting the outcome, it is difficult to understand to what extent the interventions by Saudi Arabia helped stabilize the market or what the counterfactual scenario would have looked like (i.e., if Saudi Arabia had not filled part of the demand gaps). Using a model based approach, however, helps us work around these problems. More importantly, model simulations facilitate a way of measuring Saudi Arabia’s importance not only to the oil market but also to global economic activity.
6. The systemic role played by Saudi Arabia in the context of a global oil supply shock can be analyzed using the IMF’s Global Economy Model (GEM). GEM is a multi-region, multiple-good model of the world economy that incorporates the global oil market. The model consists of six regions: the United States, Euro Area, Japan, Emerging Asia, Latin America, and the rest of the world (Box 1). The mechanism through which oil prices affect the global economy is fairly straight forward. A large negative oil supply shock causes oil prices to increase, resulting in higher costs of production (particularly in sectors that are oil intensive) and thus translates into a negative shock to aggregate supply. The increase in the oil price also has a direct impact in consumer prices causing headline inflation to rise.
The Global Economy Model
GEM is a multi-region, multiple-good model of the world economy that is derived from optimizing foundations.1 In each region there are households, firms, and a government. Households maximize utility derived from the consumption of goods and leisure. Firms combine capital and labor with either oil/commodities or land to maximize the net income from goods production. Governments consume goods financed through non-distorting taxes and adjust short-term nominal interest rates to provide nominal anchors.
Households
Households are infinitely lived, consume goods, and are the monopolistic suppliers of differentiated labor inputs to all domestic firms. Households exhibit habit persistence in consumption contributing to real rigidities in economic adjustment. Monopoly power in labor supply implies that households’ wages contain a markup over the marginal rate of substitution between consumption and leisure. Because of adjustment costs in wage contracts, aggregate nominal rigidities arise through wage bargaining. Households own all domestic firms, the domestic capital stock, and the land, which they rent to domestic firms. The markets for capital and land are competitive. Capital accumulation is subject to adjustment costs that contribute to gradual economic adjustment. The supply of land is fixed.
Firms
Firms produce three types of goods: a nontradable good; a tradable non-commodity good; and two tradable commodity (oil and non-oil) goods. Goods are assumed to be differentiated, leading to market power that enables firms to charge a markup over the marginal cost of production. Goods prices are subject to adjustment costs that, along with slowly adjusting wages, give rise to the gradual adjustment of prices to economic disturbances. The characteristics of the final bundle of goods consumed in each region reflect the preferences of households and firms over all goods and, consequently, international trade is driven by the interaction of preferences and relative prices.
Capital, labor, and commodities are combined to produce the tradable non-commodity good and the non-tradable good. The production process is given by:
where Y denotes the output of the non-commodity tradable good and the non-tradable good, A denotes the level of productivity, K is the capital input, L is the labor input, QC is the domestically produced commodity inputs, and MC is the imported commodity inputs. The production technology, f, embodies constant elasticity of substitution. For this application, non-commodities goods production is calibrated to be Cobb Douglas. Producers have a very high elasticity of substitution between imported and domestically produced commodities capturing the notion of a single world market for commodities.
Commodities are produced combining capital, labor, and a fixed factor, land. The production technology is given by:
where QC is domestically produced commodities, A denotes the level of productivity, K represents the capital input, L denotes the labor input, and Land is the fixed factor. The production technology, f, embodies constant elasticity of substitution. For this application, Land is calibrated to be the most important input into commodities production and the elasticity of substitution among land, labor, and capital is low.
Government
Government spending falls exclusively on non-tradable goods. Government spending is financed through a non-distorting tax. The government controls the national short-term nominal interest rate with the objective of providing a nominal anchor for the economy. The inflation rate is the nominal anchor in all countries/regions, with the exception of emerging Asia. For emerging Asia, the nominal anchor is stability in the nominal exchange rate between the Asian currency and the U.S. dollar.
The exchange rate
The key role for the exchange rate in GEM is to maintain external balance. In the short-run, differentials in real interest rates can move exchange rates away from the levels required to maintain current accounts and thus net foreign assets positions at their desired levels. However, ultimately real exchange rates will adjust to maintain external balance.
Parameterization
Parameter values for GEM are derived through calibration. Specific parameter values are determined by balancing several factors: empirical estimates available in the literature, the desired steady-state characterization of the economies, and the model’s dynamic adjustment properties. Behavioral parameters that do not affect expenditure shares or trading relationships have been set identically in all countries/blocks. Nominal and real adjustment cost parameters are also identical although nominal and real dynamics will differ because of different proportions of liquidity constrained households and different markups in goods and labor markets.
1 For a detailed description of GEM’s structure and dynamic adjustment properties see Laxton and Pesenti (2003), Hunt (2005), and Hunt and Rebucci (2005).7. In the model, an oil supply shock is considered that broadly matches Saudi Arabia’s spare production capacity. This is done to ensure that Saudi Arabia can realistically increase its oil production to completely fill the residual excess demand. Hence, the magnitude of the supply shock is set to 2 percent of global oil supply. Notice that the size of this shock is also broadly consistent with two of the event studies considered above (i.e., the twin shocks of 2003 and the Libyan crisis in 2011).
8. The simulation results illustrate the importance of Saudi Arabia to the global economy (see Table 2 and Figure 6). Three different scenarios are analyzed depending on how Saudi Arabia responds to the initial global oil supply shock in filling the residual excess demand: (1) Baseline—no response, i.e., Saudi Arabia does not increase production (black solid line); (2) Saudi Arabia fully replaces the lost output from the second quarter (blue line), this would be broadly consistent with the Venezuelan strike in 2002–03; and (3) Saudi Arabia gradually replaces the lost output over the length of a year (the Libyan crisis) (red dashed line).
Impact of a 2 percent Oil Supply Disturbance, by Region
(Maximum output loss relative to the pre-shock level in percentage points)
Impact of a 2 percent Oil Supply Disturbance, by Region
(Maximum output loss relative to the pre-shock level in percentage points)
| Saudi Response | World | Emerging Asia | Japan | U.S. | Euro Area | Latin America |
|---|---|---|---|---|---|---|
| No response (baseline) | 1.5 | 1.7 | 1.5 | 1.2 | 1.4 | 0.9 |
| Full replacement | 0.2 | 0.3 | 0.3 | 0.2 | 0.2 | 0.1 |
| Gradual replacement | 0.5 | 0.6 | 0.5 | 0.4 | 0.4 | 0.3 |
Impact of a 2 percent Oil Supply Disturbance, by Region
(Maximum output loss relative to the pre-shock level in percentage points)
| Saudi Response | World | Emerging Asia | Japan | U.S. | Euro Area | Latin America |
|---|---|---|---|---|---|---|
| No response (baseline) | 1.5 | 1.7 | 1.5 | 1.2 | 1.4 | 0.9 |
| Full replacement | 0.2 | 0.3 | 0.3 | 0.2 | 0.2 | 0.1 |
| Gradual replacement | 0.5 | 0.6 | 0.5 | 0.4 | 0.4 | 0.3 |
Global Impact of a Permanent 2 Percent Oil Supply Shock
(Percent difference relative to pre-shock level)
Citation: IMF Staff Country Reports 2013, 230; 10.5089/9781484362419.002.A001
Source: IMF staff calculations.Global Impact of a Permanent 2 Percent Oil Supply Shock
(Percent difference relative to pre-shock level)
Citation: IMF Staff Country Reports 2013, 230; 10.5089/9781484362419.002.A001
Source: IMF staff calculations.Global Impact of a Permanent 2 Percent Oil Supply Shock
(Percent difference relative to pre-shock level)
Citation: IMF Staff Country Reports 2013, 230; 10.5089/9781484362419.002.A001
Source: IMF staff calculations.Baseline case: The oil supply shock causes the oil price to rise and peak in the third quarter at about 46 percent above its the pre-shock level. Overall global economic activity falls by 1.5 percent compared to the pre-shock level after 10 quarters, with the greatest impact in Emerging Asia, which has the highest reliance on oil, where output falls by 1.7 percent. The impact is the smallest in Latin America, where output declines by 0.9 percent, given that the region has a combination of oil exporters and importers. The impact on GDP in the U.S. and the Euro Area is roughly, 1.2 and 1.4 percent, respectively.
Full replacement after one quarter: If Saudi Arabia intervenes and completely replaces the lost output in the second quarter, oil price dynamics will be significantly dampened. The oil price increases by 28 percent in the first quarter but then falls back sharply to only a 9 percent increase relative to the pre-shock level in the second quarter. The impact on global activity is also significantly mitigated as global GDP only declines by 0.2 percent. The decline in output in Emerging Asia is now 0.3 percent, while that of the U.S. and the Euro Area is 0.2 percent.
Full but gradual replacement: Not surprisingly, the gradual response constitutes an intermediate case of the preceding two simulations. The oil price first rises by 28 percent and then remains at the same level for the second quarter only to fall back over the next six months. Global GDP falls by 0.5 percent. Economic activity in Emerging Asia is 0.6 percent lower and GDP for the U.S. and the Euro Area declines by 0.4 percent.
C. Conclusion
9. Saudi Arabia is an important stabilizing force in the global economy. With control of over half of existing global spare production capacity, Saudi Arabia remains the only country in the world that can relatively quickly respond to supply disturbances. Event studies of the First Gulf War, the twin oil shocks in 2003, and the Libyan crisis suggest that Saudi Arabia has indeed used its spare capacity to mitigate supply shocks in other countries. Furthermore, simulations using the IMF’s Global Economy Model show that Saudi Arabia plays a systemically important role in the current global economy should there a significant oil supply disturbance.
10. Over the medium term, Saudi Arabia will retain a central position in the global oil market that will be shaped by both supply and demand factors. On the supply side, unconventional production technologies have resulted in a significant increase in projected oil and gas production in North America over the medium term, possibly leading to a decoupling of the western hemisphere from the rest of the global oil market. On the other hand, continued geopolitical uncertainties in the Middle East and North Africa represent downside risks to the global oil supply outlook. Uncertainties are also significant on the demand side. Although, the shale gas revolution in North America has primarily caused a shift away from consumption of coal, it could also reduce demand for oil products going forward. Furthermore, uncertainties in global demand growth and divergence in growth patterns (slow growth in Europe, moderate growth in the U.S., and stronger growth in emerging market economies) will shape the demand outlook. All these factors, in addition to strong domestic consumption growth, are likely to affect the position of Saudi Arabia in the global oil market.
References
Laxton, D., and P. Pesenti, 2003, “Monetary Policy Rules for Small, Open, Emerging Economies,” Journal of Monetary Economics, Vol. 50, pp 1109–46.
Hunt, B., 2005, “Oil Price Shocks: Can they Account for the Stagflation in the 1970s?” IMF Working Paper, WP/05/215 (Washington: International Monetary Fund).
Hunt, B., and A. Rebucci, 2005, “The U.S. Dollar and Trade Deficit: What Accounts for the Late 1990s?” International Finance, Vol. 8(3), pp 399–434.
Prepared by Niklas Westelius.
The data on spare capacity numbers for 2012 are taken from IEA which reports capacity levels that can be reached within 30 days and sustained for 90 days.
In an interview in 1998 with SPA (Saudi Press Agency), Minister of Petroleum and Mineral Resources Al-Naimi stated that Saudi Arabia had abandoned the role of swing producer in the 1980s because it had resulted in the loss of both market share and large oil revenues.
Oil price volatility is measured as the standard deviation of detrended oil prices over a 30-day period. The daily oil data is detrended using the HP-filter with a smoothing parameter of 100,000.
To some degree, one could consider the third and fourth volatility spikes as related to the short and temporary decline in volatility at the beginning of September.
The GEM Simulations in this section were prepared by Keiko Honjo.
