Inventories and quantity constrained equilibria in regulated markets: the US Petroleum Industry, 1947-1972

Technical Report · Sat Jan 01 04:00:00 EST 1983

OSTI ID:5503032

Eckstein, Z; Eichenbaum, M S

Reliable knowledge of how domestic energy supplies respond to changing prices is needed to assess the impact of an oil disruption and to estimate the value of ameliorative policies such as import tariffs and the Strategic Petroleum Reserves. Over the longer run, supply response has a bearing on how rapidly alternatives to imports will be developed. Further, price responsiveness is a central consideration in debates over the wisdom of price controls. Historical data on prices and supplies must be used in deriving empirical estimates of this response. Unfortunately, these data represent observations taken under strikingly different regimes, especially with regard to import restrictions and market demand prorationing in the case of oil. Are these data, distorted as they are, useful in projecting the response of domestic producers to future import disruptions or government policy shifts. This report addresses these issues by applying the theory of rational expectations to develop a model of the oil industry under prorationing restrictions. The model is computationally tractable, and the supply functions derived from it can be contrasted to supply relationships in the absence of regulation. The contrast is sharp: the two relationships predict systematically different responses to price. Based on these differences, the authors argue that much of the observed low responsiveness to price during the period of prorationing can be attributed to the controls and may convey a seriously misleading picture of how suppliers will react to price changes now that the controls no longer act to stabilize prices. While the model is based on a highly stylized description of the structure and operation of the petroleum industry, the methodology developed in the paper points a way toward more accurate estimation of how producers will respond to changing prices and regulatory environments.

• Research Organization: Resources for the Future, Inc., Washington, DC (USA)
• DOE Contract Number: AC01-80PE70267
• OSTI ID: 5503032
• Report Number(s): DOE/PE/70267-T16; ON: DE85016768
• Country of Publication: United States
• Language: English

Related Subjects

02 PETROLEUM
020700* -- Petroleum-- Economics
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29 ENERGY PLANNING, POLICY, AND ECONOMY
290200 -- Energy Planning & Policy-- Economics & Sociology
292000 -- Energy Planning & Policy-- Supply
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294002 -- Energy Planning & Policy-- Petroleum
ECONOMETRICS
ECONOMICS
ENERGY SOURCES
FOSSIL FUELS
FUELS
INDUSTRY
INVENTORIES
MARKET
PETROLEUM
PETROLEUM INDUSTRY
PRICES
REGULATIONS