A compact model of oil supply disruptions

Technical Report · Sat Aug 01 04:00:00 EDT 1987

DOI:https://doi.org/10.2172/5991510· OSTI ID:5991510

Reister, D. B.

We have developed a model of oil price jumps caused by oil supply disruptions. The core of the model is a compact general equilibrium model of oil demand. Given an exogenous forecast of oil supply and potential GNP for the world, the model can forecast the oil price, real GNP, and value added for the world. The data base for the model consists of historical time series of world oil supply, world oil price, and growth rates for world GNP. The data demonstrate that small changes in oil supply are associated with large changes in oil price. If a large change in oil price causes a small change in oil consumption, the short-run price elasticity of demand must be small. We have specified a model with a short-run and a long-run price elasticity. The six parameters in the model have been estimated using historical data for three cases. The initial model had five parameters. For Case 1, we used a search procedure to determine the parameters that minimized the root mean square (RMS) of the differences between the price backcast by the model and the historical data on oil price. We found that the RMS error was 121% and that the price calculated by the model was too low for the period from 1974 to 1980. After a review of the historical data on oil consumption, oil price, and world GNP, we concluded that the response of the world oil market to the 1974 oil price shock was different than the response to the 1979-80 oil price shock. To improve the model's capacity to simulate the historical data, we introduced a technological change factor that increases the demand for oil in the period from 1971 to 1979. For Case 2, the rate of technological change is 3.8% and the RMS error is 35%. For Case 3, the rate of technological change is 7.0% and the RMS error is 35%. Although Case 3 has the smallest error, we concluded that the Case 2 set of parameters provided the best match for the historical data on world oil price. 13 refs., 9 figs., 1 tab.

• Research Organization: Oak Ridge National Lab., TN (USA)
• DOE Contract Number: AC05-84OR21400
• OSTI ID: 5991510
• Report Number(s): ORNL/TM-10519; ON: DE88000034
• Country of Publication: United States
• Language: English

Related Subjects

02 PETROLEUM
020700* -- Petroleum-- Economics
Industrial
& Business Aspects
29 ENERGY PLANNING, POLICY, AND ECONOMY
294002 -- Energy Planning & Policy-- Petroleum
CORRELATIONS
ECONOMIC ELASTICITY
ENERGY SOURCES
FOSSIL FUELS
FUELS
GLOBAL ASPECTS
GROSS NATIONAL PRODUCT
MATHEMATICAL MODELS
PETROLEUM
PRICES
SUPPLY AND DEMAND
SUPPLY DISRUPTION