OPEC's Demand Curve

Abstract

I estimate world demand for crude petroleum, the effect of petroleum prices on world income, and non OPEC supply of crude petroleum using seasonally adjusted data and a number of instruments. Structural breaks help explain stationarity in demand, and cointegration of variables suggests superconsistency of estimated coefficients. Demand exhibits substantial persistence, a secular trend toward conservation, and becomes more elastic as price rises. The asymmetry of macroeconomic effects of changes in oil prices fully accounts for the asymmetry of their effects on demand. Effects of oil price increases on a stochastically trending world GDP decline as the world economy outgrows dependence on oil. Non OPEC supply exhibits persistence, improving technology, and costs that increase both as existing fields are pumped faster and as increasingly costly fields are drilled. Net demand to OPEC is more elastic than world demand, much more elastic in the long run than in the short run, and unit elastic over permanent decreases in price at a price of $81/bl under current conditions.

Keywords: OPEC, Petroleum, Demand

JEL Classification: Q34, Q41, Q43