ERF 26th Annual Conference
The Opportunity Cost of Domestic Oil Consumption for an Oil Exporter: Illustration for Saudi Arabia
No.
ERF26_309
Publisher
ERF
Date
August, 2020
Topic
Q3. Nonrenewable Resources and Conservation
O5. Economywide Country Studies
This paper develops a partial-equilibrium framework to assess the opportunity cost of domestic oil consumption for an oil-exporting country. The framework takes into account that (i) the usual ‘small economy’ assumption does not necessarily hold, (ii) the domestic oil price can be set either at a fixed level or as a function of the international price, and (iii) oil production, level of exports, or domestic consumption can be constrained. We provide a numerical illustration using 2018 data for Saudi Arabia. We find that, for a project with a short-term impact on domestic oil demand, the opportunity cost of a barrel of oil could range between US$ 15 and US$ 25. Using the envelope theorem, we show that increasing the domestic price of a barrel of oil by US$ 1 could result in a net welfare increase in Saudi Arabia of up to US$ 200 million. Our results can inform decision making in countries that aim to diversify their economies away from oil revenues.
Research Fellows
Fatih Karanfil
Principal Fellow, KAPSARC
