OPEC at 60: the world with and without OPEC

Abstract

This paper provides a historical perspective from 1990 to 2018 of the functioning of the world oil market with and without OPEC. The analysis builds on a new methodology simulating counterfactual (i.e. what-if) outcomes in the rich context of state-of-the-art structural VAR models of the world oil market to empirically assess OPEC's contribution to oil markets and the global economy by quantifying the impact of OPEC's balancing role via its spare capacity cushion on the historical evolution of oil production, oil prices and price volatility, the joint evolution of the supply and demand elasticities and global welfare. A counterfactual scenario is constructed of how global oil production would have evolved if OPEC had been producing at maximum capacity, held no spare capacity and did not play any balancing role since 1990. The analysis also employs a general equilibrium approach to determine the global welfare implications of a world without OPEC spare capacity across oil-exporting and oil-importing regions. The welfare effects are calculated based on regional GDP gains and losses following changes in oil production patterns globally. The methodology to determine the impact on GDP is based on a computable general equilibrium (CGE) framework which offers a high level of detail regarding the world economy in terms of economic sectors and regional interdependencies.