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Table of Contents
1 Introduction ................................................................................ 1
2 The Theory of Energy Prices and Supplies ............................. 2
2.1
2.1.1
2.1.2
2.2
2.3
2.3.1
2.3.2
Competition Theory ................................................................................2
The Theory of Monopolistic Competition and Oligopoly .........................2
Variational Inequalities Theory ...............................................................5
Price Discrimination................................................................................5
Cartels – a consequence of oligopolistic kinked demand curve .............7
Leader and Follower – OPEC and Non-OPEC Producers......................8
History of OPEC .....................................................................................8
3 Oil Price History ......................................................................... 9
3.1
3.2
3.3
3.4
Pricing of Oil ...........................................................................................9
Oil Price Volatility..................................................................................11
Higher Oil Prices and the Effect on the Global Economy .....................13
Oil Prices and Business Cycles ............................................................14
4 Oil dependence of the economies of Saudi Arabia and
the United States........................................................................... 15
4.1
4.2
Saudi Arabia.........................................................................................15
The United States.................................................................................18
5 Terms of Trade ......................................................................... 19
5.1
5.2
5.3
Terms of Trade .....................................................................................19
General Mechanism .............................................................................20
Welfare Effects .....................................................................................21
6 Data ........................................................................................... 21
6.1
Terms of Trade and Oil Price ...............................................................22
7 Regression Equation ............................................................... 22
8 Regression Results ................................................................. 24
9 Conclusion ............................................................................... 28
References..................................................................................... 30
Figures
Figure 2.1 Monopolistic Competition……………………………………….……....3
Figure 2.2 Kinked Demand Curve under Oligopoly ………………………………4
Figure 2.3 The Elasticity of Demand………………………………………………..6
Figure 3.1 Average IEA Crude Oil Import Prices………….………………..……12
Figure 4.1 Export pattern for Saudi Arabia 1970-2004 …………………………16
Figure 4.2 Petroleum Export and Import pattern for the United States 19902004…………………………………………………………………..…………….....19
Figure 5.1 Price Elasticity of Demand..…………………………………………...20
Figure 8.1 Elasticity of Petroleum Prices…………………………………….……25
Tables
Table 3.1 Percentage Change in World Oil Prices............................................13
Table 3.2 Percentage Growth in GWP………………………………………........14
Table 4.1 Percentage Change in Saudi Arabia’s export………………………...17
Table 8.1 Regression analysis for the World Business Cycle...........................24
Table 8.2 Regression analysis on Saudi Arabia’s petroleum export ……….....25
Table 8.3 Regression analysis for Saudi Arabia and the United States..…….. 26
Appendices
Appendix I Crude Oil Production – Non-OPEC Countries
Appendix II Crude Oil Production – OPEC Countries
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1 Introduction
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