A Simultaneous Equations Model for World Crude Oil and Natural Gas Markets

Author/Editor:

Noureddine Krichene

Publication Date:

February 1, 2005

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

A model for world crude oil and natural gas markets is estimated. It confirms low price and high income elasticities of demand for both crude oil and natural gas, which explains the market power of oil producers and price volatility following shocks. The paper establishes a relationship between oil prices, changes in the nominal effective exchange rate (NEER) of the U.S. dollar, and the U.S. interest rates, thereby identifying demand shocks arising from monetary policy. Both interest rates and the NEER are shown to influence crude prices inversely. The results imply that crude oil prices should be included in the policy rule equation of an inflation targeting model.

Series:

Working Paper No. 05/32

Subject:

Crude oil Demand Energy sector Interest rates Investment Natural gas Nominal effective exchange rate Output Prices Supply

English

Publication Date:

February 1, 2005

ISBN/ISSN:

9781451860511/1018-5941

Stock No:

WPIEA2005032

Format:

Paper

Pages:

24

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