A Simultaneous Equations Model for World Crude Oil and Natural Gas Markets
February 1, 2005
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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.
Subject: Natural gas sector, Oil, Oil prices, Personal income, Price elasticity
Keywords: crude oil, price, WP
Pages:
24
Volume:
2005
DOI:
Issue:
032
Series:
Working Paper No. 2005/032
Stock No:
WPIEA2005032
ISBN:
9781451860511
ISSN:
1018-5941
