IMF Working Papers

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

Author/Editor:

Noureddine Krichene

Publication Date:

February 1, 2005

Electronic Access:

Free Full Text. Use the free Adobe Acrobat Reader to view this PDF file

Link to data for this title

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