A Simultaneous Equations Model for World Crude Oil and Natural Gas Markets
IMF Working Papers, February 1, 2005
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- A Simultaneous Equations Model for World Crude Oil and Natural Gas Markets
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Bibliographic details
- Authors: Noureddine Krichene
- Published: February 1, 2005
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451860511.001
Model findings
- A model for world crude oil and natural gas markets is estimated.
- Confirms low price and high income elasticities of demand for both crude oil and natural gas.
- Low price and high income elasticities explain:
- the market power of oil producers, and
- price volatility following shocks.
Relationship with monetary variables and demand 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.
Policy implications and recommendations
- The results imply that crude oil prices should be included in the policy rule equation of an inflation targeting model.