A World Equilibrium Model of the Oil Market

We use a new micro data to compile some key facts about the oil market and estimate a structural industry equilibrium model that is consistent with these facts. Our model implies that demand and supply shocks contribute equally to the volatility of oil prices but that the volatility of investment by oil firms is driven mostly by demand shocks. Our model predicts that the advent of fracking will eventually result in a large reduction in oil price volatility.