A MACRO ECONOMIC APPROACH TO OIL PRODUCTION IN OPEC COUNTRIES

SIAMACK SHOJAI, Fordham University

Abstract

This paper uses a macro economic model of oil exporting developing nations (OPEC) in conjunction with a social welfare function approach (optimal control) to derive an optimum level of oil production. The macro model assumes the economy produces only three goods (oil, imported goods, and nontraded goods), and the foreign exchange rate is fixed. There are twelve endogenous and nine exogenous variables. A 2SLS technique is applied to estimate the macro model using pooled data over the period from 1973-1979. Countries included in this study are: Indonesia, Iran, Kuwait, Libya, Nigeria, Saudi Arabia, and Venezuela. The estimated macro model is used as a constraint in the process of maximization of a quadratic social welfare function which includes all of some of the endogenous variables of the model as well as the only control variable, namely, oil exports. Optimal oil production for the period 1974-1981 is calculated based on three different scenarios (A, B, and C). The empirical results indicate that oil revenue is an important factor in determination of GNP, government revenues and expenditures, consumption, and money supply. The price level does not influence imports, consumption and demand for money balances. Also, the nontraded goods industry seems to be an isolated industry, and distribution of income changes to the detriment of this industry as the economy becomes more open to international trade. The paper concludes that if economic growth is the main objective of policy makers, greater utilization of oil resources is required. Finally, it suggests more reliance on market forces and less subsidy programs. ^

Subject Area

Business Administration, General

Recommended Citation

SIAMACK SHOJAI, "A MACRO ECONOMIC APPROACH TO OIL PRODUCTION IN OPEC COUNTRIES" (January 1, 1984). ETD Collection for Fordham University. Paper AAI8506360.
http://fordham.bepress.com/dissertations/AAI8506360

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