The U.S. shale oil boom, the oil export ban, and the economy: A general equilibrium analysis

Abstract

This paper examines the effects of the U.S. shale oil boom in a two-country DSGE model where countries produce crude oil, refined oil products, and a non-oil good. The model incorporates different types of crude oil that are imperfect substitutes for each other as inputs into the refining sector. The model is calibrated to match oil market and macroeconomic data for the U.S. and the rest of the world (ROW). We investigate the implications of a significant increase in U.S. light crude oil production similar to the shale oil boom. Consistent with the data, our model predicts that light oil prices decline, U.S. imports of light oil fall dramatically, and light oil crowds out the use of medium crude by U.S. refiners. In addition, fuel prices fall and U.S. GDP rises. We then use our model to examine the potential implications of the former U.S. crude oil export ban. The model predicts that the ban was a binding constraint in 2013 through 2015. We find that the distortions introduced by the policy are greatest in the refining sector. Light oil prices become artificially low in the U.S., and U.S. refineries produce inefficiently high amount of refined products, but the impact on refined product prices and GDP are negligible.

The Shale Revolution and the Dynamics of the Oil Market

“…Manescu and Nuno [38] show that the shale boom raised oil importers' GDP by 0.2%, while Bjornland and Zhulanova [11] show that the US now responds to oil shocks more like an oil exporter because of the positive spillovers from shale oil production. Melek et al [17], with a DSGE model, have U.S. GDP rising 1 percent as a result of the shale boom, while the shale boom increases global GDP by 0.16 -0.37 percent in Mohaddes and Raisi's study [39] which uses VAR methodology. Frondel and Horvath, [23], with a reduced form dynamic OLS model, show 6 that WTI prices would have been $40 -$50 higher without the shale boom.…”

“…We take the ultimate shale share of global production to be 20 percent. 17 We assume an "S" shaped transition curve from the low share steady state to the higher shale steady state. Specifically, we set…”

“…while log(v perm t ) is the permanent transition from the old steady state to the new steady 17 The consulting firm Rystad predicts that shale's share of global production will be 20 percent in 2050. The values of v perm old ss and v perm new ss are chosen so that the shale's share in global oil production is 0.5 and 20 percent, respectively.…”