Saudi Arabia and the Oil Market

Forthcoming in Economic Journal: In this paper we document two features that have made Saudi Arabia different from other oil producers. First, it has typically maintained ample spare capacity. Second, its production has been quite volatile even though it has witnessed few domestic shocks. These features can be rationalised in a general equilibrium model in which the oil market is modelled as a dominant producer with a
competitive fringe. We show that the net welfare effect of oil tariffs on consumers is null. The reason is that Saudi Arabias' monopolistic rents fall entirely on fringe producers.