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This paper provides a quantitative analysis of the change in the price of oil due to an exogenous change in the supply of oil. It first outlines the role of oil in large-scale econometric models and reviews the theory upon which the oil/energy sectors in these models are based. It then presents a small reduced form of the large-scale econometric model and discusses the model’s key parameters. The model is solved in order to determine the price of oil in the event of an oil supply disruption. The paper then discusses the sensitivity of the price effects of an oil market disruption to changes in the model’s parameters and compares this range of price estimates to the three major supply disruptions of the past two decades.
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William L. Helkie (1991) studied this question.
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