When appraising investment projects from a public perspective, a barrel of oil displaced from or added to domestic consumption has to be valued at its opportunity cost. This paper develops a partial-equilibrium framework to assess the opportunity cost of domestic oil consumption for an oil-exporting country. The framework takes into account that (i) the usual ‘small economy’ assumption does not necessarily hold, (ii) the domestic oil price can be set either at a fixed level or as a function of the international price, and (iii) oil production, level of exports, or domestic consumption can be constrained. We derive the opportunity cost for each case considered and a formula quantifying the net welfare gains from reforming the domestic oil priceMarch 1, 2020
Axel leads the Energy and Macroeconomics program and has a special interest in applied research combining methodological innovation and practical relevance for policymaking. He joined KAPSARC in 2011, after spending 15 years at IFP Energies Nouvelles in France where he led research, consulting and training projects. Axel received his Ph.D. in Economics from Pantheon-Sorbonne University in Paris. His research focus is on energy economics and policy, corporate finance, and oil pricing. He has published more than 30 papers in peer-reviewed journals.