The Transition to Uncontrolled Crude Oil Prices

The purpose of this paper is to outline some initial steps toward the construction of an adequate dynamic analysis of oil price controls. A precise description of the goals and structure of current price controls is provided. These controls are characterized in a dynamic model that generates estimates of efficiency losses and wealth transfers. A simple dynamic model of oil production is also developed. The dynamic model leads to 2 conclusions: (1) in the short-term, continued controls are likely to lead to larger rates of domestic crude oil production than would exist if controls were removed; and (2) a multi-part pricing system that is neutral in its effects on production decisions in a static context is not neutral in a dynamic model.