How do oil producers respond to oil demand shocks?

- I study the response of oil-producing countries to demand-induced oil price changes.
- Demand shocks are derived from a structural VAR model of the global oil market.
- Short-run price elasticities of oil supply are close to zero at the country level.
- OPEC and non-OPEC producers respond differently to a speculative oil demand shock.
- Both flow and speculative demand shocks contribute to fluctuations in oil production.

This paper analyzes the response of international oil producers to demand-induced changes in the price of crude oil during 1975-2011, focusing on potential differences between OPEC and non-OPEC countries. The goal is to derive consistent estimates of the short-run price elasticity of crude oil supply at the country level. I find that oil producers hardly respond to demand shocks within the same month, and that the corresponding impact price elasticities of supply are statistically indistinguishable from zero. While there is little evidence of differences in the dynamic responses to a typical flow demand shock, on average over the sample period, OPEC members seem to curtail production in response to a speculative demand shock, whereas non-OPEC production expands significantly. Flow and speculative demand shocks account for a nontrivial fraction of the total variability in country-level crude oil supply.