OPTIMAL OIL PRICING POLICY FOR SAUDI ARABIA

The dissertation is comprised of three parts. The first part presents an institutional description of Saudi Arabia's and the world's oil industries and it analyzes the factors which are apt to shape the Kingdom's long run oil pricing policy. These factors include prices of alternative sources of energy (i.e. substitution prices), cost of exhaustion (i.e. future opportunity cost of production), opportunity cost of oil productive capacity, depletion cost and time preferences for oil revenues.;In the final part, two of the theoretical models are applied and the long-run optimal oil prices are computed. In the first model, addition to oil productive capacity is exogenously determined. This model predicts that optimal domestic and export prices would increase every year throughout the exhaustion period, which is determined to be approximately 55 years. For this period, total benefits would equal approximately 921 billion dollars, in 1978 prices. A quantitative sensitivity analysis is also provided. The factors which have the greatest influence over the country's oil prices are the discount rate and prices of alternative sources of energy. A decrease in the discount rate from 5 percent to 4 percent would raise prices and would increase the exhaustion period to 63 years. An increase in the price of alternative sources of energy from 25 dollars to 35 dollars per barrel would raise prices substantially and would increase the exhaustion period to 72 years.;In the second model, addition to capacity is endogenously determined. The model also predicts that prices would increase throughout the exhaustion period, which is estimated to equal 61 years. Total benefits are estimated to equal 906 billion dollars.;The second part is a theoretical analysis of the Kingdom's optimal oil pricing policy. The dynamic optimization models utilized are based on a price theory of exhaustible resources (i.e. the control variables are prices). The institutional factors which are analyzed in the first part are incorporated in the models, together with alternative possible formulations of the criterion function, reflecting the country's policy objectives. The optimal solution (i.e. optimal export and domestic prices) are characterized under different assumptions on the institutional factors and formulations of the criterion function. These formulations range from domestic consumers' benefits (i.e. consumers' surplus) to producer's and foreign and domestic consumers' benefits (i.e. economic surplus). The characterization of solutions varies from monopsonistic prices to monopolistic prices.