Optimum Allocation of Oil Income: A Dynamic CGE Model

Efficient and optimal allocation of oil income for sustainable development is an important issue in oil exporting countries. In this paper we present a dynamic computable general equilibrium model of exhaustible resource extraction. It is a two sector model, in which the dynamic sector is optimized with respect to static one. The static sector is a standard CGE model developed by Dervise and et. al (1982) for developing economies. In this framework, at each period of time, state sets saving rate by a set of economic policies and also sets the extraction rate of natural resources to maximize Intertemporal social welfare function. Then it determines oil sector investment by using a geo-engineering oil model, namely Maximum Efficient Recovery. Residual investible funds are allocated between non-oil sectors based on their shares in total profitability. Model is calibrated by 1380 social accounting matrix and optimal path of hydrocarbon extraction, investment in oil and gas sector and non-oil sector derived by solving Intertemporal optimization problem.