(Mis)Allocation, Market Power, and Global Oil Extraction

We propose an approach to measuring the misallocation of production in a market that compares actual industry cost curves to undistorted (counterfactual) supply curves. As compared to traditional, TFPR-based, misallocation measures, this approach leverages cost data, such that results are readily mapped to welfare metrics. As an application, we analyze global crude oil extraction and quantify the extent of misallocation therein, together with the proportion attributable to market power. From 1970 to 2014, we find substantial misallocation, in the order of US$744 billion, 14.1 percent to 21.9 percent of which is attributable to market power.