OPEC CARTEL BEHAVIOR: WHAT IS THEIR OBJECTIVE AND WHAT MAY HAPPEN NOW?

Transcription

1 OPEC CARTEL BEHAVIOR: WHAT IS THEIR OBJECTIVE AND WHAT MAY HAPPEN NOW? Peter Volkmar Rice University 19 June 2016

2 Is OPEC a Cartel? Is this a good question? Let s assume it is a cartel and see, given underlying market structure, what they might accomplish. A better question: What are the limits on a cartel s power? How much can OPEC affect the price of oil? How does the recent tight oil revolution change the answer to this question? To do just that, I build a game theoretic model showing the production cuts OPEC can ask of its membership.

3 Why should we care how much OPEC can affect the price of oil? OPEC member governments need astronomically high prices to prevent bankruptcy.

4 Why should we care how much OPEC can affect the price of oil? OPEC member governments need astronomically high prices to prevent bankruptcy.

5 Let a month s profits for player i be: N π i,t ( q t ) = P q i,t c i (q i,t ) j=1 q j,t where q t is a vector of all producers individual quantities of production again in period t. P ( ) is the price of the commodity being produced, q i,t is quantity produced by producer i in period t, c i ( ) is that producer s cost function, and there are N is the number of producers with market power.

6 Producers select a strategy to maximize the (scaled) net present value of their revenue stream: 1 1 δ i δi t π i,t ( q t ) (1) t=1 where δ i player i s is a discount factor. Coalition members are playing a game where they want their revenue stream high: both high oil prices and high production levels. They can only have one and jockey to see who can bear the brunt of lower production to get higher price for everyone else.

7 A strategy is a mapping from all players production levels (and all possible histories of those actions) to a player s production level for each period. A Sub-game Perfect Nash Equilibrium (SPNE) is a strategy profile such that in every period, given that all other players are following the prescribed strategy profile, no player can profit from unilaterally deviating to a strategy other than that prescribed in the SPNE. (We ll call this the incentive constraint.) Very broad equilibrium concept. The algorithm will return a convex set of payoffs to all players, of the form from the previous slide, which we ll call V, of all possible payoffs supported in SPNE. From that we have to back out the strategies involved.

8 Simplifying Technical Assumptions There s a public randomization device. E is convex. There is perfect monitoring. Don t have to worry about who knows what.

9 Approximating V Abreu, Pearce and Stacchetti find V theoretically. Judd, Yeltekin and Conklin approximate it in code and suggest it s possible to do so with more than two players.

10 Plan Examine payoffs supported in OPEC + Russia coalition Cost data from Rystad and Rice Baker Institute Countries can cut production down to 3 4 capacity Exclude countries with no fiscal ability to cut (Nigeria, Venezuela, etc.) Consider two scenarios: 2007 and 2017

11 Price and Cost Functions P brent t = β 0 β 1 Q t

12 Price and Cost Functions: Scenario 2007 P brent t = β 0 3Q t

13 Results: Scenario 2007 Figure: OPEC January 2017 cuts as a circle; max production as a + with Saudi Arabia, Russia, Iraq (shown), Kuwait and UAE (not shown)

14 Results: Scenario 2007 Figure: OPEC January 2017 cuts as a circle; max production as a + with Saudi Arabia, Russia, Iraq (shown), Kuwait and UAE (not shown)

15 Price and Cost Functions: Scenario 2017 P brent t = β 0 1.3Q t

16 Results: Scenario 2017 Figure: OPEC January 2017 cuts as a circle; max production as a + with Saudi Arabia, Russia, Iraq (shown), Kuwait and UAE (not shown)

17 Why should we care how much OPEC can affect the price of oil? OPEC member governments need astronomically high prices to prevent bankruptcy.