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A class of short-term models for the oil industry that accounts for speculative oil storage

Author

Listed:
  • Yves Achdou

    (Université de Paris Cité and Sorbonne Université, CNRS)

  • Charles Bertucci

    (École Polytechnique)

  • Jean-Michel Lasry

    (Université Paris-Dauphine)

  • Pierre-Louis Lions

    (Collège de France)

  • Antoine Rostand

    (Kayrros)

  • José A. Scheinkman

    (Columbia University
    Princeton University
    NBER)

Abstract

We propose a plausible mechanism for the short-term dynamics of the oil market based on the interaction of a cartel, a fringe of competitive producers, and a crowd of capacity-constrained physical arbitrageurs that store the resource. The model leads to a system of two coupled nonlinear partial differential equations, with a new type of boundary conditions that play a key role and translate the fact that when storage is either full or empty, the cartel has enhanced strategic power. We propose a finite difference scheme and report numerical simulations. The latter result in apparently surprising facts: 1) the optimal control of the cartel (i.e., its level of production) is a discontinuous function of the state variables; 2) the optimal trajectories (in the state variables) are cycles which take place around the discontinuity line. These patterns help explain remarkable price swings in oil prices in 2015 and 2020.

Suggested Citation

  • Yves Achdou & Charles Bertucci & Jean-Michel Lasry & Pierre-Louis Lions & Antoine Rostand & José A. Scheinkman, 2022. "A class of short-term models for the oil industry that accounts for speculative oil storage," Finance and Stochastics, Springer, vol. 26(3), pages 631-669, July.
    • Handle: RePEc:spr:finsto:v:26:y:2022:i:3:d:10.1007_s00780-022-00481-y
    DOI: 10.1007/s00780-022-00481-y
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    References listed on IDEAS

    as
    1. Marcel Nutz & José A. Scheinkman, 2020. "Shorting in Speculative Markets," Journal of Finance, American Finance Association, vol. 75(2), pages 995-1036, April.
    2. James D. Hamilton, 2009. "Understanding Crude Oil Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 179-206.
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    4. Harold Hotelling, 1931. "The Economics of Exhaustible Resources," Journal of Political Economy, University of Chicago Press, vol. 39(2), pages 137-137.
    5. Michael Barnett & William Brock & Lars Peter Hansen & Harrison Hong, 2020. "Pricing Uncertainty Induced by Climate Change," The Review of Financial Studies, Society for Financial Studies, vol. 33(3), pages 1024-1066.
    6. Caldara, Dario & Cavallo, Michele & Iacoviello, Matteo, 2019. "Oil price elasticities and oil price fluctuations," Journal of Monetary Economics, Elsevier, vol. 103(C), pages 1-20.
    7. Partha Dasgupta & Geoffrey Heal, 1974. "The Optimal Depletion of Exhaustible Resources," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(5), pages 3-28.
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    More about this item

    Keywords

    Economics of oil industry; Major agent facing a crowd of physical arbitrageurs; Boundary conditions linked to state constraints;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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