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OPEC, Saudi Arabia, and the Shale Revolution: Insights from Equilibrium Modelling and Oil Politics

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  • Ansari, Dawud

Abstract

Why did OPEC not cut oil production in the wake of 2014’s price fall? This study aims at aiding the mostly qualitative discussion with quantitative evidence from computing quarterly partial market equi-libria Q4 2011 – Q4 2015 under present short-term profit maximisation and different competition set-ups. Although the model performs reasonably well in explaining pre-2014 prices, all setups fail to cap-ture low prices, which fall even beyond perfect competition outcomes. This result is robust with respect to large variations in cost parameters. Rejecting present short-term profit maximisation, as well as a qualitative discussion of Saudi Arabian politics and the shale oil revolution, lead to the conclusion that the price drop of 2014-16 was most plausibly the result of an attempt to defend market shares and to test for shale oil resilience, besides being fuelled by other factors such as tightening climate policies. Although shale oil might have increased competition permanently (as supported by model results), the agreement of December 2016 should not be misunderstood as an OPEC defeat.

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  • Ansari, Dawud, 2017. "OPEC, Saudi Arabia, and the Shale Revolution: Insights from Equilibrium Modelling and Oil Politics," MPRA Paper 78657, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:78657
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    More about this item

    Keywords

    Crude oil; OPEC; Shale oil; Oil price; Equilibrium modelling; Saudi Arabia; Shale revolution;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
    • Q35 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Hydrocarbon Resources

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