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Are high oil prices profitable for OPEC in the long run?

Author

Listed:
  • Finn Roar Aune
  • Solveig Glomsrød
  • Lars Lindholt
  • Knut Einar Rosendahl

    (Statistics Norway)

Abstract

High oil prices are favourable for OPEC in the short run, but may undermine its future revenues. We search for the optimal oil price level for the producer group, using a partial equilibrium model for the oil market. The model explicitly accounts for reserves, development and production in 4 field categories across 13 regions. Oil companies may invest in new field development or alternatively in improved oil recovery in the decline phase of fields in production. Non-OPEC production is profit-driven, whereas OPEC meets the residual call on OPEC oil at a pre-specified oil price, while maintaining a surplus capacity. According to our results, sustained high oil prices stimulate Non-OPEC production, but its remaining reserves gradually diminish despite new discoveries. Oil demand is only slightly affected by higher prices. Thus, OPEC is able to keep and eventually increase its current market share beyond 2010 even with oil prices around $30 per barrel (2000-$). In fact, an oil price around $40 seems to be profitable for OPEC, even if long-term revenues are not discounted. Sensitivity analyses show that even with many factors working jointly in OPEC's disfavour, the optimal oil price seems to be at least $25. Thus, for OPEC there is a trade-off between high prices and high market share in the short to medium term, but not in the long term. For OECD countries, on the other hand, there is a clear trade-off between low oil prices and low import dependence.

Suggested Citation

  • Finn Roar Aune & Solveig Glomsrød & Lars Lindholt & Knut Einar Rosendahl, 2005. "Are high oil prices profitable for OPEC in the long run?," Discussion Papers 416, Statistics Norway, Research Department.
    • Handle: RePEc:ssb:dispap:416
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    References listed on IDEAS

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    Cited by:

    1. Eggert, Håkan & Greaker, Mads, 2009. "On blending mandates, border tax adjustment and import standards for biofuels," Working Papers in Economics 422, University of Gothenburg, Department of Economics.
    2. Lars Lindholt, 2019. "Effects of higher required rates of return on the tax take in an oil province," Discussion Papers 892, Statistics Norway, Research Department.
    3. Lars Lindholt & Solveig Glomsrød, 2011. "The role of the Arctic in future global petroleum supply," Discussion Papers 645, Statistics Norway, Research Department.
    4. Lars Lindholt, 2008. "Maximizing the discounted tax revenue in a mature oil province," Discussion Papers 544, Statistics Norway, Research Department.
    5. Finn Roar Aune & Gang Liu & Knut Einar Rosendahl & Eirik Lund Sagen, 2009. "Subsidising carbon capture. Effects on energy prices and market shares in the power market," Discussion Papers 595, Statistics Norway, Research Department.
    6. Finn Roar Aune, Knut Einar Rosendahl and Eirik Lund Sagen, 2009. "Globalisation of Natural Gas Markets - Effects on Prices and Trade Patterns," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 39-54.
    7. Bosede Comfort OLOPADE & David OLOPADE, 2010. "The Impact of Government Expenditure on Economic Growth and Development in Developing Countries: Nigeria as a Case Study," EcoMod2010 259600123, EcoMod.
    8. Knut Einar Rosendahl & Eirik Lund Sagen, 2009. "The Global Natural Gas Market: Will Transport Cost Reductions Lead to Lower Prices?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 17-40.
    9. Clemens Haftendorn & Franziska Holz & Christian von Hirschhausen, 2010. "COALMOD-World: A Model to Assess International Coal Markets until 2030," Discussion Papers of DIW Berlin 1067, DIW Berlin, German Institute for Economic Research.
    10. Lars Lindholt & Solveig Glomsrød, 2017. "Phasing out coal and phasing in renewables – good or bad news for arctic gas producers?," Discussion Papers 856, Statistics Norway, Research Department.
    11. Lindholt, Lars, 2021. "Effects of higher required rates of return on the tax take in an oil province," Energy Economics, Elsevier, vol. 98(C).
    12. Jakobsson, Kristofer & Söderbergh, Bengt & Snowden, Simon & Aleklett, Kjell, 2014. "Bottom-up modeling of oil production: A review of approaches," Energy Policy, Elsevier, vol. 64(C), pages 113-123.
    13. Aune, Finn Roar & Mohn, Klaus & Osmundsen, Petter & Rosendahl, Knut Einar, 2010. "Financial market pressure, tacit collusion and oil price formation," Energy Economics, Elsevier, vol. 32(2), pages 389-398, March.
    14. Lindholt, Lars & Glomsrød, Solveig, 2018. "Phasing out coal and phasing in renewables – Good or bad news for arctic gas producers?," Energy Economics, Elsevier, vol. 70(C), pages 1-11.
    15. Lindholt, Lars & Glomsrød, Solveig, 2012. "The Arctic: No big bonanza for the global petroleum industry," Energy Economics, Elsevier, vol. 34(5), pages 1465-1474.

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    More about this item

    Keywords

    Oil market; oil price; market power; equilibrium model;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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