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Industry restructuring, OPEC response – and oil price formation

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  • Finn Roar Aune
  • Klaus Mohn
  • Petter Osmundsen
  • Knut Einar Rosendahl

    ()
    (Statistics Norway)

Abstract

Increased focus on shareholder returns, capital discipline and return on capital employed (RoACE) caused a slowdown in investment rates and production growth among international oil companies around the turn of the century. Focusing on supply side dynamics of the oil market, we explore a hypothesis that the restructuring in the international oil industry towards the end of the 1990s had long-lived effects on OPEC strategies – and on oil price formation. Based on a partial equilibrium model for the global oil market, we examine the effects of the industry restructuring on oil supply and oil prices, compared with a counterfactual reference scenario characterised by industrial stability and unchanged price ambitions within OPEC. A key result is that important factors behind the currently high oil price can be traced back to the industrial restructuring and to the Asian economic crisis. This suggests that temporary economic and financial shocks may have a long-term impact on oil price formation.

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Bibliographic Info

Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 511.

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Date of creation: Jul 2007
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Handle: RePEc:ssb:dispap:511

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Keywords: Oil market; investment behaviour; market power; equilibrium model;

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References

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  1. Gang Liu, 2004. "Estimating Energy Demand Elasticities for OECD Countries. A Dynamic Panel Data Approach," Discussion Papers 373, Research Department of Statistics Norway.
  2. James L. Smith, 2003. "Inscrutable OPEC? Behavioral Tests of the Cartel Hypothesis," Working Papers 0305, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  3. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  4. 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.
  5. Peter C. Reiss, 1990. "Economic and Financial Determinants of Oil and Gas Exploration Activity," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 181-206 National Bureau of Economic Research, Inc.
  6. Sabine Bockem, 2004. "Cartel formation and oligopoly structure: a new assessment of the crude oil market," Applied Economics, Taylor & Francis Journals, vol. 36(12), pages 1355-1369.
  7. Osmundsen, Petter & Mohn, Klaus & Misund, Bard & Asche, Frank, 2007. "Is oil supply choked by financial market pressures?," Energy Policy, Elsevier, vol. 35(1), pages 467-474, January.
  8. Weston, J. Fred & Johnson, Brian A. & Siu, Juan A., 1999. "Mergers and restructuring in the world oil industry," Journal of Energy Finance & Development, Elsevier, vol. 4(2), pages 149-183.
  9. Golub, Stephen S, 1983. "Oil Prices and Exchange Rates," Economic Journal, Royal Economic Society, vol. 93(371), pages 576-93, September.
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Cited by:
  1. Lindholt, Lars & Glomsrød, Solveig, 2012. "The Arctic: No big bonanza for the global petroleum industry," Energy Economics, Elsevier, vol. 34(5), pages 1465-1474.
  2. Lars Lindholt & Solveig Glomsrød, 2011. "The role of the Arctic in future global petroleum supply," Discussion Papers 645, Research Department of Statistics Norway.
  3. Mohn, Klaus, 2009. "Elastic Oil. A primer on the economics of exploration and production," UiS Working Papers in Economics and Finance 2009/10, University of Stavanger.

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