A model of crude oil pricing and the interaction between OPEC, the U.K. and Mexico

Abstract

In this thesis I construct a model of the crude oil market in which attention is focused on how producers' behaviour changes over time, in particular their willingness to cooperate with other producers in maintaining high prices. This approach is based on developments in oligopoly theory which suggest that firms will only continue to abide by a cooperative arrangement so long as they observe other producers doing so. Particular attention is paid to the role of fringe producers such as the U.K. and Mexico in influencing the profitability of particular OPEC countries, and the way this is transmitted to other producers.After a brief synopsis of the recent history of the oil market, the thesis outlines some of the relevant economic analysis from the theory of exhaustible resources and oligopoly theory. A survey of attempts to model the crude oil market concludes that none of the previous attempts is very convincing in terms of their ability to explain the data, and this may be due, in part, to using an a priori fixed view of how producers behave. I then outline a model which allows producers' behaviour to vary over time, and for their behaviour to be determined by the data.The model is estimated on monthly data for 1974-83; estimation is in two parts - the demand equations and then the behavioural equations. A number of tests of specification, including forecast performance, are applied, and with a few exceptions, the model passes these tests. A test of the hypothesis that behaviour did not change is comfortably rejected, justifying the claim that variations in behaviour of producers were important over that period. The model is used to simulate changes in policy by the U.K. and Mexico. It is shown that cuts in the U.K. production would not have a significant impact on prices, as they would be largely offset by expansions of output by Nigeria. Similarly, changes in Mexico's policy have little impact on prices, since cutback in Mexico's production is offset by an expansion of Venezuela's production. (D80652)

More information

Identifiers

Catalogue record

Export record

ASCII CitationAtomBibTeXData Cite XMLDublin CoreDublin CoreEP3 XMLEndNoteHTML CitationHTML CitationHTML ListJSONMETSMODSMPEG-21 DIDLOpenURL ContextObjectOpenURL ContextObject in SpanRDF+N-TriplesRDF+N3RDF+XMLRIOXX2 XMLReferReference ManagerSimple Metadata