Modeling OPEC behavior: theories of risk aversion for oil producer decisions

Theories of OPEC such as price leadership, cartel, or game theoretic models suggest an incentive for OPEC members to expand their production capacity well above current levels in order to maximize revenues. Yet individual OPEC members consistently explore for and develop oil fields at a level well below their potential. The cause of low oil exploration and development efforts among OPEC members, and even some non-OPEC members, may have to do with risk aversion. This paper describes an alternative theory for OPEC behavior based on risk aversion using a two piece non Neumann–Morgenstern utility function similar to Fishburn and Kochenberger (1979, Decision Science 10, 503–518), and Friedman and Savage (1948, Journal of political Economy 56). The model shows possible low oil production behavior.     

A variant of the Hubbert curve for world oil production forecasts

In recent years, the economic and political aspects of energy problems have prompted many researchers and analysts to focus their attention on the Hubbert Peak Theory with the aim of forecasting future trends in world oil production.In this paper, a model that attempts to contribute in this regard is presented; it is based on a variant of the well-known Hubbert curve. In addition, the sum of multiple-Hubbert curves (two cycles) is used to provide a better fit for the historical data on oil production (crude and natural gas liquid (NGL)).Taking into consideration three possible scenarios for oil reserves, this approach allowed us to forecast when peak oil production, referring to crude oil and NGL, should occur.In particular, by assuming a range of 2250–3000 gigabarrels (Gb) for ultimately recoverable conventional oil, our predictions foresee a peak between 2009 and 2021 at 29.3–32.1 Gb/year.     

Have we run out of oil yet? Oil peaking analysis from an optimist's perspective

This study addresses several questions concerning the peaking of conventional oil production from an optimist's perspective. Is the oil peak imminent? What is the range of uncertainty? What are the key determining factors? Will a transition to unconventional oil undermine or strengthen OPEC's influence over world oil markets?     

Modeling oil production based on symbolic regression

Numerous models have been proposed to forecast the future trends of oil production and almost all of them are based on some predefined assumptions with various uncertainties. In this study, we propose a novel data-driven approach that uses symbolic regression to model oil production. We validate our approach on both synthetic and real data, and the results prove that symbolic regression could effectively identify the true models beneath the oil production data and also make reliable predictions. Symbolic regression indicates that world oil production will peak in 2021, which broadly agrees with other techniques used by researchers. Our results also show that the rate of decline after the peak is almost half the rate of increase before the peak, and it takes nearly 12 years to drop 4% from the peak. These predictions are more optimistic than those in several other reports, and the smoother decline will provide the world, especially the developing countries, with more time to orchestrate mitigation plans.     

Comparison of China's oil import risk: Results based on portfolio theory and a diversification index approach

In recent years, the international oil price has fluctuated violently, bringing about huge risk for the international oil trade. In fact, the risk of crude oil and petroleum product imports is different because of the different import origins and prices. Which import risk is lower for China? From the perspective of oil supply security, how should China portfolio crude oil and petroleum product imports to minimize its oil import risk? Using portfolio theory and a diversification index approach, this paper compares and analyzes the supply, price and transport risks of crude oil and petroleum product imports. Our results show that the following: (1) Specific risk (diversification risk) and marine transport risk of China's petroleum product imports are lower than that of crude oil imports. (2) The average rate of return of China's petroleum product imports is higher than that of crude oil imports. Moreover, the average import price variance of petroleum product imports is lower than that of crude oil imports. Thus, the systematic risk (price risk) of petroleum products is lower too. Therefore, from the perspective of oil supply security, China should increase petroleum product imports to decrease its oil import risk.     

Economics of oil regulation and the Brazilian reform: Some issues

This paper reviews the economic fundamentals for regulation in the oil industry, with a focus on the current regulatory proposal for the Brazilian oil industry. The observed exploration and production (E&P) contracts foresee much of the characteristics of the optimal contract, with a remuneration structure that combines upfront with future payments to mitigate uncertainty and incentivize exploratory efforts. In Brazil, despite slow market deconcentration since 1997’s liberalization, the current oil regulation is in general consistent with an optimal regulatory response. From an economic standpoint, the 2009’s new regulatory proposal prompted by the major oil discoveries offshore in Brazil reduces the power of incentive schemes with respect to exploratory and cost-reducing efforts while the changes in the net risk of the E&P offshore activities are not so clear.     

OPEC's production under fluctuating oil prices: further test of the target revenue theory

Oil production cutbacks in recent years by OPEC members to stabilize price and to increase revenues warrant further empirical verification of the target revenue theory (TRT). We estimate a modified version of Griffin (1985) target revenue model using data from 1973 to 2000. The sample period, unlike previous investigations, includes phases of both price increase (1970s) and price decrease (1980s–1990s), thus providing a better framework for examining production behavior. The results, like the earlier study, are not supportive of the strict version of the TRT, however, evidence (negative and significant elasticity of supply) of the partial version are substantiated. Further empirical estimates do not support the competitive pricing model, hypothesizing a positive elasticity of supply. OPEC's loss of market share and the drop in the share of oil-based energy should signal an adjustment in pricing and production strategies.     

Horizontal and vertical transmissions in the US oil supply chain

Oil prices, inventory levels, and utilization rates are influenced by changes that are transmitted horizontally and/or vertically through the energy supply chain. We define horizontal transmissions as changes that are generated by linkages among fuels at a similar stage of processing while vertical transmissions are changes that are generated by upstream/downstream linkages in the oil supply chain. Here, we investigate vertical and horizontal transmissions by estimating vector error correction models (VECMs) that represent relationships among the price of crude oil, US refinery utilization rates, US stocks of crude oil, US stocks of motor gasoline, the US price of motor gasoline, and the US price of a substitute fuel, natural gas. Causal relationships estimated from both weekly and quarterly observations indicate that the price of crude oil is an important gateway for disturbances to the oil supply chain. Impulse response functions indicate that disturbances to crude oil prices ripple down the oil supply chain and affect inventory behaviors, refinery utilization rates, and the price of motor gasoline, and are transmitted laterally to the natural gas market.     

Structural crisis in the oil and gas industry

The structure of the oil and gas industry is being disrupted by technical developments which increase supply and reduce demand, the reversal of growth in demand in transport in OECD countries and less dependence of the US and Europe on Middle East oil supplies. Upstream, expectations of scarcity are changing to expectations that, at current prices, national oil companies face increasing competition from public listed companies which use diverse advanced technologies to develop reserves in areas outside NOC control. The public listed companies also have the opportunity to bring specialized technology to match NOC needs. Downstream oil markets are dividing into the OECD markets where growth has been reversed and a non-OECD markets where it continues. This is a challenge for the major public listed companies whose downstream operations are concentrated in the OECD. They may respond by focusing on local advantages or by separating the downstream from their upstream businesses. The natural gas industry is being transformed by new discoveries, particularly in the US, but regional markets remain separated by transport costs and pricing systems. The challenge will be to find prices which will grow both the supply and demand in each region.     

Regional modelling of oil discovery and production

This paper outlines a new method for summarizing the exploratory and production potential of an aggregated geographical region in terms of the past history of exploration and production at the field level. The analytical framework is divided into two stages. First, the discovery analysis describes the physical returns to exploratory drilling (marginal expected field size), which provide additions to the potential reserve base. Subsequently, the production analysis specifies the economic costs of bringing new fields on stream, and also describes the likely production rate from fields of distinct physical characteristics. In both the exploratory stage and the production stage, the negative influence of resource depletion is modelled explicitly. The expected size of successive field discoveries is subject to exponential decay at a rate determined by analysis of past discovery history. In the production stage, production flow declines exponentially from the peak rate as the field is exhausted, Finally, the paper contains new estimates of development cost functions that are sensitive to both economic parameters and the physical characteristics of fields. The cost functions relate total investment expenditure to the size of fields, the rate of extraction, and the productivity of individual wells. The analytical framework is illustrated by application to 37 individual regions around the world.     

Demand elasticity of oil in Barbados

The importation of oil is a significant component of Barbados' imports, rising from 7% of imports in 1998 to over 20% in 2009. This increase has impacted greatly on the level of foreign reserves. As a price-taker, relying entirely on imported oil for our energy needs could prove a continuous drain on the economy. With a view to formulating an appropriate energy policy for Barbados, this paper analyses the demand for oil using monthly data from 1998 to 2009. The paper estimates the elasticities of demand for oil by employing PesAran (2001) single equation cointegration approach and comparing the results with countries that rely heavily on imported oil and whose policy objective are to alter their energy structure to rely less on imported oil. The results show that the demand for oil imports is price inelastic in the long run. The consumption of oil is responsive to past consumption, prices, income, electricity consumption and the number of appliances imported in the short-run. A policy framework to reduce the use of oil for electricity consumption via alternative energy sources should be considered and the taxation of oil imports given its elasticity is a good source of revenue.     

Optimal oil import tariffs: An international perspective for the 1980s

Since the oil price explosion of 1973–74, oil policy has focused on two problem areas: firstly, chronically high international oil prices and secondly, vulnerability to disruptions in oil supply. Until recently, many held that measures designed to reduce the level of oil imports would mitigate both of these problems. Oil import reductions would put downward pressure on world oil prices during normal supply conditions, while simultaneously reducing the importer's exposure to oil supply interruptions. By the end of the 1970s, however, several analysts had concluded that certain characteristics of the world oil market would minimize both of these potential benefits of oil import reductions. Now, after more than two years of glut on the world oil market, many doubt that policy-induced import reductions would have any beneficial effects at all. This paper assesses the value of oil import reduction policies during the oil market conditions that are expected to prevail during the 1980s. The conclusion is that there are still substantial benefits to be gained by implementing efficient import reductions. This conclusion is robust over a broad range of assumptions about OPEC objectives and other key determinants of world oil market behaviour.     

Factors influencing future oil and gas prospects in the Arctic

The article explores oil and natural gas development in the Arctic. While several commentators have argued that an increase in Arctic petroleum production in the years to come will follow directly from an increased demand for energy, our study finds that oil and natural gas production in the Arctic is dependent on a range of variables. By using climate-driven changes as a baseline, we examine spill-over effects and conditions that are important for further Arctic hydrocarbon production. Using the available literature from different scientific fields, this article provides a broad and nuanced perspective on the much debated question of whether or not the Arctic will become a region driven by oil and gas production.     

The ACEGES laboratory for energy policy: Exploring the production of crude oil

An agent-based computational laboratory for exploratory energy policy by means of controlled computational experiments is proposed. It is termed the ACEGES (agent-based computational economics of the global energy system). In particular, it is shown how agent-based modelling and simulation can be applied to understand better the challenging outlook for oil production by accounting for uncertainties in resource estimates, demand growth, production growth and peak/decline point. The approach emphasises the idea that the oil system is better modelled not as black-box abode of ‘the invisible hand’ but as a complex system whose macroscopic explananda emerges from the interactions of its constituent components. Given the estimated volumes of oil originally present before any extraction, simulations show that on average the world peak of crude oil production may happen in the broad vicinity of the time region between 2008 and 2027. Using the proposed petroleum market diversity, the market diversity weakness rapidly towards the peak year.     

Rentierism in the Algerian economy based on oil and natural gas

This essay analyzes Algeria’s degree of adaptation toward possessing the constituent features of an oil and gas rentier economy, and whether its current status could be threatened by changes to its energy policy. With this aim, the article first uses empirical evidence to analyze different rentier features of the Algerian economy (the importance of the hydrocarbon sector, Algerian NOC Sonatrach’s role in energy policy and revenue distribution). Second, the circuit that perpetuates rentier logic is described, the main conclusion being that the Algerian economy does indeed offer the very conditions that guarantee the self-perpetuation of rentierism. However, this conclusion is jeopardized by uncertainties stemming from two potential changes in the national status of the hydrocarbons sector: a greater presence of foreign hydrocarbon companies in Algeria, and growing internationalization by Sonatrach.     

The effect of the downturn in oil prices on the external surpluses of the GCC countries

The paper examines the impact of the downturn in oil prices on the performance of the external sectors of the members of the Gulf Co-operation Council (GCC). The paper also developes and tests a simultaneous-equations model to examine the interaction between the economies of the GCC and the rest of the world. The analysis shows that the slump in oil exports has reduced drastically the external surplus of the GCC and has resulted in structural shifts in the import and resource balance functions.     

Why the oil companies lost solar

Solar energy is a growing source of electricity supply. Oil companies including BP and Shell recognized this early on and entered the solar industry when it was still in its relative infancy. These companies invested heavily in vertically integrated solar companies that were at one point among the largest in the world. But neither BP nor Shell was successful, and they both decided to exit the solar market. This stands as a paradox since such companies have the funds, the long-term perspectives, the management systems, the multinational presence and the lobbying clout to potentially succeed in this new energy industry. Why were they not successful, and why did they ultimately exit? This paper uses innovation theory to explore the reasons why large incumbent corporations typically fail to succeed in commercializing disruptive innovations at scale. Evidence from semi-structured interviews and discussions with former employees of BP Solar and Shell Solar confirm the explanatory power of key constructs from innovation theory in accounting for the big oil companies' experience with solar technology. Ultimately, the findings suggest that oil companies would have done better to treat their solar businesses as separate stand-alone entities.     

Oil and the political economy of energy

The key issues concerning oil exploitation are still open for discussion: there is no agreement about where we presently stand in the world oil extraction curve, what is its exact shape, and how far can oil price grow before it changes irreversibly the world economy and consumer behavior. The paper proposes an alternative scenario to the Hubbert's bell-shaped model of oil exploitation, based on more realistic assumptions regarding political agendas in oil-exporting countries and consumer behavior dynamics in oil-importing countries. Under this scenario, the joint impact of markets and public policy in oil importing countries together with “resource pragmatism” policy in oil-exporting countries allows for a less steep oil supply curve with a much fatter tail compared to the Hubbert's model.     

The impact of the first oil crisis on energy demand in Korea

This paper investigates how the first oil crisis affected energy demand in Korea. First, annual growth rates in energy consumptions for pre-and post-crisis periods are compared. Second, the price and income elasticities of energy sources estimated from the 1961–1972 and 1961–1976 observations are compared. Third, F-test is performed with an oil demand equation to see whether a structural change in oil demand occurred after the first oil crisis. The author concludes that the impact of the first oil crisis in Korea was not serious enough to cause a structural change in oil demand.     

The Rimini Protocol an oil depletion protocol: Heading off economic chaos and political conflict during the second half of the age of oil

Knowledge of petroleum geology defines the size of the World's oil and gas resources, but the reporting of reserves is grossly unreliable. Discovery has been in decline for many years, meaning that production must soon also fall. The decline of oil will have a severe impact on the modern economy which has become dependent on it. Accordingly, a Protocol to match demand against the falling supply, as imposed by Nature, is urgently needed to lessen world tensions and achieve an orderly transition.