Does OPEC act as a Residual Producer?

Bandyopadhyay, Kaushik Ranjan (2009): Does OPEC act as a Residual Producer?

Abstract

In the conventional energy modeling systems, such as the one followed by the National Energy Modeling System (NEMS), USA or the International Energy Agency (IEA), Paris, the OPEC has been assumed to act like a residual producer. Notwithstanding such assumptions in the aforesaid models, the OPEC’s role just as a residual producer still continues to remain an open question. It deserves to be recognised that the OPEC is not a homogeneous entity but consists of producers with diverse proven reserve positions and hence diverse interests and expectations. So, it would be rather naive to expect that the OPEC as a whole would necessarily comply with the call without taking into account the interests of its member countries. Taking cue from above, a model of world crude demand and Non-OPEC crude supply has been constructed in the paper to cross-examine whether the assumption of the conventional modeling approaches regarding the OPEC’s role as a residual producer actually holds good in practice.

• Item Type: MPRA Paper
• Language: English
• Keywords: OPEC; oil; crude
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q41 - Demand and Supply ; Prices

References

Adelman, M. A. (1980), ‘The Clumsy Cartel’, The Energy Journal, 1(1), 43-53.

------(1982), ‘OPEC as a Cartel’, in Griffin, J. M. and D. J. Teece (eds.) OPEC Behaviour and World Oil Prices, (London: George Allen & Unwin), 37-63.

------(1986), ‘Oil Producing Countries’ Discount Rates’, Resources and Energy, 8(4), 309-29.

------(1993), ‘Modelling World Oil Supply’, The Energy Journal, 14(1), 1-32.

------(1993a), The Economics of Petroleum Supply: Papers by M.A. Adelman 1962-1993, (Cambridge, Mass. USA: The MIT Press).

------(1995), The Genie out of the Bottle: World Oil Since 1970,(Cambridge, Mass. USA: The MIT Press).

Askari, H. (1991), ‘Saudi Arabia’s Oil Policy: Its Motivations and Impact’, in Wilfred Kohl (ed.), After the Oil Collapse: OPEC, the United States and the World Oil Market, John Hopkins University Press.

Baldwin, N. and R. Prosser (1988), ‘World Oil Market Simulation’ in Sterner, T. (ed.), International Energy Economics, Chapman & Hall.

Bandyopadhyay, K. R. (2009), ‘OPEC’s Price-making Power’, Economic and Political Weekly, 43(46), 18-21.

British Petroleum, Statistical Review of World Energy, various issues, Available at: www.bp.org

Centre for Monitoring Indian Economy (CMIE) (2002), Energy, Economic Intelligence Service, CMIE, Mumbai.

Coondoo, D. and P. Mukherjee (2005), ‘The Indian Macroeconomy: A Time Series Econometric Exploration’, India Macroeconomics Annual: 2004-05, Centre for Studies in Social Sciences, Kolkata.

Cremer, J. and D. Salehi-Isfahani (1980), ‘Competitive Pricing in the Oil Market: How Important is OPEC?’ Working Paper, University of Pennsylvania, USA.

------(1991), Models of the Oil Market, (UK: Hardwood Academic Publishers).

Dahl, C. and M. Yucel (1991), ‘Testing Alternative Hypotheses of Oil Producer Behaviour’, Energy Journal, 12(4), 117-38.

Daly, G. et al. (1982), ‘Recent Oil Price Escalation for OPEC Stability’, in Griffen, G. M. and D. J. Teece (eds.), OPEC Behavior and World Oil Prices, (UK: George Allen & Unwin (Publishers) Ltd.), 64-93.

Dasgupta, P. and G. Heal (1979), The Economic Theory of Exhaustible Resources, Cambridge University Press.

Dees, et al. (2007), ‘Modeling the World Oil Market: Assessment of a Quarterly Econometric Model’, Energy Policy, 35(1), 178-91.

Dickey, D. A. and W. A. Fuller (1979), ‘Distribution of the Estimation for Autoregressive Time Series with a Unit Root’, Journal of the American Statistical Association, 74, 427-31.

Eckbo, P. L. (1976), The Future of World Oil, (Cambridge: Ballinger Publishing Company).

Enders, W. (2004), Applied Econometric Time Series, Second Edition, (New York: John Wiley & Sons).

Ezzati, A. (1976), ‘Future OPEC Price and Production Strategies as Affected by its Capacity to Absorb Oil Revenues’, European Economic Review, 8, 107-38.

------(1978), World Energy Markets and OPEC Stability, (Cambridge, Mass. USA: Lexington Books).

Fattouh, B. (2006), ‘Spare Capacity and Oil Price Dynamics’, Middle East Economic Survey, XLIX (5), 30 January.

------(2007), ‘OPEC Pricing Power: The Need for a Newer Perspective’, WPM 31, Oxford Institute of Energy Studies, March, Available at: www.oxfordenergy.org

Fisher, A. (1981), Resource and Environmental Economics (Cambridge Surveys of Economic Literature), Cambridge University Press.

Gately, D. (1983), ‘OPEC: Retrospective and Prospects 1973-1990’, European Economic Review, 21, 313-31.

------(1984), ‘A Ten-Year Retrospective: OPEC and the World Oil Market’, Journal of Economic Literature, 22(3), 1100-114.

------(1995), ‘Strategies for OPEC’s Pricing and Output Decisions’, The Energy Journal, 16 (3), 1-38.

------(2004), ‘OPEC’s Incentives for Faster Output Growth’, Energy Journal, 25(2), 75-96.

------(2007), ‘What Oil Export Levels Should We Expect from OPEC?’, The Energy Journal, 28(2), 151-74.

Geroski, P., A. Ulph and D. Ulph (1987), ‘Model of the Crude Oil Market in which Market Conduct Varies’, Economic Journal, 97, 77-86.

Gilbert, R. (1978), ‘Dominant Firm Pricing in a Market for an Exhaustible Resource’, The Bell Journal of Economics, 9(2), 385-95.

Griffin, J. M. (1985), ‘OPEC Behaviour: A Test of Alternative Hypotheses’, American Economic Review, 75(5), 954-63.

Griffin, J. M. and M. Teece (1982), OPEC Behaviour and World Oil Prices, (London: George Allen and Unwin).

Griffin, J. M. and H. Steele (1986), Energy Economics and Policy, (New York: Academic Press).

Griffin, J. M. and W. S. Neilson (1994), ‘The 1985-86 Oil Price Collapse and Afterwards’, Economic Inquiry, 32(4), 543-61.

Gulen, G. (1996), ‘Is OPEC a Cartel? Evidence from Cointegration and Causality Tests’, The Energy Journal, 17(2), 43-57.

Hamilton, J. D. (1994), Time Series Analysis, (Princeton: Princeton University Press).

Hammoudeh, S. (1979), ‘The Future Oil Price Behavior of OPEC and Saudi Arabia’, Energy Economics, July, 156-66.

------(1997), ‘Oil Pricing Policies in a Target Zone Model’, Research in Human Capital and Development, 11-B, 497-513.

Hammoudeh, S. and V. Medan (1995), ‘Expectation, Target Zones, and Oil Price Dynamics’, Journal of Policy Modeling, 17(6), 597-613.

Hnyilicza, E. and R. S. Pindyck (1976), ‘Pricing Policies for a Two-part Exhaustible Resource Cartel: The Case of OPEC’, European Economic Review, 8(2), 139-54.

Hotelling, H. (1931), ‘The Economics of Exhaustible Resources’, The Journal of Political Economy, 39(2), 137-75.

Houthakker, H. (1979), ‘The Political Economy of World Energy’, Discussion Paper No. 617, Harvard Institute of Economic Research.

Johansen, S. and K. Juselius (1990), ‘Maximum Likelihood Estimation and Inference on Cointegration – with Application to the Demand for Money, Oxford Bulletin of Economics and Statistics, 52(2), 169-210.

Johany, A. (1980), The Myth of the OPEC Cartel: The Role of Saudi Arabia, (New York: John Wiley & Sons).

Kaufmann, R. K. (1994), ‘A Model of the World Oil Market for Project LINK’, Economic Modeling, 12(2), 165-78.

Kaufmann, R. K., et al. (2004), ‘Does OPEC Matter? An Econometric Analysis of Oil Prices’, The Energy Journal, 25(4), 67-90.

Krichene, N. (2005), ‘A Simultanous Equations Model for World Crude Oil and Natural Gas Markets’, Working Paper WP/05/32, International Monetary Fund.

Kirchgässner, G. and J. Wolters (2007), Introduction to Modern Time Series Analysis, (Heidelberg: Springer).

Mabro, R. (1975), ‘Can OPEC Hold the Line’, in Mabro R. (ed.), OPEC and the World Oil Market: The Genesis of the 1986 Price Crisis, Oxford Institute for Energy Studies.

------(1984), ‘On Oil Price Concept’, Working Paper WPM3, Oxford Institute for Energy Studies.

------(1986), (ed.) The 1986 Oil Price Crisis: Economic Effects and Policy Responses, Oxford Institute for Energy Studies.

------(1987), Netback Pricing and the Oil Price Collapse of 1986, Oxford Institute for Energy Studies.

------(1989), OPEC's Production Policies: How do They Work? Why don't They Work? Oxford Institute for Energy Studies.

------(1991), ‘OPEC and the Price of Oil’, The Energy Journal, 13(2), 1-17.

MacAvoy, P. (1982), Crude Oil Prices as Determined by OPEC and Market Fundamentals, (Cambridge, Mass. USA: Ballinger).

MacKinnon, J. (1990), ‘Critical Values for Cointegration Tests’, Department of Economics Discussion Papers, No: 90-4, University of California at San Diego.

Mitchell, J.V. (2006), ‘A New Era for Oil Prices’, 06-014 WP, Centre for Energy and Environmental Policy Research, MIT.

Moran, T. (1982), ‘Modelling OPEC Behaviour: Economic and Political Alternatives’, in Griffin, J. M. and D. J. Teece (eds.), OPEC Behaviour and World Oil Prices, (London: George Allen & Unwin), 94-130.

Mukherjee, C., H. White and M. Wuyts (1998), Econometrics and Data Analysis for Developing Countries, (London, UK: Routledge).

Noreenge, O. (1978), Oil Politics in the 1980s, (New York: McGraw-Hill Book Company).

Pindyck, R. (1978), ‘Gains to Producers from the Cartelisation of Exhaustible Resources’, Review of Economics and Statistics, 60, 238-52.

------(1979), The Structure of World Energy Demand, (Cambridge, Mass. USA: MIT Press).

------(1982), ‘OPEC Oil Pricing, and the Implications for Consumers and Producers’, in Griffin, J. and D. Teece (eds.) OPEC Behaviour and World Oil Prices, (London: George Allen and Unwin), 175-85.

Porter, E. (1992), Uncertainty and OPEC Supply Behaviour in the US Department of Energy’s Oil Market Simulation (OMS) Model, American Petroleum Institute, December.

Powel, S. (1990), ‘The Target Capacity-Utilisation Model of OPEC and the Dynamics of the World Oil Market’, The Energy Journal, 11 (1), 27-63

Russell, D. and J. G. MacKinnon (1993), Estimation and Inference in Econometrics, (New York: Oxford University Press).

Salant, S. (1976), ‘Exhaustible Resources and Industrial Structure: A Nash-Cournot Approach to the World Oil Market’, Journal of Political Economy, 84, 1079-93.

Salehi-Isfahani, D. (1987), ‘Testing OPEC Behaviour: Comment’, Working Paper, Virginia Polytechnic Institute and State University.

Stevens, P. (1991), ‘Oil Prices: An Economic Framework for Analysis’, in Bird, G. and H. Bird (eds.), Contemporary Issues in Applied Economics, Edward Elgar.

------(1995), ‘The Determination of Oil Prices: 1945-95’, Energy Policy, 23(10), 861-70.

Suranovic, S. (1993), ‘Does a Target-Capacity Utilisation Rule Fulfil OPEC's Economic Objectives?’ Energy Economics, 15(2), 71-79.

Teece, D. (1982), ‘OPEC Behaviour: An Alternative View’, in Griffin, J.M. and D. Teece (eds.), OPEC Behaviour and World Oil Prices, (London: Allen & Unwin).