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OPEC's Incentives for Faster Output Growth

Abstract:
This paper addresses the question of whether OPEC producers are likely to expand their oil output substantially over the next two decades more than doubling in the Gulf countries by 2020. Such projections, made by the International Energy Agency (IEA) and the U.S. Department of Energy (DOE), are not based on behavioral analysis of Gulf countries decisions, but are merely the residual demand for OPEC oil the difference between projected world oil demand and Non-OPEC supply, given some assumed price-path. I employ a simulation model to compare OPEC s payoffs from faster or slower output growth, under various parametric assumptions about the responsiveness of world oil demand and Non-OPEC supply to income and price changes. The payoffs to OPEC are relatively insensitive to faster output growth; aggressive output expansion yields slightly lower payoffs than just maintaining current market share. Analysis of intra-OPEC decisions between the Core countries and the others suggests a similar conclusion: these two groups are engaged in a constant-sum game. Thus, the significant increases in OPEC output projected by IEA and DOE are implausible.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Petroleum – Policy and Regulation; Energy Security and Geopolitics – International Energy Organizations; Energy Modeling – Forecasting and Market Analysis

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
O19 - International Linkages to Development; Role of International Organizations
D4 -

Keywords: OPEC oil output, oil price projections

DOI: 10.5547/ISSN0195-6574-EJ-Vol25-No2-4


Published in Volume 25, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.