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OPEC "Fair Price" Pronouncements and the Market Price of Crude Oil

Abstract:
OPEC producers, individually or collectively, often make statements regarding the "fair price" of crude oil. In some cases, the officials commenting are merely affirming the market price prevailing at the time. In many cases, however, we document that they explicitly disagree with contemporaneous oil futures prices. A natural question is whether these "fair price" pronouncements contain information not already reflected in the market price of crude oil. To find the answer, we collect "fair price" statements made from 2000 through 2010 by officials from OPEC or OPEC member countries. Visually, the "fair price" series looks like a sampling discretely drawn (with a lag) from the daily futures market price series. Formally, we use two primary methodologies to establish that "fair price" pronouncements have little influence on the market price of crude oil and provide little or no new news to oil futures market participants.

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Energy Specializations: Petroleum – Exploration and Production; Petroleum – Markets and Prices for Crude Oil and Products; Petroleum – Policy and Regulation; Energy Modeling – Energy Data, Modeling, and Policy Analysis

JEL Codes:
D24 - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
L13 - Oligopoly and Other Imperfect Markets
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination

Keywords: Crude oil, OPEC, Fair price, Market price, Event study, Autoregressive Distributed Lag (ADL)

DOI: 10.5547/01956574.34.4.5

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Published in Volume 34, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.