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Testing Alternative Hypotheses of Oil Producer Behavior

Carol Dahl and Mine Yucel

Year: 1991
Volume: Volume 12
Number: Number 4
DOI: 10.5547/ISSN0195-6574-EJ-Vol12-No4-8
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Abstract:
Conventional wisdom holds that OPEC is a weakly functioning cartel with non-OPEC producers forming a "competitive fringe." However, several studies have challenged the cartel hypothesis for OPEC with a few even challenging the competitive hypothesis for non-OPEC producers. In this paper, we test competing hypotheses (which include dynamic optimization, target-revenue, competition, cartel, and swing production) for production decisions for both OPEC and non-OPEC producers. Recently developed cost data allow these tests to be done on the most general model to date. In our tests, we find no evidence for dynamic optimization. Formal target-revenue models are rejected, but there is some evidence that revenue targeting may influence production for some OPEC countries and a few non-OPEC countries. We find no evidence that any of the OPEC countries behave in a competitive manner. More surprisingly, we find no evidence that the fringe is competitive. Using co-integration tests, we are unable to find formal evidence of coordination in the form of strict cartel behavior or swing production among OPEC countries. Taken as a whole, the evidence suggests that loose coordination or duopoly is most consistent with OPEC behavior.



Fuel Subsidies, the Oil Market and the World Economy

Nathan S. Balke, Michael Plante, and Mine Yücel

Year: 2015
Volume: Volume 36
Number: Adelman Special Issue
DOI: 10.5547/01956574.36.SI1.nbal
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Abstract:
This paper studies the effects of oil producing countries' fuel subsidies on the oil market and the world economy. We identify 24 oil-producing countries with fuel subsidies with retail fuel prices that are about 34 percent of the world price. We construct a two-country model where one country represents the oil-exporting subsidizers and the second the oil-importing bloc, and calibrate the model to match recent data. We find that the removal of subsidies would reduce the world price of oil by six percent. The removal of subsidies is unambiguously welfare enhancing for the oil-importing countries. Removal of subsidies is welfare improving for the oil-exporting countries as well, in the baseline calibration. However, the optimal subsidy from the point of view of oil exporters is not zero, in general.





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