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Strategies for OPEC's Pricing and Output Decisions

Dermot Gately

Year: 1995
Volume: Volume16
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol16-No3-1
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Abstract:
This paper examines OPEC pricing and output strategies, both to provide an understanding of OPECs unwise price doubling in 1979-80 and also to analyze what strategy might serve it best for the future. We focus on the unavoidable uncertainty regarding the underlying parameters that characterize the world oil market (price elasticities, income growth rates), and the sensitivity of discounted OPEC revenue to changes in these parameters, for various pricing strategies. In 1979-80, OPEC chose a high-price strategy, which could have yielded good results (like many other price-paths) if the market's underlying parameters had been more favorable. But the price elasticities of demand and non-OPEC supply were much higher than anticipated, so that OPEC did very poorly-not only in absolute terms, but also relative to what it could have achieved if it had set its price more cautiously. We search for a robustly optimal strategy for OPEC in the future, which will serve it well relative to other strategies, regardless of the true parameter values underlying the market (within some plausible range). We conclude that OPEC's interests will be served best by a policy of moderate output growth, at a rate no faster than that of world income growth. This will require that OPEC slow its rate of output growth since 1985, cutting it at least in half. Slowing its output growth will allow OPEC gradually to regain the market share lost after its disastrous 1979-80 price doubling, but without jeopardizing its revenue, as might a policy of more rapid increases in output. This will yield a consistently good result for OPEC, relative to alternative strategies, over a fairly wide range of demand and supply conditions.





OPEC's Incentives for Faster Output Growth

Dermot Gately

Year: 2004
Volume: Volume 25
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol25-No2-4
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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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