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OPEC Production: The Missing Link

Abstract:
The future of oil depends critically on the production decisions of OPEC, which in turn depend on a variety of factors internal and external to the cartel. This paper uses a simulation of the world oil market to compute the, payoff to OPEC members of alternative price and production profiles, focusing on the incentives to cooperate as well as to cheat. A "tit-for-tat" strategy by the, Saudis significantly reduces the incentives to cheat, but the payoff for cheating is still positive for the smaller OPEC producers. Accordingly, prices well below the cartel's joint profit maximizing level seem most likely.

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Energy Specializations: Petroleum ā€“ Markets and Prices for Crude Oil and Products; Energy Security and Geopolitics ā€“ International Energy Organizations

JEL Codes: Q38: Nonrenewable Resources and Conservation: Government Policy, Q47: Energy Forecasting, Q31: Nonrenewable Resources and Conservation: Demand and Supply; Prices, L71: Mining, Extraction, and Refining: Hydrocarbon Fuels, Q41: Energy: Demand and Supply; Prices

Keywords: Oil production, OPEC, oil prices

DOI: 10.5547/ISSN0195-6574-EJ-Vol15-NoSI-7


Published in Volume 15, Special Issue of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.