OPEC and the Price of Petroleum: Theoretical Considerations and Empirical Evidence (Studies in International Economics and Institutions) - Tapa blanda

This book investigates the process of oil price formation, in particular the price fluctuations of the past, and to provide realistic scenarios of future developments. It starts with the history of the world petroleum market and its institutions and a comprehensive survey of the existing literature. The theoretical framework is a model which interprets OPEC as the swing producer in the market. An intertemporal aspect arises from the exhaustibility of petroleum and from the sluggish adjustments of demand and non-OPEC supply. The model is solved by application of Pontryagin's maximum principle. Price shocks are explained by OPEC's incorrect expectations about demand behaviour. The model is analysed econometrically by means of nonlinear-least-squares methods and the parameter estimates are used to compute scenarios of future price developments. The solution of the theoretical model requires application of non-standard concepts, such as algebraic Riccati equations. They are introduced in an appendix which also contains a variety of useful optimal control theorems. Another issue which is of more general interest is the consideration of incorrect expectations in intertemporal optimisation models.

1. 1. Oil price fluctuations and their impact on economic performance Drastic oil price fluctuations have been a major characteristic of the world petroleum market since the beginning of the seventies. The oil crises of 1973n4 and 1979/80 were followed by a dramatic drop of the oil price during the first two quarters of 1986. Starting from a level less than 2 $ per barrel in 1972, the spot market price of Arabian Light crude oil increased to some 35 $ in 1980, then slowly decreased, and finally fell to 13 $ in 1986 (annual averages). If monthly data are considered, the peaks of the oil price movement look even more dramatic. In December 1980 Arabian crude was traded for more than 40 $ a barrel, and in August 1986 the price was down at 8 $ (see Fig. 1. 1). 40 30 20 10 r o 84 88 76 80 72 Figure 1. 1: The spot market price of Saudi-Arabian Light crude oil! ! Data are taken from the Petroleum Economist and the OPEC Bulletin, various issues. 2 After the Second World War petroleum has become the most important energy resource. During the fifties and sixties its price was relatively low compared to other energy 2 sources like coal and firewood and it tended to drive them out of the market.