An Analysis of OPEC’s Strategic Actions, US Shale Growth and the 2014 Oil Price Crash

July 6, 2016

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Format: Chicago

Alberto Behar, and Robert A Ritz. An Analysis of OPEC’s Strategic Actions, US Shale Growth and the 2014 Oil Price Crash, (USA: International Monetary Fund, 2016) accessed November 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

In November 2014, OPEC announced a new strategy geared towards improving its market share. Oil-market analysts interpreted this as an attempt to squeeze higher-cost producers including US shale oil out of the market. Over the next year, crude oil prices crashed, with large repercussions for the global economy. We present a simple equilibrium model that explains the fundamental market factors that can rationalize such a "regime switch" by OPEC. These include: (i) the growth of US shale oil production; (ii) the slowdown of global oil demand; (iii) reduced cohesiveness of the OPEC cartel; (iv) production ramp-ups in other non-OPEC countries. We show that these qualitative predictions are broadly consistent with oil market developments during 2014-15. The model is calibrated to oil market data; it predicts accommodation up to 2014 and a market-share strategy thereafter, and explains large oil-price swings as well as realistically high levels of OPEC output.

Subject: Commodities, Demand elasticity, Economic theory, Expenditure, Financial institutions, Futures, National accounts, Oil, Oil consumption, Oil prices, Oil production, Prices, Production, Public expenditure review

Keywords: Calibration approach, Crude oil, Demand elasticity, Futures, Global, Limit pricing, Market power, Market share, Oil, Oil consumption, Oil price crash, Oil prices, Oil production, Oil supply and demand growth, OPEC, OPEC capacity, OPEC producer, OPEC statistics, OPEC supply, Price crash, Production capacity, Public expenditure review, Regime switch, Shale growth, Shale oil, Strategic action, WP

Publication Details

Pages:

36
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/131
Stock No:

WPIEA2016131
ISBN:

9781498351638
ISSN:

1018-5941

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