An Analysis of OPEC’s Strategic Actions, US Shale Growth and the 2014 Oil Price Crash
Electronic Access:
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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.
Series:
Working Paper No. 2016/131
Subject:
Commodities Demand elasticity Economic theory Expenditure Financial institutions Futures National accounts Oil Oil consumption Oil prices Oil production Prices Production Public expenditure review
English
Publication Date:
July 6, 2016
ISBN/ISSN:
9781498351638/1018-5941
Stock No:
WPIEA2016131
Pages:
36
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