How to save the world using game theory ?

Thèmes abordés

Save the world, game theory, Organisation of Petroleum Exporting Countries, OPEC, oil production, oil prices

Résumé du document

Why does it seem so hard for the Organisation of Petroleum Exporting Countries (OPEC) to reach an agreement on crude oil production ? Looking at the oil prices evolution since 2014 leads us to a statement : oil producers are facing a hard time in terms of profits. It would be to their entire benefit to agree on a lower amount of production, so that they could higher the oil prices.
Although the oil price is sometimes naively seen as a simple variable value, which only depends on the economic conditions, a thorough glance on the international oil market makes us consider that various microeconomic tools are taken into account.

Extraits

[...] Indeed, they would benefit from the rising oil price, as they will keep their own amount of output. Let's examine the following payoff table, illustrating this issue. The figures chosen increase with the profit from the outcome is the worst outcome is the best one). If both the producers keep their production at the same current level, they would face the worst situation ; if they both reduce their output, they would face an intermediate situation, which would be the optimal situation. [...]

[...] Doubting about the capacity of the OPEC to control the market Some analysts recently stated that the OPEC's control of the market is weakening increasingly, as the shale gas market increases. One of the goals of the high oil output of the OPEC was to eliminate American frackers who bet on the expectation of stable high crude oil prices. Shale gas is considered as a substitutable good of oil. But today the initial investments of shale frackers are amortized and some of them have a breakeven price point as low as $30/bbl. Indeed, the production costs of shale gas are dropping, since shale producer are facing scale economies. [...]

[...] The Dollar rate is also correlated to the oil price, as it determines the effective price in terms of currencies. Supply is partly determined by geopolitical shocks (prices can spike if a major oil-producing region shows signs of political or economic upheaval, as does China with its current bad economic prospects) and by the state of technology and access to resources. Indeed, the discovery of a new oil field by a non-OPEC member (whose amount of output is not necessarily determined by a cartel agreement) would lead to a surplus of oil output on the market. [...]

[...] What if the main producers kept prices low in the long run ? It wouldn't be a sustainable situation, both for producers and consumers. As we've seen by talking about the game of chicken, cooperation should be encouraged in order to drop gas production. This could be possible thanks to the support of international organizations such as the UNO, which could constrain the main gas production at a lower level. Raising the oil prices would lead to a new era of sustainable economic development. [...]

[...] They can even direct the demand expectations by predicting publicly the evolution of prices on the medium term : for instance, the OPEC recently stated that the oil price will not exceed $80 before 2020. Its goal is likely to strengthen and stabilize the demand which would anticipate a low growth of the oil price, and would keep on consuming oil. Using the game theory to analyse the oil market, we can assume that the OPEC is playing a game of chicken with its market opponents, starting with the US producers. [...]