A Model for the Global Crude Oil Market Using a Multi-Pool MCP Approach

19 Pages Posted: 9 Jul 2009 Last revised: 16 Apr 2012

See all articles by Daniel Huppmann

Daniel Huppmann

International Institute for Applied Systems Analysis (IIASA)

Franziska Holz

German Institute for Economic Research (DIW Berlin)

Date Written: March 1, 2009

Abstract

This paper proposes a partial equilibrium model to describe the global crude oil market. Pricing on the global crude oil market is strongly influenced by price indices such as WTI (USA) and Brent (Northwest Europe). Adapting an approach for pool-based electricity markets, the model captures the particularities of these benchmark price indices and their influence on the market of physical oil. This approach is compared to a model with bilateral trade relations as is traditionally used in models of energy markets. With these two model approaches, we compute the equilibrium solutions for several market power scenarios to investigate whether the multi-pool approach may be better suited than the bilateral trade model to describe the crude oil market. The pool-based approach yields, in general, results closer to observed quantities and prices, with the best fit obtained by the scenario of an OPEC oligopoly. We conclude that the price indices indeed are important on the global crude market in determining the prices and flows, and that OPEC effectively exerts market power, but in a non-cooperative way.

Keywords: crude oil, market structure, cartel, pool market, simulation model

JEL Classification: L13, L71, Q41

Suggested Citation

Huppmann, Daniel and Holz, Franziska, A Model for the Global Crude Oil Market Using a Multi-Pool MCP Approach (March 1, 2009). DIW Berlin Discussion Paper No. 869, Available at SSRN: https://ssrn.com/abstract=1431388 or http://dx.doi.org/10.2139/ssrn.1431388

Daniel Huppmann

International Institute for Applied Systems Analysis (IIASA) ( email )

Schlossplatz 1
Laxenburg, A-2361
Austria

Franziska Holz (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

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