An Analysis of OPEC's Strategic Actions, US Shale Growth and the 2014 Oil Price Crash
37 Pages Posted: 9 Dec 2016
Date Written: July 2016
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.
Keywords: Oil sector, Organization of Petroleum Exporting Countries, Markets, United States, Oil production, Oil prices, Supply and demand, Econometric models, Crude oil, OPEC, price crash, shale oil, market share, limit pricing
JEL Classification: L12, L71, Q41
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