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

37 Pages Posted: 9 Dec 2016

See all articles by Alberto Behar

Alberto Behar

International Monetary Fund (IMF)

Robert Ritz

University of Oxford

Date Written: July 2016

Abstract

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

Suggested Citation

Behar, Alberto and Ritz, Robert, An Analysis of OPEC's Strategic Actions, US Shale Growth and the 2014 Oil Price Crash (July 2016). IMF Working Paper No. 16/131, Available at SSRN: https://ssrn.com/abstract=2882566

Alberto Behar (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Robert Ritz

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

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