Oil Prices & Dynamic Games Under Stochastic Demand

32 Pages Posted: 4 Oct 2017

See all articles by Isaiah Brown

Isaiah Brown

Princeton University

Jacob Funk

Princeton University

Ronnie Sircar

Princeton University - Department of Operations Research and Financial Engineering

Date Written: October 3, 2017

Abstract

Oil prices remained relatively low but volatile in the 2015-17 period, largely due to declining and uncertain demand from China. This follows a prolonged decline from around $110 per barrel in June 2014 to below $30 in January 2016, due in large part to increased supply of shale oil in the US, which was spurred by the development of fracking technology. Most dynamic Cournot models focus on supply-side factors, such as increased shale oil, and random discoveries. However, uncertain demand is a major factor driving oil price volatility.

This motivates the study of Cournot games in a stochastic demand environment. We present analytic and numerical results, as well as a modified Hotelling's rule for games with stochastic demand. We highlight how lower demand forces out higher cost producers from producing, and how such changing market structure can induce price volatility.

Keywords: oil, energy, Cournot, differential games

JEL Classification: L13

Suggested Citation

Brown, Isaiah and Funk, Jacob and Sircar, Ronnie, Oil Prices & Dynamic Games Under Stochastic Demand (October 3, 2017). Available at SSRN: https://ssrn.com/abstract=3047390 or http://dx.doi.org/10.2139/ssrn.3047390

Isaiah Brown

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

Jacob Funk

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

Ronnie Sircar (Contact Author)

Princeton University - Department of Operations Research and Financial Engineering ( email )

Princeton, NJ 08544
United States

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