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The Oil Market as an Oligopoly

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Table of contents

  1. Introduction
  2. Oil Supply Outside The Oligopoly
  3. Literature Review
  4. Conclusion/Recommendation
  5. References

This topic treats the oil market as an oligopoly with a competitive fringe. The oligopoly is assumed to consist of Egypt, Oman, Mexico, Malaysia and Norway plus all OPEC members. The remaining oil producing countries are included in a fringe which by assumption takes the oil price development as exogenously given. Outcomes with varying degrees of collusion within the oligopoly are specified. Intermediate cases are also studied, such as complete or partial cooperation within OPEC, but no cooperation between OPEC and any other countries in the oligopoly.

Introduction

The future value advancement for oil will rely upon to what degree the OPEC individuals can arrange their creation choices, and to what degree OPEC prevails with regards to collaborating with other real oil makers. Numerous nations both inside and outside OPEC will endure expansive decreases in earnings by a fall in the oil cost because of breakdown of OPEC. This clearly shapes the foundation for the way that a few nations outside the association have thought that it was helpful to consult with OPEC it requests to help OPEC’s control over the market. For every operator in the market this sort of assentation must be weighed against the advantages of being a free rider in the market. The topic of advantages from collaboration with OPEC from the perspective of Mexico and Norway is-examined in Berger, Bjerkholt and Olsen (1987). This examination utilized a basic incomplete balance display (WOM) for the universal oil advertise as its purpose of flight, and the issue of participation was then drawn closer by various presumptions of exogenous oil supplies from various locales. Along these lines, no formal behavioural relations on the supply side of the oil showcase were basic these re-enactments. Even though it might be addressed whether a formal cartel show is suited for fitting the clearly complex relations in the worldwide unrefined petroleum advertise, regardless we trust that a more formal investigation is valuable as a supplement of understanding present and future advancement in the market.

This paper regards the oil advertise as an oligopoly with an aggressive edge. Predictable with the thinking in Berger et al. (operation. cit) we accept that Egypt, Oman, Mexico, Malaysia and Norway are the oil makers outside OPEC which are well on the way to collaborate with OPEC. The oligopoly is along these lines smashed to comprise of these nations in addition to all OPEC individuals. The rest of the oil delivering nations are incorporated into a boundary which by presumption takes the oil value improvement as exogenously given. We think about results with shifting degrees of agreement inside the oligopoly. One outrageous case is portrayed by an entire breakdown of participation inside the oligopoly.

The contrary extraordinary is where all nations in the oligopoly organized their generation choices with the goal that the aggregate benefit of the oligopoly is amplified. We likewise consider middle cases, for example, entire or incomplete participation inside OPEC, the net interest for raw petroleum which the oligopoly is confronting is generally steady with request and supply relations in the WOM model. Restriction of theoretical framework Firstly, in the model capacity limits of oligopoly individuals are kept steady, pushing up minor expenses marginal costs as demand and production grow. Besides, impacts of expanded substitutability in the oil advertise, spoke to in its purest type of the nearness of a fence innovation. By and large, one may state that the model presents a negative predisposition on costs in the short to medium run, yet tend to overestimate costs over the long haul. In the present form of the model, limit points of confinement of all oligopoly individuals are exogenous. For a long run examination, this is obviously unacceptable. In a later form of the model we want to indigenize generation limits. The most straightforward method for doing this is to utilize long run cost capacities, which incorporate the cost of limit extension. An elective methodology is to display the oligopoly advertise as a two-arrange diversion. In the primary stage, the capacity limit of every nation is resolved as an equilibrium of a non-cooperative game. The second phase of the model might be displayed correspondingly as will be portrayed in the accompanying, i.e. with exogenous limit. The limit picked in the main stage will influence the result in the second stage and thus the result to every player. The capacity chosen in the first stage will affect the outcome in the second stage and consequently the payoff to each player. The relationship between capacities and payoffs will depend on the degree of collusion in the second stage of the game.

Add up to world oil request (outside the East Bloc and China) in the oligopoly show is determined as: D = D (P, Zd) P is the oil price in dollars and Zd is a vector of exogenous factor, counting income levels in various nations, exchange trade rates, and costs of other energy sources. As specified in the introduction, is gotten from the WOM model. More particularly, D is the total of the oil request of three locales in WOM, specifically USA, whatever remains of OECD, and the LDC’s. An observationally convincing auxiliary model of the oil advertise must have the capacity to isolate the reactions of oil showcase factors to oil-particular stuns from those to worldwide financial improvements. Considering this objective, we select worldwide financial pointers that satisfy two necessities: To begin with, they should catch key remarkable highlights of the worldwide business cycle, and, second, they should be great indicators of the worldwide interest for oil.

Oil Supply Outside The Oligopoly

The supply condition is adjusted in the accompanying route: In the WOM show a sub model is indicated for the gathering of makers outside OPEC. In this sub model oil generation from these nations are identified with different ideas of oil stores, and investigation and extraction of these stores are relying upon the (normal) oil cost. For given presumptions of the oil cost and other free factors this sub model is mimicked various years ahead (until 2000), yielding non-OPEC supply for changing mixes of informative factors. Total world supply from the nations outside the oligopoly (counting net exports out from the East Bloc) is indicated as S = S (P, Zs) Specifically, the main exogenous factor in the supply work (i.e. in Zs) is a period slant. The time drift is incorporated to speak to a bit by bit declining supply, at a steady oil cost, because of depletion.

OPEC cartel with side payments In this model form, essentially because there are very numerous oligopoly specialists working in the market, the result is likely not extremely distant from an aggressive harmony. Most nations have minimal expenses over 95 percent of the oil cost, and just Saudi Arabia has under 90 percent. The contrast amongst cost and minimal cost varies from Saudi Arabia where peripheral cost is 68 percent of the oil cost to Ecuador with more than 99. Towards 2000 and 2010 the grieved increment in earnings (Gross domestic product) basic the projections suggest solid increments sought after. This pushes the limit usage rates near 100 percent in all nations, even high cost nations create more than 97 percent. This puts solid weight on oil costs, which ascend from 32.70 US$/barrel in 2000 to 86.90 US$/barrel in 2010. Here it ought to be underscored that in the introduced computations we have neither considered impacts from rivalry from other vitality sources nor changes in cost and wage reactions that most likely will happen (particularly in creating nations) if wage and costs rise. In this reenactment, we let the 13 OPEC oligopolies act together in a cartel with. side instalments as per the model illustrated in segment 6.2. NOPEC countries keep on acting as Cournot oligopolies. The most critical contrast from the unadulterated Cournot case is that OPEC lessens generation in the base year and therefore the oil cost builds. OPEC nations dice 65 percent of their ability in 1986. As per this hypothetical model, they assign creation as to limit costs, i.e. with the goal that all nations have measure up to minimal cost. The impact on the peripheral cost is emotional contrasted with the oligopoly reproduction; the regular minimal cost for OPEC nations just constitutes 31 percent of the oil cost. In 2000 and 2010 the minor cost of OPEC is still underneath the oil cost (25 and 20 percent of cost individually). However, both price and marginal costs increase, inferring that production increases correspondingly. Because the inverse L state of the marginal cost capacities for these nations, limits will be high even at direct levels of marginal cost. The limit usage in 2000 is 87 percent while it is 98 percent in 2010. All the NOPEC nations. deliver near their abilities in 2000 and 2010. Oman, with minimal cost oil fields, create at fall limit as of now in the base year. All nations inside NOPEC are near 100 percent of limit in 2000 and achieve 100 percent in 2010. For these nations, the marginal costs are near the oil price, except for Mexico where minor expenses constitute 90 percent of the cost. The oil cost is more than 40 percent higher in the base year in this simulation than in the unadulterated oligopoly case.

Literature Review

Oil-particular demand stuns added to the speeding up in the decay of the price of oil in mid 2015. From one perspective, positive stuns to worldwide supply, as identified by the disintegration of worldwide production plotted in the upper-right board, likely came about because of the persevering extension in unpredictable shale oil creation, as likewise recognized by Baumeister, C. and L. Kilian (2016b). “Understanding the Decline in the Price of Oil since June 2014. Journal of the Association of Environmental and Resource Economists 3 (1), 131–158.” Then again, the negative stuns to oil-particular demand were likely because of winding down worries about future accessibility of oil supplies and in this way elevated desires of future overabundance supply in worldwide oil markets. These desires, thusly, probably mirrored a couple of fundamental variables—for instance, the return to production of oil fields in Iraq and Libya following the end of military dangers from radicals, more prominent market certainty that the extension in shale oil production would not suddenly lose force following the price slump, and OPEC’s unwillingness to cut production. In recent work, Baumeister and Hamilton (2015b) recognize the significance of indicating conceivable priors on both the oil free market activity versatilities. What rises out of the investigation is that one could utilize the joint distribution of the oil supply and demand elasticities to limit the arrangement of acceptable models. worldwide demand stuns clarify around 35 percent of the recorded fluctuations in oil prices, contrasted and the 8 percent assess acquired by Kilian (2009) and the 4 percent evaluate got by Baumeister and Hamilton (2015b). The utilization of IP takes after Aastveit et al. (2015), who investigate the contribution of demand from cutting edge and developing economies to developments in the price of oil.

During the last years coordinate efforts have been undertaken and some tacit agreements have been obtained even between OPEC and some non-OPEC oil producers. Even though these contacts obviously are difficult to describe in any formal manner, the existence of such agreements should create some interest for the present model version. When the 5 NOPEC countries are included in the cartel, its market power increases considerably. This is exploited by the cartel; total output from the 18 countries is reduced by 1/3 compared to the oligopoly case in the base year, and by 18 percent from the OPEC-cartel solution. The price is 22.40 US$/barrel in the base year, an increase of 78 percent compared to the oligopoly case. In the two OPEC-cartel simulations we saw above that the monopoly power of the cartel almost vanishes towards 2010, reflected in the observation that the oil price is insignificantly above the value in the pure Cournot case. In the present simulation, however, output is reduced in 2010 by 15 percent, while the oil price in the same year is increased from the by 40 percent.

Conclusion/Recommendation

The motivation behind this topic is to display a structure for breaking down different sorts of strategic behaviour and collusive behaviour in the crude oil market. The investigation is preparatory, and specifically the exact re-enactments ought to be viewed primarily as shows of the system and differences between the various strategic models. Oil supply shocks account for half of oil price fluctuations at business cycle frequencies, while shocks to global demand account for 30 percent. A drop-in oil prices driven by oil supply shocks boosts economic activity in advanced economies, while it depresses economic activity in emerging economies, thus helping explain the muted effects of changes in oil prices on global economic activity.

References

1. Osborne, D.K. (1976): “Cartel problems. American economic review, 66, pp.” 835-844

2. Baumeister, C. and L. Kilian (2016b). “Understanding the Decline in the Price of Oil since June 2014. Journal of the Association of Environmental and Resource Economists 3 (1),” 131–158.

3. Kilian, L. (2009). “Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market. American Economic Review 99 (3).”

4. Baumeister, C. and J. D. Hamilton (2015b). “Structural Interpretation of Vector Autoregressions with Incomplete Identification: Revisiting the Role of Oil Supply and Demand Shocks. Manuscript, University of Notre Dame and UCSD.”

5. Aastveit, K. A., H. C. Bjrnland, and L. A. Thorsrud (2015). “What Drives Oil Prices? Emerging versus Developed Economies. Journal of Applied Econometrics 30(7),”1013–1028.

6. Berger, K., O. Bjerkholt and O. Olsen (1987): “What are the options for non-OPEC producing countries. Discussion Paper No. 26, Central Bureau of Statistics, Oslo.”

7. Newbery, D. (1981): “Oil prices, cartels and the problem of dynamic inconsistency. Economic Journal, 91, pp.” 617- 646

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The Oil Market as an Oligopoly. (2018, September 04). GradesFixer. Retrieved January 31, 2023, from https://gradesfixer.com/free-essay-examples/the-oil-market-as-an-oligopoly-2/
“The Oil Market as an Oligopoly.” GradesFixer, 04 Sept. 2018, gradesfixer.com/free-essay-examples/the-oil-market-as-an-oligopoly-2/
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