A class of short-term models for the oil industry that accounts for speculative oil storage

Yves Achdou (), Charles Bertucci (), Jean-Michel Lasry, Pierre-Louis Lions, Antoine Rostand () and José A. Scheinkman ()
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Yves Achdou: Université de Paris Cité and Sorbonne Université, CNRS
Charles Bertucci: École Polytechnique
Jean-Michel Lasry: Université Paris-Dauphine
Pierre-Louis Lions: Collège de France
Antoine Rostand: Kayrros
José A. Scheinkman: Columbia University

Finance and Stochastics, 2022, vol. 26, issue 3, No 7, 669 pages

Abstract: Abstract We propose a plausible mechanism for the short-term dynamics of the oil market based on the interaction of a cartel, a fringe of competitive producers, and a crowd of capacity-constrained physical arbitrageurs that store the resource. The model leads to a system of two coupled nonlinear partial differential equations, with a new type of boundary conditions that play a key role and translate the fact that when storage is either full or empty, the cartel has enhanced strategic power. We propose a finite difference scheme and report numerical simulations. The latter result in apparently surprising facts: 1) the optimal control of the cartel (i.e., its level of production) is a discontinuous function of the state variables; 2) the optimal trajectories (in the state variables) are cycles which take place around the discontinuity line. These patterns help explain remarkable price swings in oil prices in 2015 and 2020.

Keywords: Economics of oil industry; Major agent facing a crowd of physical arbitrageurs; Boundary conditions linked to state constraints; 49N80; 91A16; 91B69; 91B52 (search for similar items in EconPapers)
JEL-codes: C61 C73 D43 L13 Q02 Q41 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s00780-022-00481-y

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