OPEC vs US shale oil: Analyzing the shift to a market-share strategy

Alberto Behar () and Robert Ritz

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

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, notably 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: Crude oil; OPEC; price crash; shale oil; market share; limit pricing (search for similar items in EconPapers)
JEL-codes: L12 L71 Q41 (search for similar items in EconPapers)
Date: 2016-03-31
New Economics Papers: this item is included in nep-com and nep-ene
Note: rar36
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: OPEC vs US shale oil: Analyzing the shift to a market-share strategy (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:1623

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