Cooperate or Compete? Insights from Simulating a Global Oil Market with No Residual Supplier

with Bertrand Rioux, Abdullah Al Jarboua, Axel Pierru, Shahd Al Rashed, Colin Ward

Abstract

Structural changes in the oil market, such as the rise of tight oil, are impacting conventional market dynamics and incentives for producers to cooperate. What if OPEC stopped organizing residual production collectively? We develop an equilibrium model to simulate a competitive world oil market from 2020 to 2030. It includes detailed conventional and unconventional oil supplies and financial investment constraints. Our competitive market scenarios indicate that oil prices first decline and tend to recover to reference residual supplier scenario levels by 2030. In a competitive oil market, a reduction in the financial resources made available to the global upstream oil sector leads to increased revenues for low-cost producers such as Saudi Arabia. Compared to the competitive scenario, Saudi Arabia does not benefit from acting alone as a residual supplier, but, under some assumptions, it benefits from being part of a larger group that works collectively as a residual supplier.

Link to full paper

 

Fiscal Policy for Stability in Oil-Exporting Countries: From the Old Problems to the Challenges of COVID-19

with Olivier Durand-Lasserve

Abstract

Since the Great Recession of 2008, oil-exporting countries have had to adjust their fiscal policies to respond to larger oil price variations and increased unpredictability. This commentary provides insights into the relationship between oil prices and fiscal policies in emerging and developing (ED) oil-exporting countries. It also gives an overview of how fiscal rules and sovereign wealth funds (SWFs) can contribute to mitigating fluctuations in oil revenues and stabilizing economies. Last, it discusses the fiscal responses of oil-exporting countries to the COVID-19 crisis.

Link to full paper

 

The Opportunity Cost of Domestic Oil Consumption for an Oil Exporter: Illustration for Saudi Arabia

with Axel Pierru

Abstract

We develop a partial equilibrium framework to assess the opportunity cost of domestic oil consumption for an oil-exporting country. We show that the opportunity cost depends on various factors, including the constraints to which the oil producer is subject and the domestic oil pricing scheme. Moreover, through an application of the envelope theorem, we assess net welfare gains that can be generated from a reform of the domestic oil price. Our results show that the most efficient pricing policy is to set the domestic price equal to the opportunity cost. A numerical illustration for Saudi Arabia is provided to demonstrate the practical value of the proposed framework. Our findings can inform public decision-making for projects and policies that impact oil demand.

Link to full paper