Opec and the Price of Petroleum: Theoretical Considerations and Empirical Evidence (Studies in International Economics and Institutions)

This book investigates the process of oil price formation, in particular the price fluctuations of the past, and to provide realistic scenarios of future developments. It starts with the history of the world petroleum market and its institutions and a comprehensive survey of the existing literature. The theoretical framework is a model which interprets OPEC as the swing producer in the market. An intertemporal aspect arises from the exhaustibility of petroleum and from the sluggish adjustments of demand and non-OPEC supply. The model is solved by application of Pontryagin's maximum principle. Price shocks are explained by OPEC's incorrect expectations about demand behaviour. The model is analysed econometrically by means of nonlinear-least-squares methods and the parameter estimates are used to compute scenarios of future price developments. The solution of the theoretical model requires application of non-standard concepts, such as algebraic Riccati equations. They are introduced in an appendix which also contains a variety of useful optimal control theorems. Another issue which is of more general interest is the consideration of incorrect expectations in intertemporal optimisation models.