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Application of Game Theory - OPEC Dynamics
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Application of Game Theory - OPEC Dynamics

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OPEC dynamics interpreted through Nash Equilibrium & Stackleberg Game Theory.

OPEC dynamics interpreted through Nash Equilibrium & Stackleberg Game Theory.

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Application of Game Theory - OPEC Dynamics Presentation Transcript

  • 1. OPEC ROLE IN GLOBAL OIL MARKET STRUCTURE Presented by: JOYDEEP MUKHERJEE (20081020) MOHIT RAJ (20081030) MRUGESH BRAHMBHATT (20081031) REJO MATHEW (20081042) VIKRAM DESHMUKH (20081057)
  • 2. Factors affecting OPEC Pricing Model + OPEC behaviour is not constant and can exhibit variation in conduct with important implications on price dynamics in the oil market + OPEC’s influence is asymmetrical depending on whether it is responding to rising or falling global oil demand + The shift to the futures markets for price determination has introduced a large number of players and the large variety of participants has complicated the process of decision-making within OPEC
  • 3. Intra-OPEC Scenario
    • Factual Data:-
      • Quantity produced by OPEC per day = 24.85 million barrels
      • Quantity produced by Saudi Arabia = 10.5 million barrels
      • Payoff is calculated on annual basis (for 300 days / year)
      • Oil Price = $ 70 / barrel
      • Price elasticity of demand = 0.21
      • Reduction in Quantity = 20 %
      • New quantity OPEC = 19.88 million barrels
      • New quantity Saudi Arabia = 8.4 million barrels
      • Price rise = $ 3 / barrel
      • New Price = $ 73 / barrel
  • 4. NASH EQUILIBRIUM SAUDI ARABIA REST OF THE PLAYERS (OPEC) Fair Cheat All figures are in million Dominant Strategy
  • 5. Inference from NASH Equilibrium
    • Both the parties are better-off when they “cheat” and they get maximum payoff
    • If one of the countries of the OPEC goes against cartel then whole cartel gets affected in terms of profit
    • Practically it doesn’t happen so:
      • This is not an one-off game, but repetitive game. So any information asymmetry is reduced over time.
      • Political differences with the Western countries unites the Middle East nations.
  • 6. OPEC Price v/s Renewable Energy Investment
    • Factual Data:-
      • Payoff is calculated on annual basis (for 300 days /year)
      • Oil Price Present = $ 200/ barrel
      • Oil Price Revised= $ 75 / barrel
      • World energy consumption:
      • + Petroleum = 35%
      • + Renewable sources = 13%
      • Thus, Ratio of consumption = 3:1 (approx)
      • Daily production by OPEC = 24.85 million barrels
      • Annual production = 24.85 * 300 = 7455 million barrels
  • 7. STACKLEBERG GAME IMPORTING COUNTRY OPEC OPEC Invest in Renewable sources Do not invest in Renewable sources Low Low Maintain Maintain (1398, 4193) (0, 14910) (0, 5591.25) (11182, 3727) 0.25*75*74.55 =1398 0.75*75*74.55 = 4193 0.75*200*74.55= 11182 0.25*200*74.55= 3727 75* 74.55 = 5591.25 200*74.55 = 14910 (All figures are in multiples of 10^8)
  • 8. Inference from STACKLEBERG GAME
    • From the payoffs it is obvious that:
      • OPEC has the incentive to lower the prices to make investments in renewable sources unviable.
    • We see the allegation that one of the factors for the current downslide in Oil prices was that OPEC trying to curb the investments in renewable energy R&D seems to have some weightage.
  • 9.
    • THANK YOU