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Application of Game Theory - OPEC Dynamics

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OPEC dynamics interpreted through Nash Equilibrium & Stackleberg Game Theory.

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Application of Game Theory - OPEC Dynamics

  1. 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. 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. 3. Intra-OPEC Scenario <ul><li>Factual Data:- </li></ul><ul><ul><li>Quantity produced by OPEC per day = 24.85 million barrels </li></ul></ul><ul><ul><li>Quantity produced by Saudi Arabia = 10.5 million barrels </li></ul></ul><ul><ul><li>Payoff is calculated on annual basis (for 300 days / year) </li></ul></ul><ul><ul><li>Oil Price = $ 70 / barrel </li></ul></ul><ul><ul><li>Price elasticity of demand = 0.21 </li></ul></ul><ul><ul><li>Reduction in Quantity = 20 % </li></ul></ul><ul><ul><li>New quantity OPEC = 19.88 million barrels </li></ul></ul><ul><ul><li>New quantity Saudi Arabia = 8.4 million barrels </li></ul></ul><ul><ul><li>Price rise = $ 3 / barrel </li></ul></ul><ul><ul><li>New Price = $ 73 / barrel </li></ul></ul>
  4. 4. NASH EQUILIBRIUM SAUDI ARABIA REST OF THE PLAYERS (OPEC) Fair Cheat All figures are in million Dominant Strategy
  5. 5. Inference from NASH Equilibrium <ul><li>Both the parties are better-off when they “cheat” and they get maximum payoff </li></ul><ul><li>If one of the countries of the OPEC goes against cartel then whole cartel gets affected in terms of profit </li></ul><ul><li>Practically it doesn’t happen so: </li></ul><ul><ul><li>This is not an one-off game, but repetitive game. So any information asymmetry is reduced over time. </li></ul></ul><ul><ul><li>Political differences with the Western countries unites the Middle East nations. </li></ul></ul>
  6. 6. OPEC Price v/s Renewable Energy Investment <ul><li>Factual Data:- </li></ul><ul><ul><li>Payoff is calculated on annual basis (for 300 days /year) </li></ul></ul><ul><ul><li>Oil Price Present = $ 200/ barrel </li></ul></ul><ul><ul><li>Oil Price Revised= $ 75 / barrel </li></ul></ul><ul><ul><li>World energy consumption: </li></ul></ul><ul><ul><li>+ Petroleum = 35% </li></ul></ul><ul><ul><li>+ Renewable sources = 13% </li></ul></ul><ul><ul><li>Thus, Ratio of consumption = 3:1 (approx) </li></ul></ul><ul><ul><li>Daily production by OPEC = 24.85 million barrels </li></ul></ul><ul><ul><li>Annual production = 24.85 * 300 = 7455 million barrels </li></ul></ul>
  7. 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. 8. Inference from STACKLEBERG GAME <ul><li>From the payoffs it is obvious that: </li></ul><ul><ul><li>OPEC has the incentive to lower the prices to make investments in renewable sources unviable. </li></ul></ul><ul><li>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. </li></ul>
  9. 9. <ul><li>THANK YOU </li></ul>

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