Does a target-capacity utilization rule fulfill OPEC's economic objectives?

Why do oil prices jump (or fall)?

“…This framework has been proposed in Gately and Kyle (1977) and their numerical calculations show a cyclical pattern although they do not study this property theoretically. Powell (1990) and Suranovic (1993) repeat this pattern but again do not investigate the stability properties of the underlying dynamic system either. Accounting for dynamic demand Rauscher (1988) shows for myopic expectations (i.e., differential equation (1)) and Wirl (1993) for rational expectations based on the EisnerStrotz (1963) transient and damped price oscillations are possible.…”

“…This is most obvious for the descriptions taken from currency markets that consider bands and targets, e.g., Tang and Hammoudeh (2002) for price bands, Powell (1990) and Suranovic (1993) argue for a target capacity model and Ramcharran (2002), on the basis of an econometric investigation following Griffin (1985), advocates a target revenue model. Reynolds (1999) views risk aversion as crucial for understanding OPEC behavior.…”

Output adjusting cartels facing dynamic, convex demand under uncertainty: The case of OPEC

“…Given the economic importance it is surprising that only few papers attempt to explain these ups and downs of oil prices. In fact, many papers argue to the contrary that OPEC pursues a target similar to central banks trying to stay within exchange rate bands, e.g., Tang and Hammoudeh (2002) for price, Powell (1990) and Suranovic (1993) for capacity utilization. Oil price volatility or cycles are model outcomes in Wirl (1990), Cremer and Isfahani (1991) and in Rauscher (1992) where OPEC behavior is modeled by a perfect cartel with perfect competition.…”

Stability of the Price Reaction Function When the Consumers Anticipate Future Prices

“…Gately-Kyle [1977] is, at least to my knowledge, the first work that offers this description of OPEC decision making. The U.S. Energy Information Administration's Oil Market Simulation model, see Suranovic [1993] and models of the world oil market in Baldwin-Prosser [1988], Hogan [1989] and the U.S. are recent examples that use the price reaction function (PRF in the following). All these papers, however, omit a stability analysis although the calculations, already in Gately-Kyle [1977] and recently in Suranovic [1993], show a cyclical oil price evolution over time.…”

“…The U.S. Energy Information Administration's Oil Market Simulation model, see Suranovic [1993] and models of the world oil market in Baldwin-Prosser [1988], Hogan [1989] and the U.S. are recent examples that use the price reaction function (PRF in the following). All these papers, however, omit a stability analysis although the calculations, already in Gately-Kyle [1977] and recently in Suranovic [1993], show a cyclical oil price evolution over time. Rauscher [1988a] proves the stability of the PRF for a particular class of dynamic demand relations and offers this hypothesis to explain actual oil price volatility.…”