OPEC vs US shale: Analyzing the shift to a market-share strategy

Abstract

In November 2014, OPEC announced a new strategy geared towards improving its market share. Oil-market analysts interpreted this as an attempt to squeeze higher-cost producers, notably US shale oil, out of the market. Over the next year, crude oil prices crashed, with large repercussions for the global economy. We present a simple equilibrium model that explains the fundamental market factors that can rationalize such a "regime switch" by OPEC: (i) the growth of US shale oil production; (ii) the slowdown of global oil demand; (iii) reduced cohesiveness of the OPEC cartel; and (iv) production ramp-ups in other non-OPEC countries; while (v) reductions in US shale costs act against these factors. We show that these qualitative predictions are broadly consistent with oil market developments during 2014-15. The model is calibrated to oil market data; it predicts accommodation up to 2014 and a market-share strategy thereafter, and explains large oil-price swings as well as realistically high levels of OPEC output.

OPEC, Saudi Arabia, and the shale revolution: Insights from equilibrium modelling and oil politics

“…This approach is common for countrylevel models in the crude oil sector (e.g. Behar and Ritz (2017)) and follows a simple rationale already introduced: (Conventional) projects are characterised by high initial costs, a long project lifetime, and relatively low running costs. Hence, outside of OPEC, suppliers have no official spare capacities and hardly any incentive to have such (Aguilera and Radetzki, 2015).…”

“…• OPEC flooded the market with crude in an attempt to defend its market share and to drive out shale producers (Behar and Ritz, 2017;Brown and Huntington, 2017;Coy, 2015;Gause, 2015;Mănescu and Nuño, 2015);…”

“…Behar and Ritz (2017) construct an algebraic framework with numerical computation. They show that flooding the market becomes the dominant strategy when shale supply and costs are high, non-OPEC capacities are large, and OPEC collusion as well as market demand are low; this has had been the case post-2014.…”

“…As mentioned, despite a large literature discussing the issue, including, for example, Baffes et al (2015); Baumeister and Kilian (2016); Dale (2016); ; Khan (2017), and Aguilera and Radetzki (2015), the only study featuring a comprehensive formal discussion and a numerical calibration is Behar and Ritz (2017). However, their quantitative part is limited to predicting the strategic decision between defending market share and maximising short-term profit.…”

New Challenge and Research Development in Global Energy Financialization

“…For example, the 'roller coaster' surge in oil prices in 2008 is considered to be the result of the widespread involvement of international financial capital in energy futures markets (Creti and Nguyen 2015). Games between new and old energy forces, the American shale gas revolution and disputes with Russia will all affect the reorganization of the energy market and cause sharp price fluctuations (Behar and Ritz 2017;Caporin and Fontini 2017;Cooper, Stamford, and Azapagic 2018). Energy financialization has become an inevitable trend, which will lead to the traditional commodity attributes (supply-demand relationship) that affect changes to energy risk no longer playing a leading role, and the characteristics of financialization will give new uncertainty and heterogeneity to market risk.…”