Cartels and Game Theory in the Oil Industry

Thursday, October 30, 2014
by Ben Christopher

The Organization of Petroleum Exporting Countries (OPEC) is an example of an oligopoly colluding overtly to fix the price of a barrel of oil - currently there are 12 members and according to OPEC they control 81% of crude oil reserves. One of OPEC's main aims is to “ensure stable oil prices, secure fair returns to producing countries and investors in the oil industry“. 

Prices have hardly been stable of late, in fact according to the Economist "the price of Brent crude fell over 25% from $115 a barrel in mid-June to under $85 in mid-October, before recovering a little". This great article is well worth a read as it goes into the global consequences of this fascinating turn of events in such a key market. But what caught my eye, in particular as we're not far off looking at oligopolies and game theory in A2 Microeconomics, was this Bloomberg article pointing out a potential breakdown of the OPEC price fixing agreement as predicted by the prisoner's dilemma and game theory:

"China is finding oil supplies 14,000 miles away, aided by the global rout in prices that’s left producers vying for new markets. PetroChina Co. said it bought Colombian crude for a northern refinery for the first time because it was good value. The transaction underscores how the world’s second-biggest oil consumer is benefiting as producers from the Middle East to Latin America vie for customers in Asia."

Part of the reason for this price fall is the rapid increase in US production (not a member of OPEC) - see graphic below - and the Saudi response was to INCREASE production by half a percent (causing other OPEC members to follow the Saudi lead) determined to protect their market share against non-cartel rivals. “OPEC appears to be gearing up for a price war,” Eugen Weinberg, head of commodities research at Commerzbank, wrote on Oct. 2 - another feature of Oligopoly behaviour explained by the kinked demand curve. 

The prisoner's dilemma highlights the difficulty in cartels lasting any length of time as the temptation to break the agreement and reap the rewards is simply irresistible - now the US, Latin American and others not tied to OPEC are willing to sell for cheap, are we witnessing the beginning of the end of this cartel?

China poised to pass US as world’s biggest economy

by Ben Christopher

This prediction is based on estimates of the real cost of living, known as purchasing power parity or PPPs which according to this FT article "are recognised as the best way to compare the size of economies rather than using volatile exchange rates". PPP theory takes into account the cost of living in individual countries and the International Comparison Program, the organisation who have come up with the research causing all the headlines have found that money goes much further in poorer countries than it previously thought.

Aside from China about to take the top spot away from the US (a place the US has occupied since 1872) "the figures revolutionise the picture of the world’s economic landscape, boosting the importance of large middle-income countries. India becomes the third-largest economy having previously been in tenth place."


Wednesday, October 29, 2014
by Mo Tanweer

Some quirky videos here on economic questions from WeTheEconomy...

Paul G. Allen’s Vulcan Productions and Morgan Spurlock’s Cinelan have partnered to produce WE THE ECONOMY 20 Short Films You Can’t Afford to Miss. Each film is helmed by an acclaimed filmmaker, each with their own creative vision. The series aims to drive awareness and establish a better understanding of the U.S. economy. Told through animation, comedy, musical, non-fiction, and scripted films, WE THE ECONOMY seeks to demystify a complicated topic while empowering the public to take control of their own economic futures.

A panel of top economic experts including academics, analysts, journalists, and historians helped identify 20 key topics about the U.S. economy that every American should understand. Those and other economic advisers then worked with filmmakers to shape the topics into 5-8 minute films that answer the questions:

In the current economic climate, the need for citizens to be engaged and informed is greater than ever. Distributed digitally, across multiple platforms and in theaters, WE THE ECONOMY will do both... and best of all: it’s available everywhere, to everyone.

The videos can be found here.

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