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

Accepted version
Peer-reviewed

Type

Article

Change log

Authors

Behar, A 
Ritz, RA 

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.

Description

Keywords

crude oil, limit pricing, market share, OPEC, shale oil

Journal Title

Energy Economics

Conference Name

Journal ISSN

0140-9883

Volume Title

63

Publisher

Elsevier