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Behar, A. and Ritz, R.

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

CWPE1623

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. These include: (i) the growth of US shale oil production; (ii) the slowdown of global oil demand; (iii) reduced cohesiveness of the OPEC cartel; (iv) production ramp-ups in other non-OPEC countries. 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.

Keywords: Crude oil, OPEC, price crash, shale oil, market share, limit pricing

JEL Codes: L12 L71 Q41

Author links: Robert Ritz  

PDF: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1623.pdf

EPRG Paper Link: 1612

Open Access Link: https://doi.org/10.17863/CAM.5768


Published Version of Paper: OPEC vs US shale: Analyzing the shift to a market-share strategy, Behar, A. and Ritz, R., Energy economics (2017)

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