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Faculty of Economics

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Behar, A. and Ritz, R.

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

Energy economics

Vol. 63 pp. 185-198 (2017)

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 2014–2015. 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, limit pricing, Market share, OPEC, Shale oil

JEL Codes: L12, L71, Q41

Author links: Robert Ritz  

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Cambridge Working Paper in Economics Version of Paper: OPEC vs US shale oil: Analyzing the shift to a market-share strategy, Behar, A. and Ritz, R., (2016)

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