The market equilibrium of OPEC's pricing mechanism
- Drexel Univ., Philadelphia, PA (United States)
At least twice a year, oil ministers of the Organization of the Petroleum Exporting Countries (OPEC) meet in Vienna or Geneva to adjust the group's output ceiling to eliminate discrepancies between the market price and the target price. If the market imbalances are persistent, then the target price is also adjusted. Often, OPEC's members differ in their assessment of future market demand for their oil and, thus, present different views on the need to adjust the output celing and the target price. During periods of downward pressures on oil prices, the high absorbers of capital (i.e., oil revenues) prefer a speedy downward adjustment to the celing, while the low absorbers are slow to react. However, in the event of tightening markets, the low absorbers usually respond by exceeding their quotas before agreeing on a ceiling adjustment. Therefore, OPEC nations have different desirable speeds of adjustment. This paper specifies and examines the stability of OPEC's pricing mechanism. It presents a strategy which would enable the organization to achieve a target price-based market equilibrium with increased rapidity through the appropriate manipulation of the speed of output ceiling adjustment. This strategy is applied using data on market and target prices, actual output, and output ceilings for the first quarter of 1991. The main finding is that, given the target price, OPEC's equilibrium market demand is significantly lower than the assigned output ceiling. Production should have been reduced by at least 3 million barrels a day for OPEC to realize the $21 per barrel target price in the first quarter of 1991. Seasonal factors can cause slight variations in this output but would not bring out compatibility between the target price and the output ceiling within a reasonable period of time unless OPEC follows an activist policy of output adjustment. 3 figs., 1 tab.
- OSTI ID:
- 7040241
- Journal Information:
- Journal of Energy and Development; (United States), Vol. 16:1; ISSN 0361-4476
- Country of Publication:
- United States
- Language:
- English
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POLICY AND ECONOMY
02 PETROLEUM
OPEC
FORECASTING
PETROLEUM
MARKET
PRODUCTION
CEILINGS
ECONOMICS
PLANNING
PRICES
SEASONAL VARIATIONS
ENERGY SOURCES
FOSSIL FUELS
FUELS
INTERNATIONAL ORGANIZATIONS
OIL-EXPORTING COUNTRIES
VARIATIONS
294002* - Energy Planning & Policy- Petroleum
020700 - Petroleum- Economics
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