DYNAMIC ADJUSTMENTS AND CHANGE IN THE WORLD OIL MARKET
Nazli. Choucri
Department of Political Science
Massachusetts Institute of Technology
Cambridge, Massachusetts
" Introduction
“the world of1 market is undergoing substantial changes, in teras
of overall structure, number of key participants, and market adjust-
ment mechanisms, ‘These changes will influence both price determination
as well as critical decisions pertaining to production capacity and
capacity utilization.
Problem Statement
The following type of problem is examined: If producer countries
decide unilaterally to cut production or production capacity, what will
the effects be on the market, and what policies can be adopted to reduce
instabilities or imbalances. If consumer countries continue to adjust
their demand for oil imports, what impacts will there be on prices and/or
on producer production décisions.
This paper presente a model of the world oil market, disaggregated
by individual components -- buyers, sellers, and international oi
companies ~~ whose purpose is to determine the effects of the policies
on one actor on the behavior and actions of others. Buyers and sellers
are disaggregated according to individual countries and regions, and
their distinctive characteristics specified.
The Model
The m
pe), is a
price and pi
initialized
torical obsi
the model for this paper to 1980 and simulate the effects of alternative
price and p
225
odel, entitled the International Petroleum Exchange Model
system dynamics model of demand and supply adjustments to
rice adjustments to market changes, While the model is
for 1970 to enable a comparison of model results with his-
ervations for a ten year period, we propose to initialize
roduction policies to 2000. Results are presented on an
annual basis, although it is possible to generate quarterly or monthly
observations.
Anong critical issues to be examined are the potential effects on
producer countries of substantial changes in consumer demand, or of
expansion o}
f consumer countries’ own petroleum production, or expan-
sion of uses of alternatives to petroleum. The conditions under which
mon-OPEC producers, as new entrants in the market, become important
are delineated, the overall adjustments to new market conditions are
determined
This
adjustment.
accordingly.
paper presents a system dynamics model of detailed market
It is a first effort to depict the world oil market in its
constituent analytical as well as behavioral components.
The model may be used in three different modes:
qa)
Q)
Analytically for determining the supply and demand relation—
ships and price formation under different conditions.
Structurally for observing relative positions of buyers,
sellers and companies under different market and price
conditions.
318
=m
(3) Financially for obtaining the economic consequences of
alternative market conditions and price paths with regard
to import payments, balance of payments, investments in the
o41 industry, revenue from oil sales, and so forth.
Model Uses:
Different users may emphasize or use different features of the
IPE model.
Among the questions to be analyzed with use of the IPE model are
the following:
e If producer countries change their price per barrel, what
are the effects:
for consuiters in terms ‘of
e demand for imports
o-- demand
e future prices
© balance of payments
© strategic vulnerability
investments in domestic sources of supply
for international of] companies in terms of
© corporate profits from oil sales
© investments in the ofl industry
for producer countries in terms of
e oil revenue
e investments domestically
© imports of goods. and services
a4
¢ investments in the economies of industrial
countries
© production capacity
© actual production
© If consuner countries cut their oil imports what would
. be the effects for:
© strategic vulnerability
© price
© production rates
© production capacity
© If non-Gulf suppliers expand production, what are the effects
for:
© Gulf production
price
© consumer: strategic vulnerability
These types of questions illustrate the versatility of the IPE model in
allowing an integrated’ analysis of the world ofl market under different
economic and political conditions.
Interation among Actors
The model can be disaggregated (sectoralized) to represent behavior
and adjustment of individual countries (or groups of countries). For example,
we can examine the effects on the United States of Saudi Arabian policies,
or effects on the narket of U.S. import policies or demand behavior. The
national adjustments to market changes can thus be. identified.
ae
Results
This paper presents select results of national adjustments to market
changes, as well as impacts of individual national policies on the oil
market.
319
