Abstract
We analyse the behaviour of OPEC as a group by formulating a theoretical model that encompasses the perfect competition model and various forms of the imperfect competition model. By confronting the theoretical model with quarterly data for the period from 1992 to 2013 within the context of a cointegrated vector autoregressive (CVAR) model, we find support for the imperfect competition hypothesis regarding the output decisions of OPEC. We also find that a dynamic equilibrium correction model with imperfect competition is stable in-sample. However, a forecasting exercise for the period from 2014 to 2018 reveals that the model breaks down following the November 2014 meeting at which OPEC decided to keep its supply unchanged despite the huge oil price drop in advance. The model systematically underpredicts OPEC production over the forecast period and by as much as 2.5 million barrels per day at the end of 2016. During 2018, however, the model forecasts OPEC production quite well. Our findings suggest that the behaviour of OPEC did indeed change significantly after the November 2014 meeting.
Highlights
The growing importance of OPEC during the 1970s and the increased perception that the organisation could affect world oil prices initiated a lot of empirical work about the oil market, and in particular, about the behaviour of OPEC
By estimating a cointegrated vector autoregressive (CVAR) model based on data running from the first quarter of 1992 to the fourth quarter of 2013, we find support for the imperfect competition hypothesis regarding the output decisions of OPEC
The likelihood ratio (LR) tests with degrees of freedom in parentheses are based on the partial CVAR with r = 1 and without a linear trend
Summary
The growing importance of OPEC during the 1970s and the increased perception that the organisation could affect world oil prices initiated a lot of empirical work about the oil market, and in particular, about the behaviour of OPEC. Among the various competing hypotheses about OPEC behaviour, Griffin (1985) finds some support for a cartel model where OPEC as a group is a dominant producer setting the oil price, while non-OPEC countries behave as a competitive fringe. We contribute to the literature by studying the behaviour of OPEC as a group for the period from 1992 to 2018, with a special focus on the possibility of changes in actions taken by the organisation before and after the November 2014 meeting. By estimating a CVAR model based on data running from the first quarter of 1992 to the fourth quarter of 2013, we find support for the imperfect competition hypothesis regarding the output decisions of OPEC.
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