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

• Published in: Energy economics 2017-03, Vol.63, p.185-198
• Main Authors: Behar, Alberto, Ritz, Robert A.
• Format: Article
• Language: English
• Subjects: Accommodation; Cohesion; Cost analysis; Cost engineering; Crude oil; Crude oil prices; Demand; Energy economics; Equilibrium; Global economy; International economic organizations; International markets; International relations; Limit pricing; Market share; Market shares; Marketing; Markets; Mathematical models; Oil and gas exploration; Oil consumption; Oil shale; OPEC; Petroleum; Petroleum production; Prices; Pricing; Production; Qualitative research; Shale; Shale oil; Strategy
• ISSN: 0140-9883; 1873-6181
• DOI: 10.1016/j.eneco.2016.12.021

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. •In November 2014, OPEC announced a new strategy geared towards market share.•This was seen as an attempt to squeeze high-cost producers, notably US shale oil.•We present an equilibrium model of the fundamental drivers of such a “regime switch”.•The qualitative model predictions are in line with 2014 oil-market developments.•Calibration to oil-market data shows that the model can rationalize OPEC's actions.