Producer behavior and price determination in the international oil market: An alternative model of oil prices based on Marx's theory of competition and market value

This dissertation presents an alternative model of oil prices based on Marx's theory of competition and market value in the context of rent-bearing sectors. Chapter 1 reviews the literature on oil models and shows that target-revenue, cartel, and dominant-firm models are not able to provide consistent theories of oil price determination especially during periods of disequilibrium when the actual pricing behavior of oil producers contradicts the models' main assumptions. In Chapter 2, and based on a detailed investigation of Marx's theory of competition and market value applied to rent-bearing sectors, I suggest that the limitations of oil models identified in Chapter 1 can be overcome with an alternative model of oil prices which I call the Marxian Disequilibrium (MD) model. The MD model is an extension of a detailed analysis of the coal market presented by Marx in Theories of Surplus Value where special emphasis is placed on disequilibrium industry dynamics, an issue largely neglected in Marxian economics as well as in the orthodox Industrial Organization literature. This chapter concludes by describing how the expected patterns of supply and investment behavior of oil producers, depending on whether they belong to OPEC or non-OPEC, in conjunction with changing market conditions, are expected to determine oil prices throughout a hypothetical oil price cycle. In Chapter 3 I conduct a detailed empirical analysis of the international oil market in order to test the theoretical and empirical expectations of the MD model. This analysis identifies cyclical patterns in world and regional oil demand, oil production by OPEC and non-OPEC producers, as well as recurrent patterns in the cost of lifting oil by a group of US private oil companies known as the FRS companies. The observed patterns in these economic variables, for the period of 1973-2005, are shown to coincide with the empirical expectations of the MD model. Chapter 3 concludes with a test of the MD and the Dominant Firm models which shows that price determination in the international oil market is mainly a function of demand and production conditions in high-cost (non-OPEC) regions, while production conditions in low-cost (OPEC) regions play a limited determinant role during cyclical downturns.