LIMITS ON SAUDI ARABIA'S OIL PRICING POLICY: A SHORT-RUN ECONOMETRIC-SIMULATION MODEL (OPEC, ENERGY ECONOMICS, CARTELS)

Crude petroleum, despite its presence and usefulness since the 1870s, came to hold an unprecedented importance during the 1970s--a decade dramatically but erroneously called the "energy crisis decade". Analytically, this study traces the evolution of the international oil industry from privately-owned and dispersed production units to its highly-integrated oligopolistic structure, to its cartel-like phase, and lately its state of devolution into quasi-cartelization with tendencies toward competitive price-setting.;Three supply sources are identified: (a) major non-OPEC producers (Britain, Norway and Mexico) assumed to be price-takers; (b) the OPES group (OPEC excluding Saudi Arabia) acting as price-maximizers; and (c) Saudi Arabia's supply decisions assumed constrained by budgetary requirements. The simulated, non-cooperative assumptions enable this study, based on 1970-1984 statistical data, to predict supply responses by the OPEC group excluding Saudi Arabia to unilateral, sudden and non-transitory Saudi Arabian production variations and the ultimate effect of such actions on oil prices.;The major conclusions of this study are: (1) contrary to popular belief the international oil industry rarely, if ever, operated competitively, (2) the sole association of oil price increases to the embargo of 1973 is an outright distortion of facts, (3) the roots of the so-called energy crisis lie in: (a) post-World War II West European reconstruction, (b) U.S. industrial adjustments from a war to a consumer-oriented economy, (c) the continuously dwindling oil reserves in major industrial countries, and (d) the comparative advantage of location and cost-per-unit of the Middle Eastern oil, (4) barring further market institutionalizations, a per barrel price below ;The quasi-cartel phase (1970 to 1980) witnessed OPEC members' inability to maximize joint revenues; nevertheless this was an impressive episode of income transfers to the OPEC members. The absence of a unified OPEC policy is largely attributed to frequent Saudi Arabian pricing/production decisions to influence oil price changes. Such demonstrated ability in the past prompted many to attribute oil price current downward rigidity to Saudi Arabian unwillingness to increase production. Empirically, this study presents a simultaneous equations oil market model in a simulation setting to test the above hypothesis and to predict future oil prices under specific assumptions.