Optimal Oil Production and the World Supply of Oil (forthcoming, Journal of Economic Dynamics and Control) (original) (raw)

Optimal Oil Extraction as a Multiple Real Option

We study optimal oil extraction strategy and the value of an oil field using a multiple real option approach. Extracting a barrel of oil is similar to exercising a call option and optimal strategies lead to deferring production when oil prices are low and when volatility is high. We show that, in theory, the net present value of a country’s oil reserves is increased significantly (by 100 percent, in the most extreme case) if production decisions are made conditional on oil prices. We also show that the marginal value of additional capacity is higher for countries with bigger resources and longer production horizons. We apply the model to Brazil and the U.A.E. in order to pin down two points of the global supply curve

Optimal Oil Production and Taxation in Presence of Global Disruptions

2017 Proceedings of the Conference on Control and its Applications, 2017

This paper studies the optimal extraction policy of an oil field as well as the efficient taxation of the revenues generated. Taking into account the fact that the oil price in worldwide commodity markets fluctuates randomly following global and seasonal macroeconomic parameters, we model the evolution of the oil price as a mean reverting regime-switching jump diffusion process. Given that oil producing countries rely on oil sale revenues as well as taxes levied on oil companies for a good portion of the revenue side of their budgets, we formulate this problem as a differential game where the two players are the mining company whose aim is to maximize the revenues generated from its extracting activities and the government agency in charge of regulating and taxing natural resources. We prove the existence of a Nash equilibrium and the convergence of an approximating scheme for the value functions. Furthermore, optimal extraction and fiscal policies that should be applied when the equilibrium is reached are derived. A numerical example is presented to illustrate these results.

A model of optimal dynamic oil extraction: evidence from a large middle eastern field

Journal of Productivity Analysis, 2001

We model the economically optimal dynamic oil production decisions of a representative country whose oil fields resemble the largest developed oil field in Saudi Arabia, Ghawar. A government-controlled enterprise may base its oil production decisions on criteria other than maximization of the present discounted value of profits. In particular, oil production decisions are likely to reflect many political, strategic and geopolitical motives of the government. Our analysis of the optimal economic decisions nevertheless enables one to assess the extent to which long-run value maximization is being followed. This in turn allows one to judge the costs that political decisions are imposing in terms of foregone economic output, government revenue and foreign exchange. These costs ought to be of interest to policy-makers within Saudi-Arabia and also to external parties interested in modifying Saudi pricing and production decisions.

A DECISION MODEL FOR NATURAL OIL BUYING POLICY UNDER UNCERTAINTY

2000

A manufacturer, in a fast moving consumer goods industry, buys Nat- ural oils from a number of oil suppliers world-wide. The prices of these oils are the major raw material cost in producing the consumer goods, which are also sold world-wide. The volatility in the international prices of the Natural oils has signiflcant impact on the planning and budgets decisions.

Modelling the world oil market: Assessment of a quarterly econometric model

Energy Policy, 2007

This paper describes a structural econometric model of the world oil market intended to be used to assess oil price developments and to provide quantitative analyses of oil related risk assessments. In this model, oil demand is explained by behavioural equations that relate demand to domestic activity and the real price of oil. Oil supply for non-OPEC producers is derived from a competitive behaviour, taking into account the effect of geological and economic variables. Oil prices are defined by a "price rule" based on changes in market conditions and OPEC behaviour. In particular, OPEC acts according to a co-operative behaviour and ensures the global equilibrium at the price determined by the price rule. Insample simulation results show that the model satisfactorily reproduces past developments in oil markets. Policy simulations show that the responses of demand and non-OPEC supply are rather inelastic to changes in price. Finally, although OPEC is assumed to "close" the model by absorbing any excess in supply or demand, the model shows that OPEC decisions about quota and capacity utilisation have a significant, immediate impact on oil price.

The Fundamental and Speculative Components of the Oil Spot Price: A Real Option Value Approach

2012

This paper investigates the recent evolution of the oil price, with the objective to analyze the main drivers that during last fifteen years have led the unstable path and the volatility persistence in the international oil market. We assume that the oil price is composed by two components, deterministic and speculative. The first one can be defined as the certain one, and it is referred to the fundamental component given by supply and demand interaction. Differently, the uncertain one is given by unclear changes in the price structure, and it is assumed to be linked to the speculative activity. Through a structural equation model (SEM) in a linear reduced form we find that the speculation in the oil market measured with the real option methodology can improve the traditional model explaining a consistent part of the oil fluctuations.

Two-Factor Oil-Price Model and Real Option Valuation: An Example of Oilfield Abandonment

SPE Economics & Management, 2012

We discuss the two-factor oil-price model in valuation and analysis of flexible investment decisions. In particular, we will discuss the real options formulation of a typical oilfield-abandonment problem and will apply the least-squares Monte Carlo (LSM) simulation approach for calculation of project value. In this framework, the two-factor oil-price model will go a long way in the analysis of decisions and value creation. We also propose an implied method for estimation of parameters and state variables of the two-factor price process. The method is based on implied volatility of option on futures, the shape of the forward curve, and the implicit relationship between model parameters.

Oil Price Shocks and Macroeconomy: The Role for Precautionary Demand and Storage

SSRN Electronic Journal, 2012

Traditional literature on energy economics gives a central role to exogenous political events (supply shocks) or to global economic growth (aggregate demand shock) in modeling the oil market. However, more recent literature claims that the increased precautionary demand for oil triggered by increased uncertainty about a future oil supply shortfall is also driving the price of oil. The intuition behind the precautionary demand is that since firms, using oil as an input in their production process, are concerned about the future oil prices, it is reasonable to think that in the case of uncertainty about future oil supply (such as a highly expected war in the Middle East), they will buy futures and/or forward contracts to guarantee a future price and quantity. We find that under baseline Taylor-type interest rate rule, real oil price, inflation and output loss overshoot and go down below steady state at the next period if uncertainties are not realized. However, if the shock is realized, i.e. followed by an actual supply shock, the effect on inflation and output loss is high and persistent.

The crude oil market mechanism in the light of the 1990-91 price crisis

OPEC Review, 1992

THE POLITICAL circumstances (PCs) in which the oil market operates are of crucial importance, whether in market analysis or in any price forecasting. Either PCs are ignored or they constitute implicit assumptions in models. The usual forecasting practice, especially in the long run, is to assume that PCs are normal over time, and that they will not affect the general trend, which is dominant in the long run and hence taken to be an implicit assumption in any forecasting and market analysis. But, when there are abnormal PCs, the market operates with uncertainty. Hence the principal task is to ascertain the extent to which one can capture the element of uncertainty and to find the means of incorporating it in the price forecasting formula, particularly when the element itself is not a'unique one. This paper is an attempt to forecast crude oil prices in the 1990-91 crisis (see footnote below). The methodology used is based on the standard supply/demand apparatus, with respect to the possible PCs which prevailed during the crisis. The paper begins by modelling crude oil prices. Then the application of the model to the oil market will be discussed. The exclusive findings of this study concern the method of estimating that crude oil prices would grow to a maximum level of 32perbarreljustbeforethestartofthe(military)warinJanuary1991and,atthesametime,thattotalexcessdemandwouldbearound2.5millionbarrelsperday,andthat,inthecaseofaninjectionofabout2.5mb/dofcrudeintothemarket,priceswouldcollapsetotheirpre−crisislevelsofapproximately32 per barrel just before the start of the (military) war in January 1991and, at the same time, that total excess demand would be around 2.5 million barrels per day, and that, in the case of an injection of about 2.5 mb/d of crude into the market, prices would collapse to their pre-crisis levels of approximately 32perbarreljustbeforethestartofthe(military)warinJanuary1991and,atthesametime,thattotalexcessdemandwouldbearound2.5millionbarrelsperday,andthat,inthecaseofaninjectionofabout2.5mb/dofcrudeintothemarket,priceswouldcollapsetotheirpre−crisislevelsofapproximately19/b. It also shows how the effects of POlitical deterioration on prices can be divided into a shift in the slope of the demand curve and a shift in the demand curve itself. Oil price modelling At the outset, it seems to be useful to look at the possible forms of price trend, and consequently the possible forms of price equation. Experience suggests three forms of price trend. The author is Economic Analyst, OPEC Aflairs and International Relations, National Iranian Oil Company, Tehran, the Islamic Republic of Iran. He wishes ro express his appreciarion to Dr K A. Mork for his helpful comments. The framework of the paper was written on 20 September 1990. All the evaluations of the paper's model's components were carried out ex ante, while the actual figures of market balance were added for verification later.

Modeling ex-ante risk premia in the oil market

Le Centre pour la Communication Scientifique Directe - HAL - memSIC, 2021

Using survey-based data we show that oil price expectations are not rational, implying that the ex-ante premium is a more relevant concept than the widely popular expost premium. We propose for the 3-and 12-month horizons a portfolio choice model with risky oil assets and a risk-free asset. At the maximized expected utility the risk premium is defined as the risk price times the expected oil return volatility. A state-space model, where the risk prices are represented as stochastic unobservable components and where expected volatilities depend on historical squared returns, is estimated using Kalman filtering. We find that the representative investor is risk seeking at short horizons and risk averse at longer horizons. We examine the economic factors driving risk prices whose signs are shown to be consistent with the predictions of the prospect theory. An upward sloped term structure of oil risk premia prevails in average over the period.