A Model for the Global Crude Oil Market Using a Multi-Pool

German Institute for Economic Research

A Model for the Global Crude Oil Market Using a Multi-Pool MCP Approach

Daniel Huppmann, Franziska Holz

Enerday, TU Dresden – April 3, 2009

http://commons.wikimedia.org/wiki/File:Oil_well.jpg

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Agenda

•! Motivation

•! The Model – Bilateral Trade vs. Pool Approach

•! Countries & Data

•! Results

•! Conclusions and Future Directions

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Motivation

•! The role of OPEC

-! Cartel? Oligopoly? Perfect Competition?

-! Supplier: profit maximization or political objectives?

•! Game-theoretic approaches in partial equilibrium modelling

-! Nash-Cournot markets with non-cooperative strategic behaviour

-! Extensively used in modelling natural gas markets Gastale (Boots et al, 2004), World Gas Model (Egging et al, 2008), etc.

-! Formulated as Mixed Complementarity Problems (MCP)

•! Influence of oil price indices and liquid spot markets on trade flows?

Agenda

•! Motivation



•! Results


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The Model

•! Nash-Cournot partial equilibrium model

•! Suppliers (assumption of profit maximization)

-! Production entity (with quadratic cost function)

-! Trading entity

•! Final demand for crude oil

Linear inverse demand function

•! Types of transport

Tanker ship and pipeline

•! Two setups:

-! Bilateral trade (without arbitrageur)

-! Pool trade (including arbitrageurs)

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The Model – Crude Oil Flow in Bilateral Trade Setup

Supplier: A, B, C | Final demand for crude oil: D, E, F | ! Crude oil trade flow

ABC

D

EF

Supplier

Final Demand

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The Model – Crude Oil Flow in a Pool Market Setup

Pool Node: G | "! Flow of crude oil bought/sold by arbitrageur

ABC

D

EF

Supplier

Final Demand

G

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The Model – Bilateral Trade and Pool Setup

•! Bilateral Trade in Nash-Cournot Models

-! Commonly used in modelling natural gas and coal markets

-! Price discrimination can occur if market power is exerted

-! May yield unrealistic results in an integrated market such as crude oil

•! Pool Trade Approach

-! Proposed by Hobbs (2001) to model pool electricity markets

-! Arbitrageurs operating from a pool node force market prices in each node to equal the pool price plus transport costs from the pool node

-! Introduce more than one pool to account for global market

-! WTI (West Texas Intermediate, USA)

-! Brent (UK)

-! Dubai (United Arab Emirates)

-! Only amounts bought and sold by the arbitrageur pass through the pool

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The Model – Market Power Scenarios

•! Perfectly competitive market – (no mp)

•! Nash-Cournot market, all suppliers exert market power – (all mp)

•! OPEC members exert market power (but do not jointly maximize profits), others: competitive fringe – (oligopoly)

•! OPEC forms a standard cartel and exerts market power, others: competitive fringe – (cartel)

Agenda

•! Motivation



•! Results


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Countries and Data – Countries in the Model

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Data and Countries – Model Data

•! Base Year: 2006

•! Data sources:

-! Consumption and production quantities, reference prices

IEA (2008), BP (2008)

-! Production Cost

Roberto F. Aguilera, Roderick G. Eggert, Gustavo Lagos C.C., and John E. Tilton.

Depletion and Future Availability of Petroleum Resources. The Energy Journal, 2009.

-! Transport Costs

Bundesanstalt für Geowissenschaften und Rohsto!e, Hannover (2003)

-! Demand Elasticity – assumed to be -0.1

Fattouh, B. The Drivers of Oil Prices: The Usefulness and Limitations of Non-Structural

model, the Demand-Supply Framework and Informal Approaches. Working Paper 32. Oxford Institute of Energy Studies, March 2007.

-! Production Capacity

we assume that each country operates at 95% of capacity in the base year;

this allows to identify countries which could gain from expanding production

without distorting results more than necessary

Agenda

•! Motivation



•! Results


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Results – Final Demand Prices in the Model

Final demand prices in $/ton, Pool setup

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Results – Bilateral Trade Model with Price Discrimination

Final demand prices in $/ton, Bilateral trade setup

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Results – Price Discrimination in East Asia

Price differential between Japan and China in the bilateral trade setup

•! Such a significant price differential does not occur in integrated markets

•! This phenomenon cannot occur in the pool setup

Market Power Scenario

No MP All MP Oligopoly Cartel Transport Cost

$2.49 $16.69 $15.06 $15.05 $2.49

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Results – Crude Oil Exports of Middle East

in mio tons, Pool setup / (Bilateral trade setup)

* consumption from domestic production only

No MP All MP Oligopoly

Asia & Pacific 527.0 268.2 166.3

(778.8) (335.3) (305.9)

Europe 250.4 282.6 236.8

(216.8) (270.5) (235.9)

America 218.1 336.6 312.0

(0.0) (329.8) (315.7)

Domestic consumption* 180.6 118.7 166.7

(180.4) (52.3) (24.2)

Total production 1176.1 1006.0 881.8

(1176.1) (987.9) (881.8)

Middle East imports 2/3 of domestic consumption in bilateral trade setup

! Unrealistic when observing real-world trade flows

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Results – Crude Oil Exports of Middle East

in mio tons, Pool setup / (Bilateral trade setup)

* consumption from domestic production only

No MP All MP Oligopoly

Asia & Pacific 527.0 268.2 166.3

(778.8) (335.3) (305.9)

Europe 250.4 282.6 236.8

(216.8) (270.5) (235.9)

America 218.1 336.6 312.0

(0.0) (329.8) (315.7)

Domestic consumption* 180.6 118.7 166.7

(180.4) (52.3) (24.2)

Total production 1176.1 1006.0 881.8

(1176.1) (987.9) (881.8)

Middle East imports 2/3 of domestic consumption in bilateral trade setup

! Unrealistic when observing real-world trade flows

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Results – Consumption of Crude Oil

in 100 mio tons, Pool setup, selected countries

! Oligopoly scenario yields best fit to observed values

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Results – Production of Crude Oil

in 100 mio tons, Pool setup, selected countries

! Oligopoly scenario yields good fit to observed values but Saudi Arabia does not fit in the picture

Agenda

•! Motivation



•! Results


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Conclusions & Future Directions

•! Pool Setup offers an improvement in modeling the crude oil market

•! Results indicate that OPEC exerts markert power, but in a non-cooperative way (oligopoly rather than cartel)

•! Assumption of profit maximization ignores important aspects of the behaviour of National Oil Companies

•! Possible extensions of the model

-! More realistic maximization problem for the supplier

-! Capacity constraints for ports and pipelines

-! Multi-period model with endogenuous investment

-! Stochasticity

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References

•! Roberto F. Aguilera, Roderick G. Eggert, Gustavo Lagos C.C., and John E. Tilton. Depletion and Future Availability of Petroleum Resources. The Energy Journal, 30(1):141–174, 2009.

•! Maroeska G. Boots, Fieke A.M. Rijkers, and Benjamin F. Hobbs. Trading in the downstream european gas market: A successive oligopoly approach. Energy Journal, 25(3):73–102, 2004.

•! BGR. Reserven, Ressourcen und Verfügbarkeit von Energierohsto!en 2002, Volume 28 of Rohsto!wirtschaftliche Länderstudien. Bundesanstalt für Geowissenschaften und Rohsto!e, Hannover, 2003.

•! BP. Statistical Review of World Energy. BP, 2008.

•! Ruud Egging, Steven A. Gabriel, Franziska Holz, and Jifang Zhuang. A Complementarity Model for the European Natural Gas Market. Energy Policy, 36(7): 2385–2414, 2008.

•! Bassam Fattouh. The Drivers of Oil Prices: The Usefulness and Limitations of Non-Structural model, the Demand-Supply Framework and Informal Approaches. Working Paper 32. Oxford Institute of Energy Studies, March 2007.

•! Benjamin F. Hobbs. Linear Complementarity Model of Nash-Cournot Competition in Bilateral and Poolco Power Markets. IEEE Transactions on Power Systems, 16(2):194–202, 2001.

•! IEA. World Energy Outlook 2008. Organisation for Economic Co-operation and Development, Paris, 2008.

Documents

A Model for the Global Crude Oil Market Using a Multi-Pool