Analytical specifications of the world oil market: A review and comparison of twelve models.

Abstract

One discernible reaction to the oil price increases of October 1973 is a variety of arguments and position papers about different features of the "crisis," yielding both diagnoses of the "problem" and prescriptions for its "solution." Much of this literature is dominated by a view that the problem is created by the oil exporting countries, and the solution is some form of induced price reduction. At the same time, however, there is a new line of research that seeks to apply techniques of mathematical modeling and simulation to analyses of the "problem." The importance of this new work on the world oil market lies in its intended contribution to our understanding of that market, by seeking to yield insights into precise relationships and provide specific predictions or forecasts. The purpose of this review is to compare the structure of twelve models of the world oil market, identify the analytical formulations employed, and render explicit the world view adopted by each and its implications for modeling international trade in petroleum. This comparison is designed to highlight both the dominant assumptions and the characteristic features of price de- termination in models of the world petroleum market. We shall conclude that models reviewed all share the same general paradigm, that the implicit world view employed poses inherent difficulties, that important features of "reality" in international oil trade are omitted, and that some of these difficulties can be overcome by an explicit recognition of the broader international exchanges within which this particular market is imbedded.