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Oil Price Analysis - Essay Example

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According to the research findings of the paper "Oil Price Analysis", in order to get independence, oil-consuming countries need to support policies that promote alternative fuel use, maintenance and greater fabrication of domestic oil. Domination can be decreased by these things as the requirement will get comparatively more elastic. …
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Oil Price Analysis
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Download file to see previous pages The world oil market is often said to be best described by four major models (Griffin,2002, 52): cartel, competition, target-revenue and property-right models. MacAvoy (2004) and Verleger (2007) claim that the oil price is largely determined by market fundamentals. Supply disruptions, rather than cartel-related actions, impact oil prices. As an alternative, Ramcharran (2001) supports the target-revenue model, claiming that oil production is determined by the OPEC countries ability to absorb internal investments from oil revenue. From the viewpoint of the Hotelling theory with zero extraction cost, the property-right models indicate that the real price of oil will rise at a lower discount rate as host countries take over the ownership from oil companies (Johany, 2005, 352). However, the most popular version is a cartel-related model of Adelman (2004), which contends that OPECs behaviour lies between market-sharing-cartel and dominant-firm models.
In a well-known paper, Griffin (2002) tests the four models that attempt to describe OPECs behaviour. Using quarterly data from the first quarter of 1971 to the third quarter of 1983 for 11 of the 13 OPEC countries, Griffin rejects all but the cartel model. The clear-cut nature of his result points to the superiority of the partial market sharing-cartel model for all 11 OPEC members for explaining OPEC behaviour. For the non-OPEC countries, on the other hand, the competitive model could not be rejected for 10 of the 11 non-OPEC producers. Gryphons conclusion carved out a picture of a market-sharing cartel with some competitive suppliers. Indeed, results from the majority of studies are in agreement about treating OPEC as a cartel-related organisation. For instance, the result by Alhajji and Huettner (2000) indicates that OPEC behaviour is more in line with a dominant-firm model (with the dominating entity being Saudi Arabia). This is a variant of the cartel model. ...Download file to see next pagesRead More
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