Managing the Oil Market Under Misinformation: A Reasonable Quest?

  • Focus Area Energy Macro & Micro-economics Energy Macro & Micro-economics
  • Type Discussion paper
  • Date 28 May 2024
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Abstract

This paper examines the type and quality of information that OPEC needs to stabilize the oil market. We extend our previous structural model, in which OPEC makes potential mistakes in judging the size of market shocks, to now include the possibility that OPEC misestimates how the market price would react to any given adjustment to its production level.  Thus, we present a model that incorporates both observational errors regarding physical market developments as well as potentially erroneous judgments regarding the elasticities of supply and demand.  We use the model to determine the counterfactual (unstabilized) prices that would have prevailed if OPEC, acting under a broad range of misinformation, had not attempted to stabilize the price. We find that misestimation of the demand and supply elasticities generally increases the computed counterfactual price volatility.  By comparison to historical volatility, these elevated counterfactual volatilities strengthen our previous finding that OPEC has substantially decreased price volatility by regulating production from its buffer of spare capacity.  This is true of the OPEC+ period and the period prior to OPEC+.

Authors

Hossa Almutairi

Hossa Almutairi

Principal Fellow- Energy Macro- & Microeconomics Dr. Hossa Almutairi is currently a Principal Fellow at KAPSARC, and her research focuses on energy economics, oil markets, and…

Dr. Hossa Almutairi is currently a Principal Fellow at KAPSARC, and her research focuses on energy economics, oil markets, and climate policies. During the Saudi G20 Presidency, she served as the Sherpa of Think20 (T20), which is the research and policy advice network for the G20. Additionally, she was the lead co-chair of the T20 task force, “Sustainable Energy, Water and Food Systems.” Prior to joining KAPSARC, Dr. Almutairi was a faculty member at the University of Wilfrid Laurier, Canada. Her research contributions have been featured in several reputable journals, and she was the co-recipient of the 2023 OPEC Award for the Best Energy Research Paper.

Expertise

  • Energy Economics
  • Oil Markets
  • Climate Policies
  • Behavioral Economics

Publications See all Hossa Almutairi’s publications

Axel Pierru

Axel Pierru

Vice President, Knowledge & Analysis Axel Pierru was appointed Vice President of Knowledge and Analysis by the Board of Trustees of KAPSARC in December 2023.…

Axel Pierru was appointed Vice President of Knowledge and Analysis by the Board of Trustees of KAPSARC in December 2023. In this role, he oversees and provides thought leadership to KAPSARC’s research and analysis activities.

He joined KAPSARC in 2011, after spending 15 years at IFP Energies Nouvelles in France where he led research and consulting projects and taught energy economics and finance to postgraduate students. He has served in various leadership roles at KAPSARC, including serving as interim Vice President for Research. From 2014 to 2023 he was a program director, leading the Energy Systems & Modeling, Energy & Macroeconomics, and Energy Macro & Micro-Economics research programs.

Dr. Pierru earned his Ph.D. in economics from University Paris 1 Pantheon-Sorbonne (France). He also holds an HDR degree, which is a French accreditation to supervise research. In 2007, Dr. Pierru was awarded Chevalier dans l’Ordre des Palmes Académiques (knighthood award in the academic field) by the French Ministry for National Education. He is an editor of The Energy Journal, as well as the corecipient of the 2023 OPEC Award for the Best Energy Research Paper, a first-time honor from OPEC.

He leads the Knowledge & Analysis team in designing applied research that blends methodological innovation with practical significance for policymaking. His expertise covers energy economics, policy and finance, the oil market, energy transitions, and commodity-exporting economies.

Dr. Pierru has a proven track record of methodological innovations with over 50 journal papers to his name. He has been a key contributor to developing new research avenues, such as the role of OPEC in stabilizing the oil market, the economic modeling of price controls, or the evaluation of investment projects by international oil companies facing various tax systems.

He also coauthored with Denis Babusiaux the book Corporate Investment Decisions and Economic Analysis: Exercises and Case Studies (2005), a culmination of years of teaching, consulting, and research.

Expertise

  • Energy modelling
  • Energy economics
  • Energy policy
  • Oil pricing and finance

Publications See all Axel Pierru’s publications

James L. Smith

James L. Smith

Professor Emeritus at Southern Methodist University in Dallas James L. Smith is Professor Emeritus at Southern Methodist University in Dallas, Texas, where he held the Cary M. Maguire…

James L. Smith is Professor Emeritus at Southern Methodist University in Dallas, Texas, where he held the Cary M. Maguire Chair in Oil and Gas Management for 23 years before retiring in 2018. Specializing in energy studies since earning his Ph.D. in Economics from Harvard University in 1977, Dr. Smith has been a prolific researcher and author. His publications on OPEC, energy markets, real options, auction theory, and the oil and gas industry has appeared in numerous academic and trade journals, including the American Economic Review, Journal of Economic Perspectives, Quarterly Journal of Economics, Economic Journal, Journal of Economic Theory, The Energy Journal, Mathematical Geology, Oil and Gas Journal, and World Oil. Dr. Smith is a past president of the International Association for Energy Economics and the recipient of the association’s 2024 award for Outstanding Contributions to the Profession. In addition, Dr. Smith served for 16 years as Co-Editor of The Energy Journal.

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