An Econometric Evaluation of a Geopolitical Theory of Oil Price Behavior

44 Pages Posted: 12 Feb 2007 Last revised: 18 Dec 2009

See all articles by Ahmad Slaibi

Ahmad Slaibi

Cornell University - School of Applied Economics and Management; The World Bank

D. Chapman

Cornell University

Hazem Daouk

Cornell University - School of Applied Economics and Management

Date Written: 2006

Abstract

Previous work on crude oil price modeling has generally focused on two theoretical approaches, either the optimal control analysis of pricing of a depletable resource, or OPEC as a partial monopolist setting oil prices to maximize net present value. Neither has been wholly satisfactory. We consider a different perspective, a game theory based framework in which political and military factors interacted with economic considerations for oil exporters and importers to define a target price zone (TPZ). We analyze several issues in this context: monthly vs. annual average prices, beginning and ending dates for TPZs, degree of stability in several price series (WTI, Brent, etc.), FOB and landed prices, real or nominal prices, OPEC behavior, and effect of the Euro exchange rate on dollar denominated oil prices. We conclude that a TPZ system was in operation from 1986 through 2003. The TPZ worked imperfectly but with a substantial degree of predictability for 18 years. In 2004 the TPZ system deteriorated for several reasons, and has not been re-established.

Suggested Citation

Slaibi, Ahmad and Chapman, Duane and Daouk, Hazem, An Econometric Evaluation of a Geopolitical Theory of Oil Price Behavior (2006). Applied Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=962527 or http://dx.doi.org/10.2139/ssrn.962527

Ahmad Slaibi

Cornell University - School of Applied Economics and Management ( email )

248 Warren Hall
Ithaca, NY 14853
United States

HOME PAGE: http://www.people.cornell.edu/pages/aas54/

The World Bank ( email )

Washington, DC 20433
United States

Duane Chapman

Cornell University ( email )

Ithaca, NY 14853
United States

Hazem Daouk (Contact Author)

Cornell University - School of Applied Economics and Management ( email )

446 Warren Hall
Ithaca, NY 14853
United States
331-45-78-63-88 (Fax)

HOME PAGE: http://courses.cit.cornell.edu/hd35/

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