OPEC's Incentives for Faster Output Growth

This paper addresses the question of whether OPEC producers are likely to expand their oil output substantially over the next two decades - more than doubling in the Gulf countries by 2020. Such projections, made by the International Energy Agency (IEA) and the U.S. Department of Energy (DOE), are not based on behavioral analysis of Gulf countries’ decisions, but are merely the residual demand for OPEC oil - the difference between projected world oil demand and Non-OPEC supply, given some assumed price-path. I employ a simulation model to compare OPEC’s payoffs from faster or slower output growth, under various parametric assumptions about the responsiveness of world oil demand and Non-OPEC supply to income and price changes. The payoffs to OPEC are relatively insensitive to faster output growth; aggressive output expansion yields slightly lower payoffs than just maintaining current market share. Analysis of intra-OPEC decisions - between the Core countries and the others -suggests a similar conclusion: these two groups are engaged in a constant-sum game. Thus, the significant increases in OPEC output projected by IEA and DOE are implausible.