A Less Volatile Crude Oil Price: Supply Rotation Control
Transcript of A Less Volatile Crude Oil Price: Supply Rotation Control
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A Less Volatile Crude Oil Price:Supply Rotation Control
Huei-Chu Liao
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PURPOSE
Smooth the crude oil price
reduce the volatility cost
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APPROACH
Find Main Source of VolatilityPrinciple to Solve Problem(Incentive Compatibility) Method: Rotation ControlDetail: Market Situation/Demand ElasticityTechnique: Bootstrapping Method
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WHY PRICE VOLATILE
Fundamental (Demand/Supply)(OPEC’s Influence)Financial Market(Technical Analysis/Information Noise)WAR
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CRUDE OIL PRICE FORMULAS
Px = Benchmark Price + PremiumBenchmark Price(WTI/BRENT/DUBAI&OMAN)Spot price Futures price (-1) Futures Prices is Selected Due to Transparency Transparency in Futures Market Can’t Guarantee the (Physical Market Clear )
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OIL MARKET TRANSPARANCY
Quota
N.E.
Production
Arbitrage
Financial marketOPEC marketWorld market
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WHO SHOULD RESPONSIBLE FOR↓↑
OPEC OR FINANCIAL MARKET PLAYERS ?
No Market Imbalance(D/S Gaps or Info Bias)
No Arbitration tradeBetter control for OPEC would
help for less volatility
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PERSUASIVE PRODUCTION(Incentive Compatibility)
Privilege Assignment
Responsible for price if I’m the only decision maker
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(Each time only 1 member/groupin OPEC has privilege )
Supply Rotation Control
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P
P*
0
Q
P
S0
PccS
bcS
Q*=76.9
Figure 1 The determination of market price.
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HOW IT WORKS
More Stable Oil Supply Will Flow Into the MarketMore Reliable Information Is Perceived
Fewer Arbitration tradeMore Stable Oil Price
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Simulation Techniques
Bootstrapping Method(Market Data Distribution/Simulation)Real Market Situation (Inelastic demand)Supply Rotation Control
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Figure 2 Historical WTI Price Trend ( )
0 650 1300 1950 2600 3250 3900
20
30
40 p
10 15 20 25 30 35 40 45
0.05
0.10
Densityp N(s=5.29)
0 650 1300 1950 2600 3250 3900-10
-5
0
5dp
-10.0 -7.5 -5.0 -2.5 0.0 2.5 5.0
0.25
0.50
0.75
1.00
1.25 Densitydp N(s=0.595)
, p p∆
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Decide the Data Set of Calculating from 1986/1/2 to 2003/7/22
Equation (1)&(2)
Equation (3)
Market Price Determination
Demand Price Elasticity
Original Equilibrium
With ControlWithout Control
Random choosing 1000 from Data Set Possible Oil Price Path
Random choosing 1000 from Data SetBoom Period 3 ScenariosEach Has
( j =1, 2, 3)
Random choosing1000 from Data SetCollapse Period3 Scenarios Each Has
( j = 1, 2, 3)
Figure 3 Flow Chart of Simulation Process
( ) * ij jp or p p p= +∆
* 24.138p = * 76.9Q =
0.06dε = −
p∆
ip∆⇒
1t t ip p p−= + ∆ip∆
&j jp p
1t t ip p p−= + ∆
j t jp p p≤ ≤
ip∆
&j jp p
1t t ip p p−= + ∆
j t jp p p≤ ≤
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Decide the Data Set of Calculating from 1986/1/2 to 2003/7/22
Equation (1)&(2)
Equation (3)
Market Price Determination
Demand Price Elasticity
Original Equilibrium
With ControlWithout Control
Random choosing 1000 from Data Set Possible Oil Price Path
Random choosing 1000 from Data SetBoom Period 3 ScenariosEach Has
( j =1, 2, 3)
Random choosing1000 from Data SetCollapse Period3 Scenarios Each Has
( j = 1, 2, 3)
Figure 3 Flow Chart of Simulation Process
( ) * ij jp or p p p= +∆
* 24.138p = * 76.9Q =
0.06dε = −
p∆
ip∆⇒
1t t ip p p−= + ∆ip∆
&j jp p
1t t ip p p−= + ∆
j t jp p p≤ ≤
ip∆
&j jp p
1t t ip p p−= + ∆
j t jp p p≤ ≤
Equation (1)
where : price elasticity of demand,
: change of supply quantity,
: change of price,
: equilibrium quantity,
: equilibrium price.
dη
Q∆
P∆
*Q
*p
** *
*
d
Qp QQ
P Q PP
η
∆∆
= = ⋅∆ ∆
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Decide the Data Set of Calculating from 1986/1/2 to 2003/7/22
Equation (1)&(2)
Equation (3)
Market Price Determination
Demand Price Elasticity
Original Equilibrium
With ControlWithout Control
Random choosing 1000 from Data Set Possible Oil Price Path
Random choosing 1000 from Data SetBoom Period 3 ScenariosEach Has
( j =1, 2, 3)
Random choosing1000 from Data SetCollapse Period3 Scenarios Each Has
( j = 1, 2, 3)
Figure 3 Flow Chart of Simulation Process
( ) * ij jp or p p p= +∆
* 24.138p = * 76.9Q =
0.06dε = −
p∆
ip∆⇒
1t t ip p p−= + ∆ip∆
&j jp p
1t t ip p p−= + ∆
j t jp p p≤ ≤
ip∆
&j jp p
1t t ip p p−= + ∆
j t jp p p≤ ≤
Equation (2)
where : price elasticity of demand,
: change of supply quantity,
: change of price,
: equilibrium quantity,
: equilibrium price.
dη
Q∆
P∆
*Q
*p
* *d
QP QP
η∆ = ⋅ ⋅∆
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Figure 4
Figure 4 Possible Crude Oil Price Path (without any control)
Figure 4a
0102030
1 101 201 301 401 501 601 701 801 901T
P(U
S$/b
b
Figure 4b
010203040
1 101 201 301 401 501 601 701 801 901T
P(U
S$/b
b
Figure 4c
0102030405060
1 101 201 301 401 501 601 701 801 901T
P(U
S$/b
b
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Table2 Price boom in less production with control US$/bbl
Figure 5c5.39429.24220.68841.228Constraint4
(Loss3 /3.138)
Figure 5b3.01525.49720.08833.923Constraint1
(Loss2 /1.888)
Figure 5a1.63825.53320.70828.698Constraint
(Loss1 /0.779)
FigureStandard errorAveragePriceMin PriceMax PriceScenario
(mb/d)
Note: Loss : the Total Loss Production of oil from OPEC. Loss1: Iraq excess capacity=0, Other Member loss 20%, Nigeria loss 40%, Venezuela loss 10%.Loss2: Iraq excess capacity=0, Other Member loss 20%, Nigeria loss 50%, Venezuela loss 25%.Loss3: Iraq excess capacity=0, Other Member loss 25%, Nigeria loss 90%, Venezuela loss 40%.
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Figure 5 Possible Crude Oil Price Path in Boom Period (with control)
Figure 5a
0204060
1 101 201 301 401 501 601 701 801 901T
P(U
S$/b
b
Figure 5b
010203040
1 101 201 301 401 501 601 701 801 901T
P(U
S$/b
b
Figure 5c
010203040
1 101 201 301 401 501 601 701 801 901T
P(U
S$/b
b
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Table3 Price collapse in more production with control US$/bbl
Figure 6c3.80915.0667.89825.518Constraint(EC3 /3.101)
Figure 6b4.53319.46610.50325.948Constraint(EC2 /2.150)
Figure 6a1.68823.72217.99827.528Constraint(EC1 /1.075)
FigureStandard error
AveragePriceMin PriceMax PriceScenario
(mb/d)
Note: EC : the Total Excess capacity from OPEC.EC1: Iraq production capacity=2.5mb/d, and quota=2, total OPEC quota=25.401(2003/6/1 level),
Total OPEC excess capacity=5.376, but all used 20%, 1.075mb/d.EC2: Iraq production capacity=2.5mb/d, and quota=2, total OPEC quota=25.401(2003/6/1 level),
Total OPEC excess capacity=5.376, but all used 40%, 2.150mb/d.EC3: Iraq can’t take over, so he’s excess capacity=0, and total OPEC quota=25.401mb/d,
Total OPEC excess capacity=3.101mb/d, all used.
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Figure 6 Possible Crude Oil Price Path, in collapse period with Control
Figure 6a
010203040
1 101 201 301 401 501 601 701 801 901T
P(U
S$/b
b
Figure 6b
0102030
1 101 201 301 401 501 601 701 801 901T
P(U
S$/b
b
Figure 6c
010203040
1 101 201 301 401 501 601 701 801 901T
P(U
S$/b
b
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Conclusion
Price Around Fair Price
Supply Rotation : Privilege Assignment
Less Volatile Price is Expected
Further Research
(capacity utilization in Bootstrapping simulation)
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