This book investigates the process of oil price formation, in
particular the price fluctuations of the past, and to provide
realistic scenarios of future developments. It starts with the
history of the world petroleum market and its institutions and a
comprehensive survey of the existing literature. The theoretical
framework is a model which interprets OPEC as the swing producer in
the market. An intertemporal aspect arises from the exhaustibility
of petroleum and from the sluggish adjustments of demand and
non-OPEC supply. The model is solved by application of Pontryagin's
maximum principle. Price shocks are explained by OPEC's incorrect
expectations about demand behaviour. The model is analysed
econometrically by means of nonlinear-least-squares methods and the
parameter estimates are used to compute scenarios of future price
developments. The solution of the theoretical model requires
application of non-standard concepts, such as algebraic Riccati
equations. They are introduced in an appendix which also contains a
variety of useful optimal control theorems. Another issue which is
of more general interest is the consideration of incorrect
expectations in intertemporal optimisation models.
General
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