Mars Les cahiers de l'économie - n 78. Série Recherche - PDF

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! Mars 2011 Les cahiers de l'économie - n 78 Série Recherche La collection Les cahiers de l économie a pour objectif de présenter des travaux réalisés à IFP Energies nouvelles et à IFP School, travaux de recherche ou notes de synthèse en économie, finance et gestion. La forme peut être encore provisoire, afin de susciter des échanges de points de vue sur les sujets abordés. Les opinions émises dans les textes publiés dans cette collection doivent être considérées comme propres à leurs auteurs et ne reflètent pas nécessairement le point de vue d IFP Energies nouvelles ou d'ifp School. Pour toute information sur le contenu, prière de contacter directement l'auteur. Pour toute information complémentaire, prière de contacter le Centre Économie et Gestion: Tél The views expressed in this paper are those of the authors and do not imply endorsement by the IFP Energies Nouvelles or the IFP School. Neither these institutions nor the authors accept any liability for loss or damage incurred as a result of the use of or reliance on the content of this publication. IFP Energies nouvelles - IFP School - Centre Économie et Gestion , av. Napoléon Bonaparte, F Rueil-Malmaison Cedex, FRANCE Does OPEC still exist as a cartel? An empirical investigation Vincent BREMOND *, Emmanuel HACHE ** and Valérie MIGNON *** November 2010 Abstract The aim of this paper is to determine if OPEC acts as a cartel by testing whether the production decisions of the different countries are coordinated and if they have an influence on oil prices. Relying on cointegration and causality tests in both time series and panel settings, our findings show that the OPEC influence has evolved through time, following the changes in the oil pricing system. While the influence of OPEC is found to be important just after the counter-oil shock, our results show that OPEC is price taker on the majority of the considered sub-periods. Finally, by dividing OPEC between savers and spenders, we show that it acts as a cartel mainly with a subgroup of its members. JEL Classification: C22, C23, L11, Q40. Keywords: Oil prices, oil production, OPEC, cartel, cointegration, causality. Corresponding author: Valérie Mignon, EconomiX-CNRS, University of Paris Ouest, 200 avenue de la République, Nanterre Cedex, France. Tel Fax : * EconomiX-CNRS, University of Paris Ouest, and IFP Énergies Nouvelles, 1 et 4 avenue de Bois Préau, Rueil Malmaison, France. ** IFP Énergies Nouvelles, 1 et 4 avenue de Bois Préau, Rueil Malmaison, France. *** EconomiX-CNRS, University of Paris Ouest, and CEPII, Paris, France. 1 1. Introduction Since the creation of the Organization of the Petroleum Exporting Countries 1 (OPEC) at the beginning of the 1960s, many authors have focused on its role in the oil market and, notably, its capability to influence oil prices in both the short and long run (see Dahl and Yücel (1989) among others). At the same time, the oil pricing system witnessed major transformations in the last 50 years, which can be summarized by a shift from an administered pricing system to a market related price since the middle of the 1980s. The posted price period, with the different pricing systems in the physical market Gulf price (Single Basis System), was implemented by the International Oil Companies (IOC) at the beginning of the 20 th Century. According to Yergin (1991) and Fattouh (2006), the aim of this pricing regime was to lower the tax paid by the IOC to the host countries, leading to a very low and stable official price whatever the market conditions. The entry into the market of new large scale players, such as the Soviet Union at the end of the 1950s, triggered a major change with a huge surplus of production. In reaction, the so-called seven sisters cartel decided to cut by 10 per cent the posted prices in the market to safeguard their market share. This factor can be considered as the key element which triggered the creation of the OPEC in Nevertheless, it took 13 years for the Organization to claim its market power in the oil sector. Since 1973, the oil market as well as the oil pricing regime have thus experienced a period of continuous change. Within this context, our aim is to investigate the dynamics of the production behavior of countries belonging to the OPEC, as well as non-member countries that are considered as major key players in the oil market. More specifically, our aim is to determine if OPEC acts as a cartel by testing whether the production decisions of the different countries are coordinated and if they have an influence on oil prices. A related question has been previously investigated by Dahl and Yücel (1989) who test numerous theories about the OPEC behavior. They show that OPEC is not a cartel, and that some countries behave in a non-competitive way or with a target revenue goal. Considering various sub-periods, Loderer (1985) shows that while the announcements of OPEC decisions do not affect prices in the period, the alternative hypothesis that OPEC could act as a cartel is not rejected during the beginning of the 1980s. Using cointegration and Granger 1 OPEC was formed by five countries (Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela) in September 1960 in Baghdad. 2 causality tests, Gülen (1996) obtains similar findings: OPEC production Granger-causes oil prices during the period, whereas none causality is found for the previous periods investigated. Testing different models (namely cartel models, competitive models, target revenue models and property rights models), Griffin (1985) puts forward that the partial market sharing is the best fitted model for the OPEC countries, while non-opec countries are better represented by the competitive model. Other studies consider that OPEC is a divided cartel. Hnyilicza and Pindyck (1976) split OPEC in two groups, namely saver and spender countries, the spender countries being composed of members with an immediate need for cash and rate of discount lower than the savers, and focuses on the bargaining power between these two groups. Following the same typology, Aperjis (1982) concludes that a conflict can exist between OPEC members regarding their production decisions. There also exists a set of studies concerned with target behavior models, such as Teece (1982) and Adelman (1982) who modeled OPEC behavior according to a target revenue model. Alhajji and Huetnner (2000) conclude as well that OPEC does not act as a cartel, and that the target revenue model is not rejected for Algeria, Libya and Nigeria. Finally, one can mention the works by Johany (1980) focusing on the impact of the uncertainty about property rights, and MacAvoy (1982) showing that political events and market fundamentals (a growing demand and speculation) have played a key role in explaining the price dynamics during the 1970s, more than the OPEC behavior itself. This brief survey of the literature shows that no consensus exists regarding the OPEC production behavior. Our aim is to contribute to this literature by testing if OPEC acts as a cartel. To this end, we rely on time series and panel (i) cointegration techniques to investigate the existence of a long-term relationship between the production of each member and that of the OPEC, and (ii) Granger causality tests to apprehend the influence of OPEC production decisions on oil prices. The rest of the paper is organized as follows. In Section 2, we briefly describe the major changes observed in the oil pricing regime since the first oil shock, which also define the subperiods of our empirical study. Section 3 describes the data, and Section 4 provides the results of cointegration and causality tests. Finally, Section 5 concludes the article. 3 2. Main changes in the oil pricing regime In 1973, the oil market experienced a new way of pricing with the introduction of the Government Selling Price (GSP) or Official Selling Price (OSP). This price can be considered as the historical counter-part of the Posted price implemented by the IOC few decades earlier except that the prices were now determined by OPEC, with the Arabian Light (34, API) as the crude marker. OPEC was at that time the dominant player in the market (with more than 50 per cent of the market share). Nevertheless, if this period was marked by the two world oil shocks ( and ), with a sharp increase of the prices on the market from 3.65 to US dollars per barrel between October and December 1973 in nominal terms, and from around US dollars in 1978 to in November 1980 it also had a significant positive impact on the level of production from countries outside the Organization. Thus, during the period, the non-opec countries production registered an increase about 44.5 per cent, with Mexico (+ 2.5 millions barrel per day), the United Kingdom (+ 2.0 millions) and Norway (+ 0.5 million) representing around 45 per cent of this increase. It helps to develop the spot markets and can explain the emergence of a dual system in terms of pricing with the coexistence of an OPEC reference price (administered price) and a market price. This leads to the second sub-period of our study. The period is characterized by an important decline of oil prices, given rise to the oil counter-shock in 1986 with oil prices at less than 10 US dollars per barrel. It has also conducted to the implementation of the quotas policy by the Organization in March From 1982 to 1986, the oil pricing system has experienced a transition period with the administered OPEC price which lasts until 1985, a growing influence of the price in the spot markets and the introduction of the netback pricing system in This latter has been abandoned a few months after due to the implementation of a new market share policy from Saudi Arabia. The year 1986 can be considered as a milestone in the oil markets with the introduction and the widespread of a new system: the market related regime. It represents the first construction phase of a complex structure on the market with the introduction of a pricing system based on three reference prices: West Texas Intermediate (WTI) for North America, Brent for Europe and South American countries, and Oman-Dubai for crude oil sent to the East Asia, by the national Mexican company PEMEX. It also represents a sort of golden youth on the oil market including the import of the classical tools of modern finance (swap, options) created by the financial revolution, the so-called financial big bang of the early 1980s. During , we observed a sharp increase of 4 the liquidity (in terms of financial contracts such as Light Sweet Crude Oil) in the financial market, especially on the New York Mercantile Exchange (NYMEX) and on the International Petroleum Exchange 2 (IPE). This was followed by a gradual financialization on the market during For example, the number of futures contract in the NYMEX increased by more than 40 per cent during this period and at the same time the oil-pricing regime experienced some controversy: squeeze, decrease of the liquidity due to a marked decrease of the Brent and WTI production which have introduced some doubts regarding the efficiency of the price formation on the market. After the introduction at the end of December 2000 of the law modernizing raw materials markets the Commodity Futures Modernization Act 3 (CFMA) two major changes have been registered. From January 2001 to January 2009, we observed a sharp rise in transaction volumes in the financial markets, and a context of high volatility on the oil market. Between January and July 2008, oil prices increased to almost 147 US dollars per barrel and collapsed a few weeks later to under 35 US dollars per barrel. This context has left many analysts and researchers puzzled by the underlying explanations for determination of prices and the influence of the non-commercial players in the market. The interaction between a physical price based on geographical reference prices and a financial one based on futures contracts with the underlying assumption of a growing speculation factor seems to have changed drastically the market conditions. This brief description of the main changes in the oil pricing system leads us to consider five sub-periods in our empirical analysis: January 1973 to February 1982, March 1982 to April 1986, May 1986 to February 1993, March 1993 to December 2000, and the period starting in January Data and unit root tests We consider a sample of 15 countries including (i) 11 countries belonging to the OPEC (Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela), and (ii) 4 other non-opec countries (namely Mexico, Norway, the United Kingdom, and Russia). Production and price series are extracted from Datastream. 2 The IPE became the InterContinental Exchange (ICE) in For more information, see the CFTC website at 5 We use monthly data from January 1973 to July Note that for some countries, production data are not available on the whole period. More specifically, we consider Indonesian production until May 2008, given that Indonesia leaves OPEC after that date. For Mexico, Norway and UK, the analysis begins in 1982 due to the establishment of a larger oil production policy than previously while the Russian analysis starts after its creation in Furthermore, we exclude Ecuador and Gabon from the analysis because of their coming and going into the Organization. Recall that our aim is to test for a cooperative behavior between OPEC members by investigating the link between the production of one member country and the global production of the other OPEC members. For each country i, we define the production of the other member countries which we call rest of the cartel production as the difference between the total OPEC production and the individual production of country i. 4 The crude oil price is the UK Brent in US dollars. It is expressed in real terms using the US CPI (extracted from Datastream) as the deflator. Finally, note that production and price series are expressed in logarithmic terms. The first step is to determine the integration order of our series. Given that our sample period is characterized by various oil pricing regimes (see Section 2), we consider a test robust to structural breaks. We rely on the Zivot and Andrews (1992) test. Under the null hypothesis, there is a unit root without any exogenous structural break, whereas the alternative hypothesis is the stationarity with a break date determined endogenously. The conclusions of the test are reported in Table A1 in the appendix and show that the majority of the considered series are I(1). Table 1 summarizes the results and lists the countries for which both the individual production and the rest of the cartel production are I(1). 4 Note that in the appendix, the rest of cartel prod is denoted as country2. 6 Table 1. Individual and rest of the cartel productions integrated of order Algeria, Indonesia, Iran, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, Venezuela. Algeria, Indonesia, Iraq, Kuwait, Qatar, Venezuela, Mexico, U.K. Algeria, Indonesia, Libya, Nigeria, Qatar, U.K. Algeria, Indonesia, Iraq, Libya, Nigeria, Qatar, Saudi Arabia, U.A.E., Mexico, Norway, U.K., Russia Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, U.A.E., Venezuela, Mexico, Norway, U.K., Russia 4. Cointegration and Granger causality tests 4.1. Time series analysis In order to test for the existence of a long-run relationship between the production of exporting countries and that of the OPEC, we rely on the Engle and Granger (1987) test based on the null hypothesis of no cointegration. Table 2. Results of the Engle-Granger cointegration test. Sub-periods Cointegrated countries Algeria, Kuwait, Nigeria, Qatar Algeria, Indonesia, Mexico Indonesia, Libya, Nigeria, Qatar Nigeria, Qatar, U.A.E., Saudi Arabia, Mexico, Norway Iran, Nigeria, Qatar, Saudi Arabia*, U.A.E.* *: rejection of the null hypothesis of no cointegration at the 10% significance level. Otherwise, the significance level is 5%. Results displayed in Table 2 5 show that, for the first three periods, none of the large producing countries is cointegrated with the rest of the Organization production. This result indicates that the individual shares of production are not constant over time. Countries for which cointegration is obtained do not account for more than 30 percent of the OPEC production. Contrary to the first three periods, the sample is characterized by the presence of massive producers (particularly Saudi Arabia) accounting for nearly 50 per cent of the OPEC market share. Moreover, the absence of cointegration is also rejected for two 5 See Table A2 in the appendix for the detailed results. 7 countries belonging to our non-opec group, leading to the question of a possible larger agreement between producer countries. This sub-period could also be considered as some kind of Golden Age in terms of coordination within the Organization. Finally, in the last period ( ), cointegration is observed for countries representing about 65 to 70 percent of the OPEC production, but without any non-opec producers. As for the previous period, Saudi Arabia belongs to these cointegrated countries. It is worth noting that during the first three periods characterized by the absence of cointegration for the major oil producers, the OPEC market share in world oil production was highly volatile and unstable (see Figure 1). On the contrary, this market share is quite stable since These findings may lead us to the conclusion that OPEC also fits its production policy according to the non-opec supply and demand. Figure 1. OPEC market share in world oil production. 0,6 0,4 0, To investigate the direction of the link between production and price series, we implement the Granger causality test. 8 Table 3. Results of the Granger causality test Price-Prod Libya Venezuela, S. Arabia UAE, Mexico, Iran, Kuwait, Mexico, Qatar, OPEC Libya, S. OPEC* Arabia, UAE, UK, Russia, OPEC Prod-Price - Algeria, Iraq* Libya, Qatar, UAE Venezuela* Algeria, Nigeria, OPEC*, S. Arabia* *: rejection of the null hypothesis of no causality at the 10 % significance level. Otherwise, the significance level is 5 %. Price-prod: null of no causality from price to production, prod-price: null of no causality from production to price. The first main conclusion that emerges from Table 3 6 is that, except for Libya, we can not reject the null hypothesis of no causality for each OPEC member during the first controversial sub-period (including two oil shocks). As a consequence, there is no evidence that production policies are linked to price movements, a result which is relevant with the fact that the price was fixed during this period. The second sub-period is mainly characterized by the rejection of the null hypothesis of no causality from price to production for the OPEC as a whole, illustrating the fact that OPEC is price taker. Whereas the links between price and production are relatively weak in this period, the null of no causality from production to price is rejected for major producers in the third period, with a feedback effect observed for Saudi Arabia. The sub-period following the counter shock is thus the only one for which the OPEC production policy seems to have had an effect on price. It reflects the abandonment of the netback pricing system from Saudi Arabia and other OPEC countries which experienced the former system. For the fourth period, the main finding is the existence of a relation running from price to production for the OPEC. The last period is probably one of the most interesting, because several producers display a link from price to production in a context of increasing prices. Once again, OPEC is price taker. The characteristics of these countries are interesting as well. Actually, if we consider Saudi Arabia, U.A.E., Kuwait, Libya and Iran, we can notice that, according to BP 2009 Sta
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