OPEC GAME: Instructions for the OPEC Game

Instructions for the OPEC Game

 

OVERVIEW:

In the OPEC game, will be assigned to a team (country). Your team controls the oil production

of a country that is part of OPEC. The countries correspond (very roughly) to Saudi Arabia, Iran,

Iraq, Kuwait, United Arab Emirates, Venezuela, and Nigeria. There is also production by the

Rest of World (ROW). In each period, each of the seven member countries of OPEC choose their

quantities. The ROW chooses production as a price taker in response to the price in the world

market.

 

 

YEARS OF THE GAME: The OPEC game has three “years.” In the first year, which has only

2 production periods, all 28 teams in the class are part of the same game. In the second year and

third years, there will be four games –A, B, C, and D, one for each section – and seven countries

in each game. In the second year, each country attempts to maximize its profits without any

communication or coordination with other countries. There are 4 production periods in the

second year. The third year is identical to the second except the countries in each game will meet

in section at the beginning of the third year. At that point, you may attempt to form a cartel and

agree upon production quotas. The ROW never participates in the cartel and always behaves as a

price taker in all years.

 

STRATEGY CHOICES: The game lasts for 10 periods, 2 in the first year and 4 in each of the

second and third years. The schedule for the OPEC game is shown at the end of this document.

In each period, your country has only one choice variable: the quantity of oil you will produce in

that period. The world market price adjusts to clear the market given the production of all OPEC

countries and ROW.

Each country is endowed with a total oil reserve for the game and a constant marginal cost of

extraction up to a per-period production capacity. These are given in the worksheet

CountryData. These data are included in forStudentsOPECDATA2015.XLS. All information on

production costs, capacities and reserves are public at the beginning of the game. You cannot

exceed reserves during each year- for example in year 1 Iran’s production decisions in period 1

and two added up have to be less than reserves listed for YEAR 1 (that is, 10120). The actual

production choice by each country in each period is not public information, but all players see

the price in the market and approximate world production (an estimate of world production that

is accurate to plus or minus random shocks that allow production to vary by up to 2.5% with a

probability of 0.95).

 

DEMAND FOR OIL: In order to maximize profits for their country, each team must consider,

among other things, the world demand for oil and the world supply. Demand has two levels,

“low demand” which occurs during every odd numbered period and “high demand” which

occurs during every even numbered period. The forStudentsOPECDATA2015.XLS spreadsheet

also contains 24 historical observations that include estimates of world oil production and ROW

oil production, as well as the actual world oil price. These are given in the worksheet

DemandData. Twelve of the observations occurred during low demand periods and twelve

ARE 100B    OPEC GAME

UC Davis, Department of Agricultural and Resource Economics      Spring 2016

 

during high demand periods. Other than switching between low and high, demand does not

change systematically over time, but is also subject random shocks of plus or minus 2.5% with a

probability 0.95. The ROW supply as a function of price does not change systematically over

time other than the random variation already mentioned (plus or minus 2.5% with a probability

0.95).

 

What could you do with this information in the worksheet DemandData?

• Get linear demand as an expression Q=a-b*P and ROW supply as an expression q=c+d*P

by copying and pasting the data into Stata or any other data analyzing software (GRETL,

etc.)

Note: I encourage you to try this step. After you completed this step, please compare

your results to the results included in the worksheet Regression Results.  If you are

not familiar with data analysis yet, please refer to the worksheet for the estimated

demand and ROW supply and proceed with these equations.    

• Get residual demand for the 7 countries (OPEC) from the above calculations.

Note: You get the residual demand for OPEC by using the demand and subtracting the

ROW supply (subtracting in terms of Q).

• Then, given your marginal costs of seven OPEC countries, decide how much your

country (or your cartel) should produce to maximize your profits given the rules for each

year and demand for each period.

 

END OF EACH YEAR: Each year is essentially a separate game. At the end of each year, a

new technology appears that allows energy production at the equivalent cost of $100 per barrel

of oil. All oil that countries still have in reserve at the end of a year is valued in a “residual”

period at the price of $100 minus the country’s marginal cost of production. Interest is earned on

accumulated funds (within a year) between each period.

 

COSTS AND FINANCING: The only costs that a country has in producing oil is the marginal

cost given. The real interest rate is 10% per period. This is also the nominal interest rate as there

is no inflation. All funds earned and held at the end of each period earn that interest rate. A

country starts over each year with no funds in the bank.

 

LOGISTICS: For each deadline listed below, each country must submit production decisions by

9pm. Submission is done by email to me (kiesel@ucdavis.edu

). Please clearly indicate your

game, country, year, and period in the subject line (Subject: OPEC submission for Game X,

Country Y, Year X, Period Y,” (where X and Y and 123 are replaced with the appropriate

information). The body of the email should then state the quantity that the country will produce.

If a country does not submit by the deadline, their production will default to the level they

produced in the previous period. (Since demand changes between periods, this is unlikely to be

the optimal choice.) Each country will need to keep track of its own finances and oil reserves.  I

will announce the resulting prices and overall supply in lecture and post them on the course

website.

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