Since June 2014 the world oil price has dropped from $115/bbl to under $60/bbl. The low oil price brings benefits for the oil-importing countries in the short term because of savings on energy expenditure. However, in the long term, low oil prices may cause concern for national energy security and renewable energy development because it discourages investment in domestic unconventional and alternative fuels. In the context of the current low oil price, this paper analyzes the potential effect of strategic interactions between the USA, China, and OPEC on the long-term US domestic transportation liquid fuels mix. The main contribution of this research is to provide a unified modeling framework to capture the strategic interactions and future uncertainties.
A bilevel, multileader, multifollower, stochastic optimization framework is proposed for the purposes of this study. In this research, we make the following assumptions for upper-level agents: OPEC aims to balance short-term profits and long-term market share by choosing production levels; China tries to balance economic growth and environmental impact by controlling energy demands; the USA makes trade-offs between energy security and renewable fuel share by setting carbon prices. The upper-level agents make decisions expecting a response from lower-level fuel suppliers. Then, in the face of the decisions of the upper-level agents and the uncertain oil price and production technologies, the lower-level agents make investment decisions, aiming to maximize their own long-term profits.
OPEC, by increasing the current production level rather than cutting output by 2 mbbl/day, can gain between 7 or 8% of the US transportation market share from its competitors: biofuel and unconventional oil producers. For the USA, setting the carbon price is the dominant strategy, but the effect is relatively insignificant: a $27/ton CO2 carbon price could increase biofuel share by only 1~2%. Sensitivity analysis shows that a 10% biofuel market share increase could be achieved by adding $100/t CO2; different market power assumptions on the part of OPEC can bias the market share estimation by as much as 15 percentage points. The subgame perfect equilibrium solution depends on how much OPEC emphasizes its market share. Results for China are not yet available, as the work is still in progress.
Based on the results, the USA will prefer to set a carbon price in order to balance its domestic fuels supplies and renewables share, but the expected effect will be limited unless the carbon price is relatively high. OPEC will make a decision depending on its preference for short-term (profits) or long-term (market share) benefits, which will determine the equilibrium outcome. This research could be extended in the following directions: i) Model more upper-level agents (Russia, different groups of OPEC members); ii) Consider the different risk attitudes of decision makers; iii) Incorporate the dynamic nature of decision making into modeling.
Dan Jessie, Advanced Systems Analysis Program, IIASA
David McCollum, Energy Program, IIASA
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Last edited: 03 February 2016
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