World Oil Market Module
The function of the Stochastic Energy Deployment System's (SEDS's) world oil market module is to calculate a world oil price.
SEDS will set start and end dates for the forecast period, and a time increment (assumed to be one year in the initial version). The module will then randomly select an Annual Energy Outlook (AEO) oil price case and calibrate itself to that case. As it steps through each year, the module will generate a stochastic supply shock to the Organization of the Petroleum Exporting Countries (OPEC) output and accept a new estimate of U.S. petroleum demand from SEDS.
The module will then calculate a new oil market equilibrium for the current year. The world oil price at the new equilibrium will be sent back to SEDS. When the end year is reached, the process will begin again with the selection of a new AEO forecast. Iterations over forecasts will continue until SEDS has completed all its simulation runs.
The different AEO world oil market projections represent uncertainty about the state of the world. SEDS executes year by year over a forecast period and when the ending year is reached it begins a new iteration. A different AEO projection is selected for each SEDS iteration. Iterations continue until SEDS has completed its desired number.
A basic, dynamic representation of the world oil market can constructed by dividing the world into three demand regions:
- United States
- Rest of Organisation for Economic Cooperation and Development (Rumalia Operating Organization [ROO])
- Developing and transitional economies (DTE).
Also, it can be divided by three supply regions:
- United States
- Rest of the world/non-OPEC
The model is comprised of linear lagged adjustment equations for U.S. oil demand, U.S. domestic supply, ROO and DTE oil demand, and non-OPEC oil supply, following the method of Greene, Jones and Leiby (1995).
OPEC oil supply is exogenous, reflecting the oil cartel's role as a non-competitive producer. Three sources of uncertainty are incorporated into the model:
- Size of the world's unconventional oil resources
- Extent to which OPEC will expand its production over time
- Oil supply disruptions.
In SEDS light, the first two types of uncertainty will be represented by alternative scenarios of the evolution of the world oil market, as reflected in the AEO's high, low, and reference world oil price cases. Uncertainty about supply disruptions will be represented by a stochastic model of supply reductions from OPEC, calibrated to historical data.
The linear lagged adjustment model assumes that the difference between the current period's oil demand (supply) and last period's is a fraction (λ) of the difference between long-run equilibrium (or desired) demand (supply) and last periods actual demand (supply).
Focus of Analyses:
The world oil market module's focus is to determine a future price for imported petroleum.
Stochastic inputs are based on two areas of assumptions within the world oil market module.
The first consideration concerns level of optimism/pessimism the analyst has in the future world oil prices—such as low oil price, high oil price, or reference price scenarios. The variable, "O_select_case", identifies the oil price scenario used for the simulation.
The second area of assumptions deal with what OPEC may do concerning the global oil market. The module will randomly determine, for each time period, whether or not an OPEC supply shock will occur. This variable is referred to as the "O_shock_happens." If the shock does occur, the world oil market module will generate stochastic variables identifying both the intensity of the shock ("O_shock_magnitude") and its duration ("O_shock_length").
Finally, there are stochastic variables used to identify OPEC's response to any fluctuations in demand within the world oil market. For instance, will OPEC attempt to maintain production of a relatively fixed amount of oil or will OPEC attempt to lower production in order to maintain the price of oil? This is referred to as the "OPEC Scenario" and assigned a variable name of "O_opec_case."
Key Inputs from Other Modules
Inputs from other SEDS modules include an estimate of U.S. oil demand for the period.
Key Outputs to Other Modules
Outputs to other SEDS modules include an expected oil price for the current period.
David L. Greene, Oak Ridge National Laboratory
W. T. Wilson, Oak Ridge National Laboratory