Oil price formation through unstable, inelastic demand and cartel imperatives

Ming-Jeng Hwang, Chin W.Yang, Bwo-Nung Huang

Abstract

ABSTRACT

This paper generalizes the theoretical model through both demand and supply functions of the Organization of the Petroleum Exporting Countries cartel. The cartel's pricing policy is largely affected by its aggregate demand curve and related elasticities. Market equilibrium is shown to be self-adjustable under the stable case. The unstable case has helped to explain the divergence and, therefore, the greater volatility in prices and uncertainty in the oil market. Finally, estimation of the elasticity of oil demands in the US market (the world's largest energy consumer) is used to explain and predict movements in the market price of crude oil.