Instructions for the OPEC Game
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
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
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,
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 (email@example.com
). 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