World oil market simulation

This paper presents a recursive simulation model of the world oil market - the World Oil Market Simulation Model (WOMS). The objective was to construct a computationally simple model which provides a transparent view of the workings of the oil market. In the event WOMS has a number of features which distinguish it from other published models: the effect of exchange rate movements is incorporated in the supply and demand functions; both demand and supply functions are dynamic; the non-OPEC supply functions account for the geological as well as the economic aspects of supply; oil prices can be determined either by OPEC setting prices (as normally included in this type of model) or by OPEC setting volumes and market forces determining the price; and consistency checks on consumers' and producers' behaviour are incorporated to confirm the plausibility of model projections. The paper commences with an outline of the model structure followed by an examination of the choice of the appropriate data. The main sections of the paper discuss the estimation of the demand and non-OPEC supply functions. Finally the modelling of OPEC's behaviour is addressed. Comparisons are made throughout with other published work. As the model was estimated using data covering 1960 to 1985, brief comments are also made comparing the events of 1986 with model determined values. (author)