Towards realisation of stable oil prices: an empirical analysis of the impact of OPEC’s oil price band/stabilisation policies.
Ibrahim, Mas'ud Usman
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This dissertation contributes to the literature on the role of the Organisation of Petroleum Exporting Countries (OPEC) in (de)stabilising oil prices by identifying and critically investigating a gap in the extant literature with respect to OPEC’s actions in the oil markets, vis-à-vis its stabilisation policies. Two research questions were addressed, namely: to what extent could OPEC have stabilised global oil prices within a particular target price band; and to what extent were OPEC’s stabilisation policies rendered ineffective by market forces? Consistent with the positivist’s research paradigm, unrestricted vector autoregressive (VAR) models were applied to monthly data over the 13 year period 2000-2012 on a range of relevant variables identified from the literature. Granger causality tests, impulse response functions (IRFs) and forecast error variance decompositions (FEVDs) were obtained from the VAR estimates to enable a critical analysis to be undertaken of the complex dynamics at play between OPEC and other key market players. The major contributions of the study are: it establishes that OPEC failed over the period 2000-2012 to operate as an effective cartel for controlling oil prices; it provides an innovative contribution to research methodology by utilising VAR impulse response functions and forecast error variance decompositions to describe the complex interactions between various players with diverse objectives in the markets; it contributes to the OPEC cartel literature in a novel way; it should enable regulators to better understand the political, social and economic interaction between key players in the oil markets, thereby increasing chances of policy embracement by all parties; it also makes a theoretical contribution by employing a framework based on target (price) zone theory; and finally it establishes that oil price band policy has the potential to be an important element of price stability in the oil market.