A three-person cooperative game formulation of the world oil market

In the winter of 1973, some major oil exporting countries joined together to declare an embargo on oil exports to some of the western countries for political reasons. Elated by their success and the realization that they controlled a major share of the oil exports, they subsequently raised the price of oil four-fold and cut back production, thereby obtaining, in the face of an almost inelastic demand, increased revenues. The major oil importing countries have been trying to work out an optimal policy designed to obtain their energy needs at lowest possible prices. One of the strategies considered by these countries is to attempt to split the oil cartel by bilateral dealings or by trying to play one member off against another. This paper analyses the feasibility of such a strate,v and its cost in financial terms using the theory of n-person cooperative games. In Shenoy,’ the world oil market is modelled as a twoperson non-zero-sum game with the oil importing countries denoted by OPIC as one player and the oil exporting countries denoted by OPEC as the second player. In this paper, we divide OPEC into two groups: one led by Saudi Arabia (SA) and the other led by Iran (IR). Despite many common characteristics, each group displays different national attributes and long-term commercial interests. IR, with a larger population, relatively small petroleum reserves, aggressive plans for economic development and military build-up, can use all the revenue available through major price increases. SA on the other hand, has a very small population and hence little capital absorption capability, large petroleum reserves and enormous financial reserves. In a period of rapid inflation, SA would prefer to have the oil in the ground rather than increase production. Also, SA would prefer to keep prices below the substitution threshold for new energy sources because of the fear that a flood of new energy will drive the price downward substantially in advance of the time when SA’s petroleum reserves are exhausted. Although huge time lags of seven years or more are involved in energy