Game Theory and Oil-Producing Countries

Last Saturday we witnessed another meeting of the Organization of Petroleum Exporting Countries and its allies (OPEC+). This organization is what economists refer to as a cartel or an oligopoly with cooperative strategies. In other words, it is a group of producers cooperating to influence prices, primarily by reducing production in order to increase prices from the supply side for the benefit of cartel members.

It sounds simple, but it is not. As a result, it has become one of the classic cases studied in game theory, a discipline that examines the strategic interaction of rational decision-makers. Game theory has been applied in fields such as biology, computer science, and the social sciences, particularly economics, which is where we will focus our attention.

The logic of a cartel suggests that if all participants agree to reduce production and maintain a target price, everyone benefits from higher oil prices. As a result, producers can earn greater revenues with lower output and higher prices. However, while this may be the socially optimal solution for participants, it is not the dominant strategy.

For any country within OPEC+, the dominant strategy is for all other members to reduce production and raise market prices while it does not. In that scenario, prices increase while that country produces more and sells at higher prices. Consequently, the dominant strategy for each individual country is to defect while everyone else cooperates.

Imagine a group of friends agreeing to split a restaurant bill equally. The socially efficient outcome would be for everyone to order similar meals and pay similar amounts. However, knowing that the cost will be shared, one person’s incentive is to order the most expensive item on the menu and distribute the cost among everyone else. If everyone thinks this way, the final bill becomes so high that everyone pays more, or those who ordered less feel the arrangement is unfair. If this behavior becomes repetitive, the group may eventually decide that each person should pay only for what they consume.

For this reason, a successful cartel requires certain conditions: a limited number of producers, transparent reference prices, relatively homogeneous goods, barriers to entry for non-members, and a credible threat of punishment for members who fail to cooperate.

These conditions are increasingly difficult to achieve because, in recent years, the number of countries outside OPEC+ that nevertheless contribute significant production to international markets has grown considerably. In particular, the United States, Canada, Brazil, Norway, and the United Kingdom together account for more than 20 percent of global oil production.

As a result, the price targeted by OPEC+ must be high enough to incentivize its members while remaining low enough to discourage non-members. If oil prices remain above USD 40 per barrel, it is only a matter of time before independent producers in the United States, for example, begin flooding the market once again, forcing additional production cuts and making cooperation among OPEC+ members increasingly difficult.

If game theory teaches us anything, it is that coordinating oil-producing countries around a long-term strategy becomes extremely challenging when a significant portion of global production remains outside the agreement or is willing to refuse cooperation over the long run, as is the case with countries such as Mexico. Under such circumstances, maintaining a coordinated strategy is unlikely to be sustainable for very long.

This article was originally published by Business Insider México.
Date: June 10, 2020
Original Link:https://businessinsider.mx/teoria-de-juegos-en-los-paises-petroleros-opinion-energia-circular-paul-alejandro-sanchez/ [offline]
Archived Link: https://web.archive.org/web/20240225023731/https://businessinsider.mx/teoria-de-juegos-en-los-paises-petroleros-opinion-energia-circular-paul-alejandro-sanchez/[Archived]

What NASA Can Teach CFE

"They were building a Ferrari for every launch when a Honda Accord could get the job done."
— Elon Musk

On May 30, the first private space mission was launched by Elon Musk’s company SpaceX, whose founder is also known for creating Tesla. The mission carried two NASA astronauts to the International Space Station. The launch represented the first crewed spaceflight departing from the United States in nearly a decade and what some have called the beginning of the private space race. Can this teach us any lessons for CFE?

It would be difficult to imagine an area more strategic for a government than its space program, particularly when that program is closely tied to an arms race and ideological competition under the perceived threats of the Cold War. As such, it received substantial public funding to sustain its operations.

However, in the more than sixty years since its creation, the world has changed dramatically in political, economic, and social terms. The welfare state model gradually became strained, largely because of the growing resources required to sustain government structures, and with it came a reduction in the amounts governments could devote to strategic sectors.

For example, NASA’s budget declined from USD 43.554 billion to USD 22.559 billion between 1966 and 2020 (in constant 2014 dollars). As a result, the agency was forced to retire some of its most emblematic programs, including the crewed Space Shuttle Program, which operated for thirty years from 1981 to 2011. In total, the program completed 135 missions, each with a launch cost ranging from USD 450 million to USD 1.5 billion.

The most important lesson from the launch of SpaceX’s Dragon spacecraft is that it cost approximately USD 50 million, only about 10 percent of the cost of the least expensive NASA Space Shuttle launch. As a result, NASA has decided to become one of the company’s principal customers for transporting astronauts into space.

In other words, NASA continues to carry out strategic activities in the space sector while concentrating its resources and efforts where they can generate the greatest value for the country and the world, such as the remote exploration of Mars, Jupiter, and Saturn, as well as deep-space exploration through its satellites. At the same time, it leaves launch services to private companies that can perform them more efficiently and at lower cost.

Viewed in this way, CFE could learn a great deal from NASA by focusing on the strategic areas that generate the highest value per unit of investment, such as transmission, distribution, telemetry, natural gas transportation, and natural gas marketing, among others. At the same time, it could move away from volumetric electricity generation targets that require the continued operation of expensive, inefficient, and highly polluting plants fueled by fuel oil and coal. Such generation could instead be replaced by low-cost clean and renewable energy, such as that procured through the Long-Term Electricity Auctions, benefiting both public health and consumers’ wallets.

Who knows? Instead of continuing to repair the legendary Volkswagen Beetle with a Ferrari-sized budget, perhaps CFE could accomplish far more for all Mexicans, just as NASA has done.

This article was originally published by Business Insider México.
Date: June 3, 2020
Original Link: https://businessinsider.mx/lo-que-la-nasa-puede-ensenarle-a-cfe-opinion-paul-alejandro-sanchez-energia-circular/ [offline]
Archived Link: https://web.archive.org/web/20210117004053/https://businessinsider.mx/lo-que-la-nasa-puede-ensenarle-a-cfe-opinion-paul-alejandro-sanchez-energia-circular/ [Archived]

What NASA Can Teach CFE


They were building a Ferrari for every launch, when it was possible that a Honda Accord could achieve it.

– Elon Musk

On May 30, the first private space mission was launched by Elon Musk’s company SpaceX, also founder of Tesla, which sent two NASA astronauts to the International Space Station. This launch represents the first trip departing from the United States in almost a decade and represents what some call the beginning of the private space race. Can this teach us some lessons for CFE?

It would be difficult for us to think of an area more strategic for a government than its space program, and even more so when it is intimately linked with an arms and ideological race before the perceived threat in times of the Cold War. And as such, it received large sums of public budget to operate.

However, in the more than 60 years since its creation, the world has changed a lot in political, economic and social aspects. The model of the welfare State was becoming exhausted, mainly because of the amount of resources required to sustain the government structure, and with it the large sums that governments could dedicate to these strategic sectors.

For example, NASA’s budget went from 43,554 million dollars to 22,559 million dollars between 1966 and 2020, in constant 2014 dollars. As a consequence, the agency has had to close some of its most emblematic programs, such as the manned space shuttle program that operated for 30 years from 1981 to 2011. In total, through this program, 135 trips were carried out that had a launch cost of between 450 and 1,500 million dollars.

The most important lesson from the SpaceX Dragon launch is that it cost 50 million dollars, only 10% of the cost of the cheapest launch of NASA’s space shuttles, in such a way that the agency has decided to become one of the company’s main clients to send astronauts into space.

That is, NASA continues developing strategic activities in space matters and dedicates its resources and efforts where it could obtain more value for the country and the world, such as the remote exploration of Mars, Jupiter and Saturn and the exploration of deep space with its space satellites, and leaves to private initiative the launches that can be done more economically for the agency.

Seen in this way, CFE could learn a lot from NASA, concentrating on the strategic areas that generate more value per unit of investment, such as transmission, distribution, telemetry, transportation and commercialization of natural gas, among others, and leaving behind those volumetric goals of electric energy generation that require keeping expensive, inefficient and polluting plants in operation, such as those that operate with fuel oil and coal, replacing that generation with clean and renewable energy at low costs like those obtained in the Long-Term Auctions for the benefit of our health and our pockets.

Who knows? Perhaps instead of trying to continue repairing the mythical Vocho with a Ferrari budget, CFE could achieve more, much more, for all Mexicans, just as NASA did.

This article was originally published by Business Insider México.
Date: June 3, 2020
Original Link: https://businessinsider.mx/lo-que-la-nasa-puede-ensenarle-a-cfe-opinion-paul-alejandro-sanchez-energia-circular/ [offline]
Archived Link: https://web.archive.org/web/20210117004053/https://businessinsider.mx/lo-que-la-nasa-puede-ensenarle-a-cfe-opinion-paul-alejandro-sanchez-energia-circular/[Archived]