Estimating the Potential of Changes in Oil Price in IPCC Climate Scenarios: A System Dynamics Approach

Document Type : Research Article

Authors

• Kian Ebtekar
• Hossein Khajehpour
• Abbas Maleki

Department of Energy Engineering, Sharif University of Tehran, Tehran, Iran.

10.22067/jstinp.2024.85841.1085

Abstract

This paper uses the system dynamics approach to model the changes in oil price prospects in the framework of the shared socio-economic pathways (SSP) climate scenarios proposed by the Intergovernmental Panel on Climate Change (IPCC) until 2100. This theoretical structure connects the primary feedback mechanisms: supply, demand, and price. The determining factors of most tremendous significance in the supply sector are the Organisation of Petroleum Exporting Countries (OPEC) and non-OPEC production levels. The production targets set by OPEC are indicative of its market management policies and are significantly influenced by the actions of its key members. The oil price indicates a cyclical relationship with the oil supply of significant players. The determination of global oil demand in the demand section is based on various climate scenarios presented in the IPCC report. The fluctuation of Brent oil prices over time can be linked to the disparity between supply and demand. According to the model outcomes, the price of oil will be projected to decline to $20 per barrel by the year 2100 if the sustainability policies outlined in the SSP1 framework are implemented. However, in the alternative scenarios of SSP3, characterized by regional competition, and SSP4, characterized by heightened inequality and competition, oil prices are anticipated to rise to $100 per barrel. In the context of the SSP5 scenario, which posits a path of economic and social development reliant on the consumption of fossil fuels, the price of oil displays a declining pattern after a period of relatively higher prices. The peak oil prices within the Intergovernmental Panel on Climate Change (IPCC) scenarios exhibit significant variation based on their Representative Concentration Pathways (RCPs).

Keywords

• Climatic change scenarios
• Oil demand
• Oil supply
• Oil price
• OPEC
• System Dynamics

---

References

Aghion, P., Dechezleprêtre, A., Hemous, D., Martin, R. and Van Reenen, J., 2016. Carbon taxes, path dependency, and directed technical change: Evidence from the auto industry. Journal of Political Economy, 124(1), pp.1-51. https://doi/abs/10.1086/684581.

Bashiri Behmiri, N. and Pires Manso, J.R., 2013. Crude oil price forecasting techniques: a comprehensive review of literature. Available at SSRN 2275428.

Baumeister, C. and Kilian, L., 2016. Forty years of oil price fluctuations: Why the price of oil may still surprise us. Journal of Economic Perspectives, 30(1), pp.139-160. https://doi.org/10.1257/jep.30.1.139.

Behar, A. and Ritz, R.A., 2017. OPEC vs US shale: Analyzing the shift to a market-share strategy. Energy Economics, 63, pp.185-198. https://doi.org/10.1016/j.eneco.2016.12.021.

Csereklyei, Z., Rubio-Varas, M.D.M. and Stern, D.I., 2016. Energy and economic growth: the stylized facts. The Energy Journal, 37(2), pp.223-256. http://doi/abs/10.5547/01956574.37.2.zcse.

De la Fe López-Domínguez, M., Levy-Carciente, S., Contreras, J. and Paiva-Mata, P.C., 2011. BEHAVIOR OF THE GLOBAL OIL MARKET (1995-2008) AS DESCRIBED BY A SYSTEM DYNAMICS MODEL. Análise Econômica, 29(56). https://doi.org/10.22456/2176-5456.18272 .

Fagan, M., 2020. Up the Down Staircase: What History Teaches Us about Oil Demand after a Crisis. Available at SSRN 3592443. http://dx.doi.org/10.2139/ssrn.3592443.

Forrester, J.W., 1968. Industrial dynamics—after the first decade. Management science, 14(7), pp.398-415. https://doi.org/10.1287/mnsc.14.7.398.

Greenman, J.V., 1994. The price of oil: A system dynamic approach. In 12th International System Dynamics Conference. Sterling, Scotland: System Dynamics Society.

Hamilton, J.D., 2014. The changing face of world oil markets (No. w20355). Cambridge, MA, USA: National Bureau of Economic Research. http://dx.doi.org/10.3386/w20355.

Harstad, B., 2012. Climate contracts: A game of emissions, investments, negotiations, and renegotiations. Review of Economic Studies, 79(4), pp.1527-1557. https://doi.org/10.1093/restud/rds011.

Hosseini, S.H., Shakouri G, H. and Peighami, A., 2016. A conceptual framework for the oil market dynamics: A systems approach. Energy Exploration & Exploitation, 34(2), pp.171-198. https://doi.org/10.1177/0144598716631656.

Hosseini, S.H., Shakouri, H. and Kazemi, A., 2021. Oil price future regarding unconventional oil production and its near-term deployment: A system dynamics approach. Energy, 222, p.119878. https://doi.org/10.1016/j.energy.2021.119878.

Huntington, H., Al-Fattah, S., Huang, Z., Gucwa, M. and Nouri, A., 2013. Oil markets and price movements: A survey of models.

IEA, 2022. World energy outlook 2022. Paris, France: IEA. Available at: https://www.iea.org/reports/world-energy-outlook-2022.

Jaccard, M., 2005. Hybrid energy-economy models and endogenous technological change. In Energy and environment (pp. 81-109). Boston, MA: Springer US. https://doi.org/10.1007/0-387-25352-1_4.

Kikstra, J.S., Nicholls, Z.R., Smith, C.J., Lewis, J., Lamboll, R.D., Byers, E., Sandstad, M., Meinshausen, M., Gidden, M.J., Rogelj, J. and Kriegler, E., 2022. The IPCC Sixth Assessment Report WGIII climate assessment of mitigation pathways: from emissions to global temperatures. Geoscientific Model Development, 15(24), pp.9075-9109.URL: https://pure.iiasa.ac.at/18523.

Lee, J.U., 2021. IEA, World Energy Outlook 2020. KEPCO Journal on Electric Power and Energy, 7(1), pp.25-30. https://doi.org/10.18770/KEPCO.2021.07.01.025.

Li, Q., 2015. Analysis of oil market fundamental using a system dynamics approach (Doctoral dissertation, Massachusetts Institute of Technology).URL: http://hdl.handle.net/1721.1/105312.

Linn, J., Muehlenbachs, L. and Wang, Y., 2014. How do natural gas prices affect electricity consumers and the environment?. Resources for the Future Discussion paper, (14-19). http://dx.doi.org/10.2139/ssrn.2537833.

Mashayekhi, A., 2001, July. Dynamics of oil price in the world market. In 19th International System Dynamics Conference.

Meinshausen, M., Meinshausen, N., Hare, W., Raper, S.C., Frieler, K., Knutti, R., Frame, D.J. and Allen, M.R., 2009. Greenhouse-gas emission targets for limiting global warming to 2 C. Nature, 458(7242), pp.1158-1162. https://doi.org/10.1038/nature08017.

Mercure, J.F., Pollitt, H., Viñuales, J.E., Edwards, N.R., Holden, P.B., Chewpreecha, U., Salas, P., Sognnaes, I., Lam, A. and Knobloch, F., 2018. Macroeconomic impact of stranded fossil fuel assets. Nature Climate Change, 8(7), pp.588-593. https://doi.org/10.1038/s41558-018-0182-1.

Pörtner, H.O., Roberts, D.C., Poloczanska, E.S., Mintenbeck, K., Tignor, M., Alegría, A., Craig, M., Langsdorf, S., Löschke, S., Möller, V. and Okem, A., 2022. IPCC, 2022: Summary for policymakers. https://doi.org/10.1017/9781009325844.001.

Rafieisakhaei, M., Barazandeh, B. and Afra, S., 2017, March. A system dynamics approach on oil market modeling with statistical data analysis. In SPE Middle East Oil & Gas Show and Conference. OnePetro. https://doi.org/10.2118/184040-MS.

Rafiq, S., Sgro, P. and Apergis, N., 2016. Asymmetric oil shocks and external balances of major oil exporting and importing countries. Energy Economics, 56, pp.42-50. https://doi.org/10.1016/j.eneco.2016.02.019.

Riahi, K., Van Vuuren, D.P., Kriegler, E., Edmonds, J., O’neill, B.C., Fujimori, S., Bauer, N., Calvin, K., Dellink, R., Fricko, O. and Lutz, W., 2017. The Shared Socioeconomic Pathways and their energy, land use, and greenhouse gas emissions implications: An overview. Global environmental change, 42, pp.153-168. https://doi.org/10.1016/j.gloenvcha.2016.05.009.

Samii, M. and Teekasap, P., 2010. Energy policy and oil prices: system dynamics approach to modeling oil market. Global Commerce Forum.URL: https://hdl.handle.net/10474/1313.

Sterman, J., 2002. System Dynamics: systems thinking and modeling for a complex world. URI: http://hdl.handle.net/1721.1/102741

Xiong, T., Bao, Y. and Hu, Z., 2013. Beyond one-step-ahead forecasting: evaluation of alternative multi-step-ahead forecasting models for crude oil prices. Energy Economics, 40, pp.405-415. https://doi.org/10.1016/j.eneco.2013.07.028.