The Target Revenue Model and the World Oil Market: Empirical Evidence from 1971 to 1994

Abstract

This study draws on other studies that concluded OPEC is not a cartel and Saudi Arabia acts as a dominant producer in the world oil market. The intention here is to see whether the Target Revenue (TR) model provides an explanation for the behavior of some OPEC members that do not coordinate production with Saudi Arabia. We investigate whether production cuts or increases by OPEC and non-OPEC members are based on their investment or budgetary needs. By retesting the TR model, we show that investment ami budgetary needs do not affect the production of oil in free-market economies (OPEC and non-OPEC), but they do affect production decisions of the more centrally-planned, isolated and oil-dependent economies. Existing studies in the literature have conceptual and statistical limitations that justify retesting the model. This study is the first to investigate the TR model in a separate study and to compare the results of static and dynamic models. It is also the first to examine the relationship between the degree of economic freedom and the Target Revenue model and to note the TR model is stable when used for countries that are price takers.