Cornell University DEEP-GREEN-RADAR Graduate Research Associate Khaled H. Kheiravar presented his research on a structural econometric model of dynamic game among petroleum producers in the world petroleum market at the Interdisciplinary Ph.D. Workshop in Sustainable Development (IPWSD) at Columbia University.
For his research, Khaled is developing and estimating a structural econometric model of the dynamic game among petroleum-producing firms in the world petroleum market. In his innovative and sophisticated model, petroleum producers consider future market environments as well as their competitors’ investment and production activities when making their exploration, development, production, merger, and acquisition decisions. Khaled’s model allows firms that are at least partially state-owned to have objectives other than profit maximization alone.
Khaled’s structural econometric model enables him to analyze the effects of government policies, changing geopolitical landscapes, and new technologies on the petroleum industry. A better understanding of the oil and gas industry, and of how government policies and new technologies such as new batteries for electric vehicles affect the petroleum industry will enable him to better understand what is required for early alternative fuel transitions to succeed.
Khaled uses his structural econometric model to analyze the effects of changes in OPEC membership, the privatization of state-owned oil companies, a ban on mergers, and demand shocks on the petroleum industry. The demand shocks he simulates represent what may happen as new technologies such as cleaner fuels, alternative vehicles, and new batteries for electric vehicles develop that might affect the demand for petroleum.
There are several advantages to using a dynamic structural model to analyze the investment, production, merger, and acquisition decisions of petroleum-producing firms. First, unlike reduced-form models, a structural approach explicitly models the dynamics of investment, production, merger, and acquisition decisions. Second, his dynamic games model models the strategic nature of petroleum-producing firms' investment, production, merger, and acquisition decisions. A third advantage of the structural model is that with the structural model Khaled is able to estimate the effect of each state variable on the expected payoffs from exploration, development, production, merger, and acquisition decisions, and is therefore able to estimate parameters that have direct economic interpretations.
A fourth advantage of Khaled’s structural model is that he is able to model the interdependence of the exploration, development, production, merger, and acquisition decisions. When a firm merges with or acquires another firm, the value of the other firm it merges with or acquires is given by that firm's value function, which is the present-discounted value of the entire stream of per-period payoffs for that other firm, and which accounts for the options that other firm has to explore, develop, produce, merger and/or acquire. Thus a firm's value function depends on the expected value of other firms with which it has the option to merge or acquire. As a consequence, the firms' value functions are interdependent.
A fifth advantage of Khaled’s structural model is that he can use the parameter estimates from his structural model to simulate various counterfactual scenarios. He uses his estimates to simulate the world petroleum market under counterfactual scenarios for government policy and economic development.
Khaled’s research has important implications for energy economics and policy. The current world energy consumption level is more than double what its level was in the 1970s and is projected to increase even further in the future. Forecasts estimate over 50 percent increase in world energy consumption over next 30 years. Fossil fuels supply more than 80 percent of the energy consumed in the world. Transformational technologies, including the rapid growth in the production of shale oil and shale gas, are changing the oil and gas industry, with dramatic impacts on future business models, the competition of fuels, and the composition of future energy demand. The production and consumption of oil, natural gas, and shale raise concerns about climate change, fossil fuel price volatility, energy security, and possible fossil fuel scarcity. The impact of oil, natural gas, and shale on the future development of wind, solar, and other renewable energy sources is a concern as well. The results of Khaled’s research are therefore of interest to academics, policy-makers and business practitioners, including oil companies, alike.
Khaled has won several prestigious awards for his research, including the 2013 ExxonMobil Corporate Affiliate Fellowship, the 2016 ExxonMobil Corporate Affiliate Fellowship, the 2016-2017 Henry A. Jastro Graduate Research Award, the 2017-2018 Henry A. Jastro Graduate Research Award, the UC-Davis Fellowship for Excellence in Graduate Research, and the UC-Davis Economics Department Job Market Fellowship.
In addition to Columbia University, Khaled has presented his research at the 2015 U.S. Association for Energy Economics (USAEE) Conference, for which he was awarded a USAEE Student Registration Fee Scholarship; at the 2016 U.S. Association for Energy Economics (USAEE) Conference, for which he was awarded the OPEC Fund for International Development (OFID) International Association for Energy Economics (IAEE) Support Fund Scholarship; at an Association of Environmental and Resource Economists (AERE) session at the Western Economic Association International (WEAI) Annual Conference; and at an Association of Environmental and Resource Economists (AERE) session at the Southern Economic Association (SEA) Annual Conference.
Khaled’s modeling outcomes can be used to help inform decision-making and policy design. The results of his research will be of interest to academics, policy-makers, entrepreneurs, and business practitioners, including oil companies, alike. This model will also help petroleum firms better respond to government policies, and will help policy-makers better design sustainable energy policies.
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