Statistical Methods in Finance 2017

Dec 16 - 19, 2017


Energy Prices, Dynamic Mean Field Games and Stochastic Demand

by Ronnie Sircar

We discuss oligopoly games with a continuum of players that have mean field structure. These may be of Bertrand (price setting) or Cournot (quantity setting) type and may apply to analysis of consumer goods or energy markets respectively. Key advantages over finite player nonzero sum differential games are analytical and numerical tractability. Models for energy markets with competition between producers with heterogeneous costs (fossils vs. renewables) are presented as motivation. The dramatic decline in oil prices, from around $110 per barrel in June 2014 to below $30 in January 2016 (and currently up to about $60) highlights the importance of competition between different energy sources. Indeed, the price drop has been primarily attributed to OPEC's strategic decision, until recently, not to curb its oil production in the face of increased supply of shale gas and oil in the US. We also discuss how declining and uncertain demand from China and India may be a major factor driving oil price volatility.