A model of competition between oil companies with conventional and unconventional oil production

This paper examines the problem of investment strategies choice of oil companies with conventional and unconventional oil production. A mathematical model describing the relationship between the oil companies’ investment strategies and the oil price, which depends on the ratio of supply and demand on the world oil market, is constructed and discussed. Solution is reduced to the analysis of a bimatrix game, where in the payoff matrix is formed by numerical simulation. Two possible scenarios of play are presented, a stable one and a volatile one. We present an illustrative example of the proposed approach. The obtained results show that unconventional oil production, including shale oil, will occupy a significant portion of the market in the medium term. Average market price of oil is expected to reach 55–60 \$ per barrel. This model, however, does not account for possible technology advancements, which could lower the expense of oil extraction and, thus, market price.