Game Theory Application: Why Oil Production Freezes Won’t Happen
Game Theory can be applied to many given scenarios dealing with politics and economics. The scenario discussed in the attached article is game theory applied to the oil market stability in those countries involved in oil production. Every meeting between the OPEC and Russia since the oil collapse in 2014 has lead to the same finalizing plan: increase oil production and decrease oil prices. These results can be explained by Classic Game Theory.
If each of these countries that produce oil cheat the system and produce more oil than the production limit that their quota dictates, they could have greater economic gain in the long run. Each of these countries has the choice to produce the amount that the production limits are capped at or to overproduce and thus have a better economic outcome. However, if a country produces as much as the quota says, they risk not cheating the system and having a much worse economic turnout. Each country is faced with this decision of whether to cheat the system and overproduce or not. Thus, Game Theory can be applied to this decision because each of these countries’ decisions is influenced by what they think the other countries are going to do. If all of the countries overproduce, the market will have an abundance of oil. Furthermore, this is the ideal decision for these countries because they benefit more from overproducing, whether the other countries overproduce as well or not. This is why the article argues that because of the principle of Game Theory applied to this situation, oil production won’t freeze and it will continue to rise over time.
http://seekingalpha.com/article/4004241-game-theory-finest-oil-production-freezes-happen