Reference no: EM132460950

In November 2014, OPEC oil ministers gathered in Vienna for a tense meeting. Oil prices had fallen to their lowest point in four years in world markets. For decades, the cartel had responded to situations like this by scaling back production in order to send prices higher.

But things were changing. During the mid-to-late aughts, more companies in the U.S.had begun using an alternative to traditional land-based and deepwater offshore drilling. This method, known as "fracking", involved using a mixture of water, chemicals, and proppant (sand or sand-like substances) to crack underground shale rock and so as to release oil from it.

The average break-even price for shale oil had been about $48/bbl but had fallen by more than 40 percent to around $29/bbl.

U.S. shale oil represented only about 5 percent of the oil being produced worldwide. But the expensive process suggested to many that shale producers could not stay in business if oil prices dipped too far.

The main question at hand for the OPEC ministers was whether their countries should try to raise prices by their traditional means of lowering oil production. The oil minister of Saudi Arabia, Ali al-Naimi, spoke up, arguing that, if the OPEC countries stopped pumping as much oil, non-OPEC producers, such as those in the U.S., might step in and supply more oil themselves.

Concentrate on using your managerial economics knowledge, tools, and concepts in general, and Game Theory in particular, to weigh the pros and cons of the alternative paths the industry could follow. Make your arguments as a trained economist able to rationally analyze a vexing problem