Peter J Wilcoxen > Simulation Games

Oil Trader

Welcome to Oil Trader, a simulation exploring arbitrage in the crude petroleum market. This page is the instructions; a link to the game itself appears at the bottom.

Object of the game:

To make as much money as possible speculating in the oil market for 10 years.

How to play:

Each year you must choose whether to buy or sell oil (or neither), and whether to borrow money or repay existing loans (or neither). Use the buttons and scroll bars at the bottom of the game to indicate what you want to do. When you're ready, click on the "Next Turn" button to see what happens. The game lasts for 10 turns, each one year long. You can restart it whenever you want by clicking the "Restart" button.

The game will be most interesting if you try to imagine you're doing this for real. Don't just guess, think carefully about what to do at each turn.

What the display shows:

The game display has several areas. At the upper left is your firm's balance sheet as of the beginning of the year. The left column shows your assets: any cash you have on hand plus the value of any oil you own at the current price of oil. The middle column shows your liabilities: the value of any loans you've taken out, the amount of interest due on your loans at the end of this year, and your net worth (which is the difference between your assets and the liabilities you owe to other people).

If you're not used to accounting conventions, it may seem strange for net worth to be shown in the liabilities column. Believe it or not, there's a sensible reason. By putting net worth under liabilities, the totals of the asset and liabilities columns will always be equal. This makes it easy to see what part of the firm's assets can be claimed by creditors (liabilities in the usual sense) and what part is left for the owners (the net worth). If this still isn't clear, just think of net worth as an amount the firm "owes" its owners.

The right-most column shows some information that would not ordinarily appear on a firm's balance sheet. In this case, it shows the number of barrels of oil you own, the price of oil this year, and the futures price of oil for delivery next year (Price Next). In this game there will not be any random shocks, so the futures price will be exactly equal to the true price of oil next year.

Some helpful information:

Initially, you have no money and no oil. To buy oil, you'll have to borrow money. The interest rate on loans is 10% per year. In this game the bank processes loans quickly so you may borrow money AND buy oil in the same turn. You've got a credit limit, however. The bank will not loan you more in total than $1000 plus the net worth of your business. For example, if your net worth is $10 and you have already borrowed $900, the bank would allow you to borrow up to $110 more: $1010 - $900.  On the other hand, if you had paid off your loans earlier and had a net worth of $10, the bank would let you borrow the full $1010.

When you borrow money, you must pay interest (surprise!). Each year you will have to pay 10% interest on your outstanding loans at the beginning of the year. This is the amount shown on the balance sheet as "Int Payable". One very important thing to remember is that the bank doesn't accept oil -- you must pay interest in cash. That means you must have enough cash on hand at the end of each turn to meet your interest payments (after any buying, selling, borrowing and repaying activities). If you do not have enough cash you will default on your loans and the game will be over. The game will be very frustrating if you don't keep this rule in mind.

One other thing to remember is that interest payments are compulsory and come directly out of your cash balance automatically: you do not use the "repay" option to pay them.  "Repay" is used to repay the principal on your loans (it's the opposite of "borrow"). For example, suppose you have $120 cash, $1000 of loans, owe $100 of interest and select "repay $100".  Here's what will happen: $100 of cash will be used to pay off $100 of loans, bringing your loan balance to $900.  However, you'll only have $20 of cash left to pay the $100 of interest and will be in trouble with the bank.

It may help to know that during each turn your instructions will be processed in the following order: borrowing, selling, buying, and repaying (not all of these will apply in every turn). After that, interest payments will be deducted from your cash balance. This is important if you give conflicting instructions. Suppose you had $400 in cash and asked to buy 10 barrels of oil when the price was $25, and also said you'd like to repay $300 worth of loans. To do that would require $550, which is more cash than you had on hand. You'd end up buying the 10 barrels of oil and repaying only $150 of loans instead of $300. This would also leave you with no cash so you'd be in trouble when it came time to pay interest.

The game ends at the beginning of year 11. Your score will be your net worth at that point. The game will also tell you how well you did relative to "par", a decent  score but not the maximum possible. If you're in the range of 90%-100% of par, you've understood the key idea behind the exercise.  If you are very careful, however, you can score about 125% of par.

Link to the game itself:

Play Oil Trader
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URL: http://wilcoxen.maxwell.insightworks.com/pages/237.html
Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 04/13/2015