Game Theory, the study of how individuals make decisions when they must take into account the actions of others, has been applied to topics as diverse as Politics, Biology, Sociology, and Economics. This theory can be used as an enormous aid in certain Microeconomic topics, such as in modelling how prices are set by individual firms or how monopolies operate to gain and stay in power. Specifically, it has proven to be especially useful in analyzing and predicting how the different oil market participants interact to set the price of oil, as well as the supply and demand.
Oil Producers want to accomplish two things: sell as much oil as possible, and maintain the highest oil price possible. These two goals are mutually exclusive, though. By trying to sell more oil you lower the price, and maintaining a high oil price requires limiting oil supplies. This means that producers must decide between tradeoffs.
Further complicating the process, if one producer decides to lower the quantity of oil they supply, in order to raise the price, another producer can just pick up the slack and benefit freely on their decision. So, oil producers must anticipate how each other will react two each situation from the other producers.Prod
Let's use the current situation as an example. Currently, the oil market is at the bottom of what is called a "supercycle;" a decades long cycle in which the price of oil moves from astronomical highs to lows and back again. Their is currently substantially more supply of oil than demand, i.e. the market is saturated.
In fact, the price of oil has fallen so low that many producers cannot make a profit at the current level. They can't just supply less, though, or other producers would just take up the slack. Instead, all of the major producers must make a deal amongst themselves or all will suffer the consequences of low oil prices.
This situation can is depicted in the graphical model below:
In this model, two producers must decide whether they wish to "stop pumping" and drive up the price of the remaining oil, or "keeping pumping" and maximize the number of barrels they sell. If both producers keep pumping at maximum capacity, they will each receive their "equilibrium revenue" in a perfect market; where the dynamics of supply and demand reach equilibrium at the price where demand will consume the full supply.
Depending on how the other producer acts, though, each producer can usually reach a level of revenue above the equilibrium revenue. Specifically, it is always the dominant strategy, or the strategy that will always create the best outcome for the producers, to keep pumping. So, everyone keeps pumping and must accept the equilibrium revenue.
Also, you should take note that, if both producers could agree to stop pumping, they would both earn more revenue than the equilibrium revenue. If one producers does stop pumping, though, the other can earn even more than that by continue to pump oil. So, both producers will continue to pump oil and the market stays in equilibrium.