Download S i d e l i n e The OPEC Cartel

PART 2
Efficiency and Equity
Pumping up Price
In most countries, collusion is illegal because of
its harmful effects on the consumer. Thus, cartels
that involve private companies operate secretly.
However, there is nothing to stop national governments themselves from colluding. No wonder, therefore, that the best-known example
of a cartel is an international one. OPEC, the
Organization of Petroleum Exporting Countries,
is made up of many of the major oil-producing
countries, including Algeria, Gabon, Iran, Saudi
Arabia, Iraq, Kuwait, Venezuela, Nigeria, Qatar,
the United Arab Emirates, Libya, and Indonesia.
driving the world price of oil from under US$3
per barrel before 1973 to over US$30 by the end
of the 1970s. This famous oil shock had major
effects on the world economy. There was a huge
outflow of “petro-dollars” from oil-importing to
oil-exporting countries. While oil producers benefited, bewildered oil consumers suffered.
OPEC’s success sprang from two main factors.
Because the short-run demand for oil is inelastic,
OPEC members could cut quantity supplied by a
relatively small amount and still significantly raise
the world price and their combined revenues.
OPEC’s success also hinged on the leadership of
Saudi Arabia, by far the largest exporter of oil,
whose government preserved the cartel’s power
and stabilized price by adjusting its national production levels.
OPEC in the 1970s
OPEC in the 1980s and 1990s
During the 1970s, OPEC members made spectacular gains. Through market-sharing agreements,
these countries limited their production, thus
During the 1980s and 1990s, OPEC’s influence
on world oil prices waned because of three
trends. First, the high oil prices of the 1970s had
The OPEC Cartel
Figure A
The World Price of Oil 1974-2006
70
65
60
55
Oil Prices (US$ per barrel)
S i d e l i n e
1
50
45
40
35
30
25
20
15
10
5
0
1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Year
The price of oil rose from $3 to $30 and above during the 1970s and early 1980s. But then it fell back to the $15-$20
range, where it remained until the latter part of the 1990s, after which it rose to close to $30. After 2002 it moved
even higher, to the $70 range.
Source: "Annual Oil Market Chronology" Energy Information Administration, US Government, at http://www.eia.doe.gov/emeu/cabs/AOMC/
Overview.html
CHAPTER 6
supply under the joint agreement.
The temptation to cheat is a potential hazard for all cartels. By producing extra output, a
member can raise its own revenues. Sooner or
later, however, cheating within a cartel becomes
common knowledge. Once this happens, it is likely
that the cartel will fall apart as all members disregard the agreement by selling more. Price is then
driven back down to its value before the cartel was
formed.
OPEC in the 2000s
As OPEC’s past experience shows, cartels are often
only temporarily successful in raising price and
profits for the producers involved. But recent years
have seen other trends help drive oil prices much
higher, despite continuing conflicts over production quotas within the ranks of OPEC members.
In particular, political turmoil in the Middle East
during the mid-2000s caused by the Iraq War and
its aftermath, as well as by rising tensions between
the West and Iran, caused oil prices to rise to
unprecedented heights, so that by 2006 prices had
surged past $70 a barrel. Such trends show just how
hard it is to predict oil prices, given the mix of factors that can affect this market.
1.
Non-OPEC countries supply over half of the international demand for oil, even though they have a
much smaller proportion of the world’s proven reserves. Explain what effect this imbalance could
have on future oil prices.
2.
(Policy Discussion Question)
a. Summarize OPEC’s argument concerning oil prices, as outlined in its article “Who Gets What
From Oil?” (at http://www.opec.org and link to “Who Gets What From Oil”).
b. Is the argument outlined in the article convincing?
c. When considering interests of citizens of an oil-consuming country, there is an important difference between a rise in oil prices due to higher taxes and a rise due to OPEC’s pricefixing. What
is it?
d. What arguments can be made in favour of oil taxation?
http://www.opec.org and link to "Who
Gets What From Oil?"
2
S i d e l i n e
gradually forced consumers to find ways to reduce
their oil consumption. In the long run, therefore,
the demand curve for oil became elastic, with price
changes having a much larger effect on quantity
demanded than in the short run. Second, the high
prices of the 1970s meant that oil sources previously too expensive to be exploited became profitable.
As a result, non-OPEC countries—such as Canada,
the United States, and the United Kingdom—
tapped these sources, thus raising their production
levels and pushing up the total quantity supplied
in the oil market. This left OPEC countries with a
smaller share of the market. Finally, once oil prices
began to fall, some OPEC members responded by
secretly selling more oil than they were allowed to
Monopoly and Imperfect Competition