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Global Economics Article

So What Is OPEC? You Don’t Want to Miss This One!

OPEC

OPEC is the International Organization of Petroleum Exporting Countries, formed in Bagdad in September 1960. Many OPEC countries are situated in the Middle East and the goal of this organization is to protect the interests of some of the world’s main producing countries. OPEC is one of the oldest organizations, which was established by developing countries and dominated 79.3% of the crude oil reserves globally in 2009. Moreover OPEC members hold a conference, meeting twice a year to decide the oil production quotas for the organization and individual members as well.

Since OPEC got established, it has been debated whether OPEC is a cartel or not. While lots of economics books and articles named OPEC as a cartel there are no statistical tests and theory to corroborate the popularity of OPEC as an example of a cartel. Those econometric studies which argue that OPEC is cartel have found OPEC as a parallel action but not cartilization. The Parallel might happen in any market, including a competitive market. However, politicians and economists argued that due to oil price increases in the 1970s and some powerful members like Saudi Arabia dominating the organization, has led to OPEC to become less popular.

What is Cartel?

A group of organized producers to maximize profit and get higher prices by restricting production or dividing the market. The cartel usually limits market-supply and controls production. Furthermore, there are several characters which are generally required for the cartel. Here we consider to find whether OPEC fit these characters

Quota System

A cartel sets the quota system to its members since its formation. OPEC did not have a quota system until 1983; however, since 1983 members have still not followed the quotas.

Monitoring System

A cartel usually develops a consistent monitoring system which belongs to the organization to superintend production and shipments.

Punishment Mechanism

One of the key characteristics of classical cartels is punishing members to avoid cheating. OPEC has no punishment mechanism.

Cartel Authority

A cartel demands that the authority of the cartel should be above the members’ authority. This is not the case for OPEC where member countries keep production autonomy.

Side Payments or Buffer Stocks

The objective of buffer stocks is to control the prices within a range demand from the cartel. The cartel would collect and maintain a fund and keep part of the commodity in stocks. When prices fall below the minimum price level, the cartel could use the fund to buy the commodity on the open market to increase prices. Furthermore, when price rises over the maximum price level, the cartel sells some of its stocks to cut price. OPEC has never had a mechanism of this type.

Large market share

OPEC now controls nearly 40% of the world oil market, from 1970 to 1999 OPEC‘s market share did not override 56%.

It seems that the theory of cartels does not fit OPEC very well, However, some of the characteristics could partially apply, for instance OPEC has a quota system. Also, OPEC has a monitoring system, however weak that may be, and, according to some economists, an undeclared punishment mechanism exists.

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