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OPEC and the World Oil Market

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Organization of the Petroleum Exporting Countries A Cartel is formed:

Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela

Secretary General - Masoud Mir Kazemi(since January 1, 2011)

Establishment - Baghdad, Iraq, September 10–14, 1960

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How does it matter

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CARTEL GRAPH

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Cartel Oligopoly

Sources of power Explicit agreement between the dominant players in the industry.

Each firm can significantly influence the market by setting price or production quantity.

Prices Unusually high. Prices are fixed by cartel members.

Moderate/fair pricing due to competition in market

Examples OPEC, lysine cartel, Federal Reser

Health insurers, wireless carriers, beer (Anheuser-Busch and MillerCoors), media (TV broadcasting, book publishing, movies)

Characteristics Prices and production quantities are fixed. Product is undifferentiated.

firms compete with each other based on product differentiation, price, customer service etc.

Meaning agreement between firms in an industry to fix price and production quantity

An economic market condition where numerous sellers have their presence in one single market.

Barriers to entry difficult to enter the industry because of economies of scale.

difficult to enter the industry because of economies of scale.

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Four-Firm Concentration

RatioPercentage of total industry sales accounted for by the four largest firms of an industry.

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Example: The four largest firms in the car rental industry account for 94% of all car rentals in the U.S.

So, the four-firm concentration ratio for the car rental industry is 94.

Hertz Avis

National Budget

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OPEC as Cartel

∂ adopted a formal system of production allocations

∂ individual ceilings on the output of each member

∂ OPEC has limited means by which to redistribute the revenue among its member countries

∂ the by-product of clashing national agendas that encompass far more than the petroleum sector. 

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countries would like to maintain a high price of oil. each member of the cartel is tempted to increase its production to get a larger share of the total profit.cheat on their agreements 1980s, when many OPEC countries exceeded their quotas, driving down the prices of oil

OPEC less successful

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OPEC able to maintain high levels of profit only on a short term basis firms or other entities involved in such action must be in a position to control prices in the market in order for a cartel to exist and be effective 

OPEC less successful

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Conclusion OPEC has a large share of the market and entry by competitors is slowa monopoly or dominant-firm model the cartel agreement appears to break down regularly, resulting in prices below the profit-maximizing levelA final theory holds that OPEC is an unsuccessful cartel and behaves in an essentially competitive fashionat one time or another every OPEC country has increased its output substantially

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