Economists often cite OPEC as a textbook example of a
cartel that cooperates to reduce market competition, but whose consultations
are protected by the doctrine of state immunity under international law.
However, their influence on international trade is periodically challenged by
the expansion of non-OPEC energy sources, and by the recurring temptation for
individual OPEC countries to exceed production ceilings and pursue conflicting
Organization of the Petroleum Exporting Countries is
an intergovernmental organization of 14 nations as of May 2017, founded in 1960
in Baghdad by the first five members (Iran, Iraq, Kuwait, Saudi Arabia,
Venezuela), and headquartered since 1965 in Vienna. As of 2016, the 14
countries accounted for an estimated 44 percent of global oil production and 73
percent of the world’s “proven” oil reserves, giving OPEC a major
influence on global oil prices that were previously determined by
American-dominated multinational oil companies.
OPEC’s stated mission is “to coordinate and unify
the petroleum policies of its member countries and ensure the stabilization of
oil markets, in order to secure an efficient, economic and regular supply of
petroleum to consumers, a steady income to producers, and a fair return on
capital for those investing in the petroleum industry.” The organization
is also a significant provider of information about the international oil
Other cartels are:
International Energy Agency (IEA) is one of the
larger organizations involved in the oil and gas industry. The IEA is the
energy forum for 26 industrialized countries. Formed by the Organization for
Economic Cooperation and Development (OECD) as an autonomous intergovernmental
entity within the OECD in 1974 in direct response to the oil crisis, its
members include: Australia, Austria, Belgium, Canada, the Czech Republic,
Denmark, Finland, France, Germany, Greece, Hungary Ireland, Italy, Japan,
Republic of Korea, Luxembourg, The Netherlands New Zealand, Norway,
(participates under a special Agreement), Portugal, Spain, Sweden, Switzerland,
Turkey, United Kingdom, and the United States. One of the overall objectives of
the IEA, which reflects the original reason for the group’s establishment, is
to seek ways to reduce the members’ vulnerability to a supply disruption.
Organization of Arab Petroleum Exporting Countries (OAPEC) was established in 1968 and is based in Kuwait.
Membership is limited to petroleum producing Arab countries. The three founding
members were Kuwait, Libya, and Saudi Arabia. The OAPEC is not a cartel in the
same sense as OPEC. OAPEC is devoted to developmental activities and increasing
the cooperation among its members.
FOR CHOOSING THE TOPIC
At various times, OPEC members have displayed apparent
anti-competitive cartel behavior through the organization’s agreements about oil
production and price levels. In fact, economists often cite OPEC as a textbook
example of a cartel that cooperates to reduce market competition, as in this
definition from OECD’s Glossary of Industrial Organisation Economics and
International commodity agreements covering products
such as coffee, sugar, tin and more recently oil (OPEC: Organization of
Petroleum Exporting Countries) are examples of international cartels which have
publicly entailed agreements between different national governments.
OPEC members strongly prefer to describe their
organization as a modest force for market stabilization, rather than a powerful
anti-competitive cartel. In its defense, the organization was founded as a
counterweight against the previous “Seven Sisters” cartel of
multinational oil companies, and non-OPEC energy suppliers have maintained
enough market share for a substantial degree of worldwide competition.
Moreover, because of an economic “prisoner’s dilemma” that encourages
each member nation individually to discount its price and exceed its production
quota, widespread cheating within OPEC often erodes its ability to influence
global oil prices through collective action.
In 1949, Venezuela and Iran took the earliest steps in
the direction of OPEC, by inviting Iraq, Kuwait and Saudi Arabia to improve
communication among petroleum-exporting nations as the world recovered from
World War II. At the time, some of the world’s largest oil fields were just
entering production in the Middle East. The United States had established the
Interstate Oil Compact Commission to join the Texas Railroad Commission in
limiting overproduction. The US was simultaneously the world’s largest producer
and consumer of oil; and the world market was dominated by a group of
multinational companies known as the “Seven Sisters”, five of which
were headquartered in the US following the breakup of John D. Rockefeller’s
original Standard Oil monopoly. Oil-exporting countries were eventually motivated
to form OPEC as a counterweight to this concentration of political and economic
OPEC is mainly Saudi Arabia, the dominant producer,
and some other sub-groups and Saudi alone acts like a dominant producer.
(Alhajji and Huettner, 2000)
Dermot Gatley (1984) conducted one of the early surveys
and grouped OPEC behavior modeling approaches into either a dominant
theoretical approach based on the wealth maximizing model or a simulation
approach based on the target capacity utilization model. (Dermot Gatley, 1984)
In 1998, Mabro surveyed and criticized the literature
on OPEC behavior for the period 1960-1998 and grouped it into six categories
including: history, previous literature surveys, economic modeling, political
economy, policy proposals, and trade journals reporting. (Mabro, 1998)
OPEC behaves more like an oligopoly with Saudi Arabia
as a price leader and largest producer. (Plaut, 1981)
OPEC can control the world oil market via restricting
supplies to increase prices and achieve certain revenues. (Tussing, 1989)
By the time of the 2011 Libyan Civil War and Arab
Spring, OPEC started issuing explicit statements to counter “excessive
speculation” in oil futures markets, blaming financial speculators for
increasing volatility beyond market fundamentals.
On 10 September 2008, with oil prices still near
US$100/bbl, a production dispute occurred when the Saudis reportedly walked out
of a negotiating session where rival members voted to reduce OPEC output. Although
Saudi delegates officially endorsed the new quotas, they stated anonymously
that they would not observe them. The New York Times quoted one such delegate
as saying: “Saudi Arabia will meet the market’s demand. We will see what
the market requires and we will not leave a customer without oil. The policy
has not changed.”33 Over the next few months, oil prices plummeted into
the $30s, and did not return to $100 until the Libyan Civil War in 2011
During 2014–2015, OPEC members consistently exceeded
their production ceiling, and China experienced a slowdown in economic growth.
At the same time, US oil production nearly doubled from 2008 levels and
approached the world-leading “swing producer” volumes of Saudi Arabia
and Russia, due to the substantial long-term improvement and spread of shale
“fracking” technology in response to the years of record oil prices.
These developments led in turn to a plunge in US oil import requirements
(moving closer to energy independence), a record volume of worldwide oil
inventories, and a collapse in oil prices that continued into early 2016.
In December 2017, Russia and OPEC agreed to extend the
production cut of 1.8million barrels/day until the end of 2018
The term cartel, can be defined as “a group of
parties, factions, or nations united in a common cause; a bloc” as well as
“a combination of independent business organizations formed to regulate
production, pricing, and marketing of goods by the members.”
History shows many examples of successful and not so
successful cartels – they have been around for hundreds of years. The steel
industry and diamond industries are some examples. However, one of the most
powerful modern cartels is the Organization of the Petroleum Exporting
Countries more commonly referred to as OPEC.
Prior to the rise of OPEC, the oil industry was
dominated by the large oil companies often known as the Seven Sisters that
possessed the technology and skills for exploration and production that the
countries lacked. OPEC was born, to some extent, to reduce the influence the
oil multinationals. As Skeet suggests in his book, “The governments of the
oil producing countries in varying degree, but in all cases with increasing
fervor, viewed the systems under which the companies operated as an outdated
example of imperialist domination.” In fact, one of the first things
written in the 1st OPEC Conference Resolution in Baghdad states, “Members
can no longer remain indifferent to the attitude heretofore adopted by the Oil
Companies in effecting price modifications.”
With oil prices rallying above $60 per barrel, Russia has
questioned the wisdom of extending existing cuts of 1.8 million barrels per day
(bpd) until the end of next year as such a move could prompt a spike in U.S.
Russia needs much lower oil prices to balance its budget
than OPEC’s leader Saudi Arabia, which is preparing a stock market listing for
national energy champion Aramco next year and would hence benefit from pricier
Six ministers from OPEC and non-OPEC oil producers including
Saudi Arabia and Russia met in Vienna on Wednesday – one day ahead of a full
OPEC gathering – and recommended extending the cuts to the end of 2018. At
present, the cuts expire in March. Several sources familiar with the talks have
said Russia had suggested an option of reviewing the deal at the next OPEC
meeting in June in case the oil market overheats.
Some Russian producers including Rosneft, run by an ally of
President Vladimir Putin, Igor Sechin, have questioned the rationale of
prolonging the cuts, saying it will lead to a loss of market share to U.S.
firms, which are not reducing output.
OPEC, which comprises 14 countries, has traditionally been
much less worried about exit strategies as its members have been known for
reducing compliance and cheating on their quotas towards the expiry of such
“Russia seems to be pushing OPEC to have a concrete plan to
phase out the cuts when appropriate … compared to the typical undisciplined
OPEC strategy,” U.S. bank Tudor, Pickering, Holt & Co, which is active in
the shale industry, said.
100 Most Influential People in the Shipping Industry: 3. OPEC and the oil
men”. Lloyd’s List. 12 December 2014.
“Our Mission”. OPEC. Retrieved 16 February 2013.
Information” (PDF). OPEC.
Retrieved 13 April 2014.
Gülen, S. Gürcan (1996). “Is OPEC a Cartel? Evidence from Cointegration and
Causality Tests” (PDF). The Energy Journal. 17 (2): 43–57. doi:10.5547/issn0195-6574-ej-vol17-no2-3. Archived from the original on 16
Browning, Edgar K.; Zupan,
Mark A. (2004). “The Prisoner’s Dilemma and Cheating by Cartel
Members”. Microeconomics: Theory &
Applications (8th ed.). Wiley. pp. 394–396. ISBN 978-0471678717. Retrieved 5 September 2016.
Colgan, Jeff (16 June 2014). “OPEC, the Phantom Menace”. Washington Post. Retrieved 9 November 2016.
Gately, D. (1984) “A Ten Year Retrospective: OPEC and
the World Oil Market.” Journal of
Economic Literature, 22(3): 1110-1114.
The American Heritage Dictionary of the English
Language, 5th ed.,
Skeet, Ian. OPEC: Twenty Five Years of Prices and
Politics. (Cambridge: New York: Cambridge University Press, 1988), p. 5.