The Functioning of OPEC
The Organization of the Petroleum Exporting Countries was established in 1960. Its objective is “ to co-ordinate and unify petroleum policies among member countries in order to secure fair and stable prices,” (Bade, Parkin p. 405) therefore providing an adequate amount of petroleum to consuming countries, and an adequate amount of revenue to people who invest in the industry. But with the obvious fluctuations in the prices of petroleum during the past years, who can say this goal is being reached.
In 1973 an Arab-Israeli war broke out and OPEC found its calling. The organization enforced on oil embargo, which lasted from October 19, 1973 to March 17, 1974 (wisegeek.com), causing the price of oil to increase four times its usual price. Inflation, stricter speed limits, and economic recession occurred, in the countries targeted by the embargo. The embargo forced car-making companies to make smaller, non-gas-guzzling cars, but even after it was ended, the United State’s economy was still down in the dumps (wisegeek.com).
The fundamentals of supply and demand are the most important factors behind today’s high prices. Although cartels tend to be unstable and eventually break down, OPEC has seemed to avoid this outcome (Bade, Parkin p. 398). But not necessarily in the 1980s when an increase in oil supply decreased the price and broke down the cartel (Bade, Parkin p. 405). This change in demand and supply decreased consumer surplus, increased consumer surplus and sometimes a deadweight loss is present if the monopoly is inefficient. In a single-price monopoly, the equilibrium quantity is inefficient because the price, which equals marginal benefit, exceeds marginal cost.
The governments of Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Qatar, Indonesia, Libya, United Arab Emirates, Algeria, and Nigeria are all members of OPEC. Certainly not a duopoly. Their main goal as a cartel is to increase their profits by simulating the...