Case: OPEC and the World Market

Crude Oil is a global resource which has found relevance in the economy of nations
since its discovery and has therefore become a central commodity in the socio-
economic, political, and environmental policy priorities of the modern world. In the global
context, the distribution, exploitation, and sales of oil resources affect interrelationship
among countries, particularly major oil exporting and oil-importing nations. The
production of crude oil, security of demand and supply, financial and knowledge
structures have created interdependencies in the global oil market.
This situation gave rise to the formation of Organization of Petroleum Exporting
Countries (OPEC) on September 14, 1960, in Baghdad, Iraq. Saudi Arabia, Kuwait,
Iran, Iraq, and Venezuela were the founding members of OPEC. By 1973, eight other
nations had joined: Qatar, Indonesia, Libya, UAE, Algeria, Nigeria, Ecuador, and
Gabon. Later in 2007, Angola from Southern Africa also joined OPEC. It may seem
absurd, but about 79%of the global oil reserves are concentrated within these few
OPEC states while 21% is shared by the rest of the world.
Since the Second World War, oil has played a significant role in the global economy. As
a result, socio-economic activities are dependent on the production and marketing of
crude oil. The vulnerable OPEC countries with large reserves and market share use it
as an instrument to increasing their bargaining power by influencing the market
structure and dynamics, the policy decisions of the developed countries, and the global
economy through their energy policies.
Like any cartel, OPEC tries to raise the price of its product through a coordinated
reduction in quantity produced. OPEC tries to set production levels for each of the
member countries. The problem that OPEC faces is much the same as the problem any
cartel face. OPEC countries would like to maintain a high price for oil. But each member
of the cartel is tempted to increase its production to get a larger share of the total profit.
OPEC members frequently agree to reduce production but then cheat on their
agreements.
OPEC was most successful at maintaining co-operation and high prices in the period
from 1973 to 1985. The price of crude oil rose from $3 a barrel in 1972 to $11 in 1974
and then to $35 in 1981. But in the mid- 1980s, member countries began arguing about
production levels, and OPEC became ineffective at maintaining cooperation. By 1986
the price of crude oil had fallen back to $13 a barrel.
In recent years, the members of OPEC have continued to meet regularly, but the cartel
has been less successful at reaching and enforcing agreements. Although the price of
oil rose significantly in 2007 and 2008, the primary cause was increased demand in the
world oil market, in part from a booming Chinese economy, rather than a restricted
supply of OPEC. While this lack of cooperation among OPEC nations has reduced the
profits of the oil-producing nations below what they might have been, it has benefited
consumers around the world.

Attempt both questions:

Question 1
Is forming collusion beneficial or not? Describe from the perspective of both-
producer and consumer. (Maximum words count: 400)
[20 Marks]

Question 2
On the framework of SCP paradigm, explain the above case. (Maximum words count:
400)
[20 Marks]