OPEC’s Future as a Cartel

OPEC’s Future as a Cartel

MICROECONOMIC ANALYSIS: OPEC’S FUTURE AS AN EFFECTIVE CARTEL

The purpose of this paper is to assess the likelihood that the Organization of Petroleum Exporting Countries (OPEC) will be able to function efficiently as a cartel in the future. The effectiveness of OPEC as a price-setting export cartel is significant for not only the member states of OPEC but also for all crude oil importing states. The role of OPEC is important to non-OPEC oil producing states because OPEC, to a great extent has in the past been able to influence the character of the global crude oil market.

Formally, a cartel is an organization wherein the members act jointly to set prices for a product. Whether a cartel is formalized or involves firms or other entities simply acting in tacit collusion to set prices, however, the 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 (Miller 1991, p. 277).

Cartels function as monopolies. The most important economic concepts involved in monopoly are barriers to market entry, market concentration, and the exercise of monopoly power within a market. The term monopoly refers to single-firm control within an industry or market. Effective monopoly power may be exercised within a market, however, by a small number of firms. The concentration of industries into oligopolies typically results in the development of the conditions necessary for effective monopoly power to be exercised (Pappas and Brigham 1996, p. 190).

When a cartel (as a seller) is in a monopoly position, it can establish prices without concern for competition. There is a point, however, beyond which even monopolistic sellers cannot go, if they hope to earn a profit. Monopolies can maximize profits, however, without maximizing consumer welfare (when consumer welfare is considered to be more goods, more choices, and lower prices). In a competitive ma…

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