Has OPEC been a Successful Cartel? Essay

A obligation is an shaping of bringrs grouped together for their decl are benefit. The or so well known cartel in existence today is OPEC, Organisation of crude Exporting Countries. Its members argon some ( still non all) of the most important petroleum colour producing countries including Saudi-Arabian Arabia and Mexico. Most cartels try to raise damages at the expense of consumers.The aim of this essay is to bump whether OPEC has been a masteryful cartel, this go out ungenerous I subscribe to to examine the strengths and weaknesses of OPEC which have been present throughout their existence of furnish rock anoint. This should allow me to make an appropriate thought on whether OPEC has been a successful Cartel.The skeleton history of anoint values show that rock petroleum was specious in the 1950s and 60s. This was collectible(p) to generate growing fast-breaking than collect. The premature 1970s saw a mouse of this trend, as demand appendd faster than supply. This was in the main due to the existence providence booming.Source adapted from BP statistical analyseIn November 1973, politics in the snapper easterly was to have a grand put together on oil prices. With an actual tight market, the resolution was am magnification in the price of oil.The war was curtly over but its economic beatturn meat was non lost on OPEC. OPEC, whose members at the time supplied over 60% of world demand for oil, organised a system of quotas amongst themselves, fixing limits on how lots each member could produce. By approximately cutting indorse on pre-1973 product levels, they were able to increase the average price of oil to around $13 (as shown in the table above). charge S2 As this demand and supply diagramS1 shows, as make out decreases from S1 toS2, Price increases from P1 to P2. ThisP2 explains how OPEC managed to increaseaverage prices of oil to $13 by cuttingP1 back on supply.DQuantity QD2 QD1However, this interpret exce ssively shows that Quantity demanded for oil would excessively decrease. This would mean OPEC whitethorn well not be better of in call of gross as price increases and measuring stick demanded decreases (Price * Quantity =Revenue). However there was a fundamental reason why OPEC could successfully pioneer this massive price rise, this was mainly due to the fact that the demand for oil was inelastic in the unretentive run.Price inelasticity assumes that demand is not heavily bear on by a change in price. The reason behind oil creation an inelastic product was due to the fact that oil consumers had invested heavily in detonating device equipment such as oil-fired heating system systems and petrol driven cars. In the small end point there were no cheap alternative substitutes. As a head OPEC would receive a laster(prenominal) revenue by increase prices hence higher kale. This could be considered a strength of OPEC as a cartel.However, in the longer term consumers argon ab le to replace oil-powered equipment (substitutes). This would increase the elasticity of oil, hence an increase in price would have a more than than responsive effect on the beat demanded. As a consequence, when the demand for oil began to grow over again in 1976,it was a s inflict rate than in the too soon 70s.In 1978, Iran and Iraq went to war. Iran was a major(ip) oil producer, and thesubsequent war severely dis occur supplies from these two countries. OPEC used this opportunity to abbreviate supply again. As a resultant rose again from $13 a barrel in 1978 to $36 a barrel in 1980. Total world demand fell once again. This gives an attribute of OPEC organism affected by impertinent influences such as strains among their member countries. howling(a) 1990 saw another(prenominal) blow to OPECs strangle hold over the success of producing oil in a moneymaking manner. Political events in the Middle East saw Iraq invade Kuwait, as a result oil sanctions were applied to the issue of both countries by oil down countries. Other oil producing countries feared of a major shortage in supply as prices rose from $18 to $40 a barrel as a result other non-OPEC countries reacted by increasing issue in oil. Prices fell back as overall supply returned to normal. Since the successful foretell by the US to re lead Kuwait, the price of oil has seen a steady stray downwards in price. This has to a fault light-emitting diode to OPEC losing out due to more countries increasing production in oil make an increase in controversy.Restricting competition is not necessarily easy. There are three potential difficultys that OPEC has to overcome due to it being a cartel. These are explained to a lower placeAn agreement has to be reachedThe larger the snatch of houses, the greater the possibility that at least one key firm player will refuse to collude. In the shell of OPEC, this may well be hard due to political disagreement that has on a regular basis occurred durin g OPECs history.Cheating has to be preventedin one case an agreement is made and meshingability in the industry is raised, it would pay an individual firm to cheat so long as no other firms do the same. In the case of OPEC, with the increase in non-OPEC supply has guide to strains among OPEC members. This has led to an increased bonus tocheat(mentioned further on in the essay). likely competition must be restrictAbnormal profits will go on not only existing firms in the industry to expand output but also new firms to enter the industry. Firms already in the industries that dont mating the cartel may be riant to follow the policies of the cartel in revise to earn abnormal profits themselves. However, in the case of OPEC, it would be hard for another competing country to do this as oil is a incomparable resource and also OPEC already has the majority of the market indoors their own organisation.There are a number of reasons why OPEC has been one of the hardly a(prenominal) i nternational cartels that have survived over a long period of time, this is due to the chaseNo need for any pilot film stocks or large amounts of financial seat of governmentIf OPEC wishes to reduce supply. Member countries simply produce less and leave their oil in the ground.There are a relatively small number of members of OPECMember countries are able to exert a high degree of mold over the slew of oil lifted within their own countries.Oil production is not particularly affected by variations in digestHence supply need not fluctuate widely and randomly from stratum to year as it does in many an(prenominal) agricultural markets.OPEC countries supply a hearty proportion of total world output.Because non-OPEC producers run to produce at maximum capacity, countries such as USA and the UK are inefficient to exert downward pressure on oil priceseven if they wanted to.In real terms, oil prices today are little different from those at the shekels of the 70s. OPEC countries increased their revenues substantially in the mid-1970s and again in 1979-80 but these were transient gains. OPEC suffers from three fundamental weaknesses1) commodious increases in oil prices in the 1970s led to stagnant demand for until the mid 1980s. Consumers substituted other types of energy for oil, there was a slant towards much greater energy conservation.2) Large increases in oil prices led to a large increase in supply from non-OPEC countries. The increase in supply has demoralize world prices since the start of the 1980s. Hence, OPEC receiving a lower turnover as a result.3) The increase in non-OPEC supply has led to strains amongst OPEC members. In any cartel there is an motivator to cheat. However, if countries cheat, then the price will glitter rapidly. This occurred in the mid-1980s, when many OPEC countries exceeded their quotas, driving down the prices of oil. Which again would have an adverse effect upon profits made by OPEC countries.To conclude, I believe that OPEC has suffered many problems associated with being a cartel. As a result I believe OPEC will not continue to be a successful cartel due to individual countries cheating in order to gain extra profits (as mentioned previously). There is also the effect of OPEC being able to maintain high levels of profit only on a short term basis, until free market forces take effect and these profits once again return to normal. It must also be mentioned that the increase in supply from non-OPEC members has also created a downward pressure effect upon prices, therefore decreasing OPECs control on prices. Hence, profit margins being damaged.The coming(prenominal) for OPEC may well see more adverse effects occurring. As the problem of oil being a scarce resource becomes present, free market sources will look towards a substitute for oil. This may well see the demand for oil decreasing in the long term. at a time again this will lead to OPEC losing its scrap as a cartel.