OPEC's Control of Oil Supply and Market Price

On February 10th, OPEC acclaimed that they had achieved 90% of compliance that they would cut down 1.8 million barrels per day. OPEC has always been considered Oligopoly. Some of those countries which are oil exporters allied together and formed the OPEC. It was successful from 1973 to 1981. Through their strategy of controlling the output of crude oil, OPEC raised the price from $3 per barrel to $35 per barrel. In mid-1980s, because some members in OPEC argued about the production level, OPEC became inefficient at controlling the crude oil price and the price dropped to $13 per barrel.

Now, OPEC acclaimed again that they had achieved 90% of compliance among their members. It seems that the oil price will be raised by OPEC again by reducing the output level. However, the prisoners’ dilemma in this Oligopoly can not be ignored. 90% compliance is not enough for make OPEC’s command effective. (Mankiw, 2011, 385 According to the prisoners’ dilemma, suppose that the 10% disobedience secretly produces more oil than OPEC expects it does, the oil price will not decrease immediately and those members who increase their output secretly can get huge amount of profit from the short-term price. After a period of time, as the supply goes up, the price will goes down. Other members in this cartel later realize there is somebody cheating in the Oligopoly when they see the price is decreasing. They will feel angry about the disobedient country who gets more profits from the increased crude oil price. Then the other countries will start to produce more oil even though OPEC forbids them from doing so. When those producers in the cartel start to increase their output, the supply of crude oil in the global market will increase remarkably. Because the demand will not change at once, the price of crude oil will decrease noticeably. Therefore, the price of crude oil will not increase and the OPEC will fail in its primary purpose again.

Russia, who also hopes the oil price will increase, “has agreed to gradually phase in a cut of 300,000 barrels per day” (Charles Riley, February 10th 2017). Another two crude oil exporters, Oman and Kazakhstan also appeared to be complying. It seems that if OPEC succeeds in controlling all its members, it will be able to increase price as they wish. However, other than these countries, United States is also crucial in the market. The shale oil producers in the U.S. will enter the market in the future as the crude oil price increases. “U.S. shale drillers have announced big increases in spending for 2017” (Blas and Wethe, March 8th 2017). Because the shale oil producers in U.S. are attracted by the high price in this market hence they will enter this market. Since at first these shale oil producers can provide the good with a lower price, they can increase their market share by their competitive price. As their entrance increases the supply of crude oil, the price will then decrease. Consequently, OPEC will not be able to obtain their goal of increasing crude oil price by cutting the output.

Admittedly, OPEC still holds an important role in crude oil market and its decision will influence the global crude oil price in the short run. But, the prisoners’ dilemma indicates if one member of this cartel OPEC does not follow the rules, OPEC will fail in its purpose. What’s more is that the increased price will attract other producers to enter the market thus decreasing the price. Therefore, this time OPEC might not able to increase the crude oil price as it wishes.

Work cited

Mankiw, Nicholas Gregory, Dean Darrell Croushore, and Charles A Stull. 2009. Principles Of Economics. 1st ed. Fort Worth [u.a.]: Dryden Pr.

Blas, More and More Wethe. 2017. “Shale Billionaire Hamm Says Industry Binge Can ‘Kill’ Oil Market”. Bloomberg.Com. https://www.bloomberg.com/news/articles/2017-03-09/shale-billionaire-hamm-says-industry-binge-can-kill-oil-market.

Riley, Charles. 2017. “OPEC Has Pulled Off One Of Its ‘Deepest’ Production Cuts”. Cnnmoney. http://money.cnn.com/2017/02/10/investing/oil-opec-production-cut-iea/index.html.