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Monopoly of Petroleum: OPEC

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Monopoly of Petroleum: OPEC

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A monopoly is evident where a firm is the sole seller of its product and if its product does not have close substitutes, as discussed in (Gans J., King S. Mankiw A. 2003). This essay will discuss the monopoly of petroleum by The Organization Of Petroleum Exporting Countries (OPEC), particularly how it controls the price of petrol, threats to its monopoly and the social costs involved.

OPEC was established in the 1960's and ever since, Saudi Arabia gained a reputation of being the major power of the organization. Saudi Arabia has the biggest oil reserves in the world and production costs lower than any country. (economist.com 2003)This means that it is a natural monopoly and economies of scale arises; when the long run average total cost falls as the quantity of output increases as illustrated in figure 1. (Gans, J. King, S., Mankiw, N., 2003) Saudi Arabia is the undisputed leader of OPEC.

Figure 1

Economies of Scale as a factor of Monopoly

Cost

Average Total Costs

Quantity of output

Saudi arabia's petroleum monopoly is very much its' government's major interest. The kingdom earned over $80 billion in revenue from oil in 2000.(economist.com 2003) OPEC's ability to influence the market price is the key of its power. Compared to a competitive firm, the demand curve for a monopoly is a horizontal one as it can set any quantity it wants for a given price. The demand curve slopes downwards...

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... production costs is amongst the lowest in the world. Iraq has the potential of overthrowing OPEC's regime if OPEC countries like Russia and France are ready to develop Iraq's oilfields so that it can be used to full efficiency. Does this mean that, to stop a monopoly, another monopoly must be used to overcome it? Time will tell, especially when UN sanctions are lifted and the new Iraqi government is formally established.

In conclusion, OPEC's monopoly of the petroleum industry has been a strong one since the 1960's since its members enjoy economies of scale. Its decisions concerning the output of petrol have always been strong affecting the rest of the world. This monopoly is socially inefficient due to the output and the deadweight loss that results. Interestingly enough, to break this monopoly, the new Iraq has the potential to turn the market power around.
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