The Organization of Petroleum exporting countries, better known as OPEC, is one of the most recognized cartels in the world. Yet, how many of those who can recognize the name really understand the cartel. I would venture to guess not many and even fewer know about the economic impact it has upon the world. To really get a feel for OPEC one has to delve deep into the heart of the cartel. This can be accomplished by looking at the economic definition of a cartel, the history of OPEC, OPEC today, OPEC and international trade, and the political questions that surround the cartel.
The Economics of a Cartel
Cartels in essence are simple devices. Basically, a group of suppliers band together and agree to restrict their supply and cause prices to rise. To put it another way a group of suppliers come together and act like a monopoly, creating a shared monopoly between suppliers. It would help if one could envision a graphical representation of what a cartel or monopoly does in the market. In this graph the red line is demand, the green line is marginal cost, the blue line is marginal revenue and the turquoise striped box is the profit of the monopoly. Instead of producing at the equilibrium point that a perfect competitive market would lead you to, a monopoly will produce at the point where the box meets the demand curve. This price is significantly higher than an equilibrium price would be. Thus by choosing to produce at the quantity where the box hits the demand curve a monopoly or cartel controls the amount of product in the market and the price charged for each unit. By agreeing on market share the cartel remains stable.
According to Mark LeClair, in his book entitled Int...
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...er. OPEC is a fact that will not change for a long while and the world is going to have to deal with it.
“OPEC History” 12 October 2004 Online
LeClair, Mark S. International Commodity Markets and the Role of Cartels. Armonk, New York: M.E. Sharpe, 2000
Kohler, Heinz. Economics. Lexington: D.C. Health and Company, 1992
Mouawad, Jad (2004, October 3). Irrelevant? OPEC is Sitting Pretty. New York Times, Section 4, p.1
Roche, David. (2003). OPEC cut amounts to a tax on world consumption. Euromoney; Nov2003, Vol. 34 Issue 415, p22, 1p, 1 graph.
“Energy: The Gathering Storm” Philip K. Verleger, Jr. 1 December, 2004 Online
Energy Economics Newsletter “Oil Price History and Analysis” 1 December, 2004 Online
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