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Testing Alternative Hypotheses of Oil Producer Behavior

Conventional wisdom holds that OPEC is a weakly functioning cartel with non-OPEC producers forming a "competitive fringe." However, several studies have challenged the cartel hypothesis for OPEC with a few even challenging the competitive hypothesis for non-OPEC producers. In this paper, we test competing hypotheses (which include dynamic optimization, target-revenue, competition, cartel, and swing production) for production decisions for both OPEC and non-OPEC producers. Recently developed cost data allow these tests to be done on the most general model to date. In our tests, we find no evidence for dynamic optimization. Formal target-revenue models are rejected, but there is some evidence that revenue targeting may influence production for some OPEC countries and a few non-OPEC countries. We find no evidence that any of the OPEC countries behave in a competitive manner. More surprisingly, we find no evidence that the fringe is competitive. Using co-integration tests, we are unable to find formal evidence of coordination in the form of strict cartel behavior or swing production among OPEC countries. Taken as a whole, the evidence suggests that loose coordination or duopoly is most consistent with OPEC behavior.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Petroleum – Policy and Regulation; Energy Security and Geopolitics – International Energy Organizations

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
O19 - International Linkages to Development; Role of International Organizations

Keywords: OPEC behavior, Target-revenue model, Competitive model, Uncertianty

DOI: 10.5547/ISSN0195-6574-EJ-Vol12-No4-8

Published in Volume 12, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.