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Inscrutable OPEC? Behavioral Tests of the Cartel Hypothesis

Although OPEC is commonly viewed as a syndicate of producers engaged in cooperative efforts to restrict production and raise price, to date there is a surprising dearth of supporting statistical evidence to that effect. I show that standard statistical tests of OPEC behavior have very low power across a wide range of alternative hypotheses regarding market structure. Consequently, it is difficult, given the current availability and precision of data on demand and costs, to distinguish collusive from competitive behavior in the world oil market. I apply a new, production-based approach for examining alternative hypotheses and find strong evidence of cooperative behavior among OPEC members. My results also suggest that OPEC�s formal quota mechanism, introduced in 1982 to replace a system based on posted prices, increased transactions costs within the organization. Statistical evidence is mixed on the question of whether Saudi Arabia and other core producers have played a special role within the cartel.

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

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
O19 - International Linkages to Development; Role of International Organizations

Keywords: OPEC, cartel, quotas, cooperative behavior

DOI: 10.5547/ISSN0195-6574-EJ-Vol26-No1-3

Published in Volume 26, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.