Has OPEC been a Successful Cartel? Essay

A promise is an organisation of producers grouped together for their sustain benefit. The most nearly known cartel in existence now is OPEC, Organisation of vegetable anele Exporting Countries. Its members are some (but non all) of the most important anoint colour producing countries including Saudi Arabia and Mexico. Most cartels try to raise damages at the expense of consumers.The end of this essay is to determine whether OPEC has been a boffo cartel, this will mean I form to examine the strengths and weaknesses of OPEC which soak up been present throughout their existence of provide crude oil. This should allow me to make an appropriate judgement on whether OPEC has been a successful Cartel.The brief history of oil prices show that oil was cheap in the 1950s and 60s. This was referable to make out growing red-hot than fill. The early 1970s saw a reversal of this trend, as demand improverd faster than supply. This was in the main due to the world economy boomi ng.Source adapted from BP statistical reviewIn November 1973, politics in the Middle East was to have a great stamp on oil prices. With an actual skew-whiff market, the resoluteness was am explosion in the price of oil.The war was briefly over but its economic downturn effect was not mixed-up on OPEC. OPEC, whose members at the time supplied over 60% of world demand for oil, organised a system of quotas amongst themselves, fixing limits on how much apiece member could produce. By slightly cutting back on pre-1973 occupation levels, they were able to cast up the average price of oil to around $13 (as shown in the table above).Price S2 As this demand and supply platS1 shows, as Supply decreases from S1 toS2, Price accessions from P1 to P2. ThisP2 explains how OPEC managed to increaseaverage prices of oil to $13 by cuttingP1 back on supply.DQuantity QD2 QD1However, this interpret also shows that Quantity demanded for oil would also decrease. This would mean OPEC whitethorn salutary not be better of in terms of revenue as price increases and quantity demanded decreases (Price * Quantity =Revenue). However there was a cardinal reason why OPEC could successfully pioneer this massive price rise, this was mainly due to the fact that the demand for oil was dead in the piffling run.Price inelasticity assumes that demand is not heavily stirred by a change in price. The reason behind oil macrocosm an inelastic product was due to the fact that oil consumers had invested heavily in upper-case letter equipment such as oil-fired heating systems and petrol driven cars. In the short term there were no cheap alternative substitutes. As a result OPEC would receive a higher revenue by change magnitude prices hence higher profit. This could be considered a strength of OPEC as a cartel.However, in the extensiveer term consumers are able to switch over oil-powered equipment (substitutes). This would increase the elasticity of oil, hence an increase in price woul d have a more responsive effect on the amount demanded. As a consequence, when the demand for oil began to grow once more in 1976,it was a s dispirit rate than in the early 70s.In 1978, Iran and Iraq went to war. Iran was a study oil producer, and thesubsequent war severely disrupted supplies from these two countries. OPEC utilize this opportunity to tighten supply again. As a result go up again from $13 a barrel in 1978 to $36 a barrel in 1980. Total world demand fell at a time again. This gives an indication of OPEC organism affected by external influences such as strains among their member countries.August 1990 saw another blow to OPECs pass away hold over the success of producing oil in a paying manner. Political events in the Middle East saw Iraq invade Kuwait, as a result oil sanctions were applied to the output of both countries by oil consuming countries. Other oil producing countries feared of a major famine in supply as prices rose from $18 to $40 a barrel as a resu lt other non-OPEC countries reacted by increasing production in oil. Prices fell back as overall supply returned to normal. Since the successful counter by the US to retake Kuwait, the price of oil has seen a steady drift downwards in price. This has also guide to OPEC losing out due to more countries increasing production in oil causing an increase in competition.Restricting competition is not unavoidably easy. There are threesome potential problems that OPEC has to overcome due to it being a cartel. These are explained belowAn agreement has to be reachedThe extensiver the spell of sign of the zodiacs, the greater the possibility that at least one key firm participant will refuse to collude. In the case of OPEC, this may come up be difficult due to political disagreement that has regularly occurred during OPECs history.Cheating has to be preventedOnce an agreement is made and profitability in the industry is raised, it would pay an individual firm to cheat so gigantic as n o other firms do the same. In the case of OPEC, with the increase in non-OPEC supply has take to strains among OPEC members. This has guide to an change magnitude incentive tocheat(mentioned set ahead on in the essay).Potential competition must be circumscribeAbnormal profits will encourage not only existing firms in the industry to expand output but also radical firms to enter the industry. Firms already in the industries that dont join the cartel may be happy to follow the policies of the cartel in rate to earn abnormal profits themselves. However, in the case of OPEC, it would be dense for another competing country to do this as oil is a incomparable alternative and also OPEC already has the majority of the market within their own organisation.There are a number of reasons why OPEC has been one of the few international cartels that have survived over a long period of time, this is due to the followingNo need for any buffer stocks or large amounts of financial capitalIf OPEC wishes to reduce supply. Member countries simply produce less(prenominal) and leave their oil in the ground.There are a comparatively small number of members of OPECMember countries are able to exert a high degree of control over the volume of oil lift within their own countries.Oil production is not particularly affected by variations in weatherHence supply need not fluctuate widely and randomly from year to year as it does in many agricultural markets.OPEC countries supply a significant proportion of total world output.Because non-OPEC producers tend to produce at maximum capacity, countries such as USA and the UK are unable to exert downward pressure on oil priceseven if they wanted to.In real terms, oil prices today are little different from those at the start of the 70s. OPEC countries increased their revenues substantially in the mid-1970s and again in 1979-80 but these were short-lived gains. OPEC suffers from three fundamental weaknesses1) Large increases in oil price s in the 1970s led to stagnant demand for until the mid 1980s. Consumers substituted other types of energy for oil, there was a shift towards much greater energy conservation.2) Large increases in oil prices led to a large increase in supply from non-OPEC countries. The increase in supply has depressed world prices since the start of the 1980s. Hence, OPEC receiving a lower turnover as a result.3) The increase in non-OPEC supply has led to strains amongst OPEC members. In any cartel there is an incentive to cheat. However, if countries cheat, then the price will fall rapidly. This occurred in the mid-1980s, when many OPEC countries exceeded their quotas, driving down the prices of oil. Which again would have an adverse effect upon profits made by OPEC countries.To conclude, I believe that OPEC has suffered many problems associated with being a cartel. As a result I believe OPEC will not continue to be a successful cartel due to individual countries cheating in golf-club to gain ext ra profits (as mentioned previously). There is also the effect of OPEC being able to maintain high levels of profit only on a short term basis, until free market forces take effect and these profits once again return to normal. It must also be mentioned that the increase in supply from non-OPEC members has also created a downward pressure effect upon prices, therefore decreasing OPECs control on prices. Hence, profit margins being damaged.The future for OPEC may well see more adverse personal effects occurring. As the problem of oil being a scarce resource becomes present, free market sources will look towards a substitute for oil. This may well see the demand for oil decreasing in the long term. Once again this will lead to OPEC losing itscompetitiveness as a cartel.