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Has Opec Been A Successful Cartel?

1518 words - 6 pages

A cartel is an organisation of producers grouped together for their own benefit. The most well known cartel in existence today is OPEC, Organisation of Petroleum Exporting Countries. Its members are some (but not all) of the most important oil producing countries including Saudi Arabia and Mexico. Most cartels try to raise prices at the expense of consumers.The aim of this essay is to determine whether OPEC has been a successful cartel, this will mean I have to examine the strengths and weaknesses of OPEC which have been present throughout their existence of supplying oil. This should allow me to make an appropriate judgement on whether OPEC has been a successful Cartel.The history of oil prices can give me important information on how well OPEC has managed to control prices:Year Crude oil prices, $ per barrel1970 31975 131980 351985 271990 172000 14The brief history of oil prices show that oil was cheap in the 1950s and 60s. This was due to supply growing faster than demand. The early 1970's saw a reversal of this trend, as demand increased faster than supply. This was mainly due to the world economy booming.Source: adapted from BP statistical reviewIn November 1973, politics in the Middle East was to have a great effect on oil prices. With an existing tight market, the result was am explosion in the price of oil.The war was soon over but its economic downturn effect was not lost 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 each member could produce. By slightly cutting back on pre-1973 production levels, they were able to increase the average price of oil to around $13 (as shown in the table above).Price S2 As this demand and supply diagramS1 shows, as Supply decreases from S1 toS2, Price increases 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 graph also shows that Quantity demanded for oil would also decrease. This would mean OPEC may well not be better of in terms of revenue as price increases and quantity demanded decreases (Price * Quantity =Revenue). However there was a fundamental reason why OPEC could successfully pioneer this massive price rise, this was mainly due to the fact that the demand for oil was inelastic in the short run.Price inelasticity assumes that demand is not heavily affected by a change in price. The reason behind oil being an inelastic product was due to the fact that oil consumers had invested heavily in capital 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 increasing prices; hence higher profits. This could be considered a strength of OPEC as a cartel.price S2S1 As this demand & supply diagram shows,D as S1 decreases to S2 Price increasesP2 from P1 to P2. This time...

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