Oil as a cartel commodity - an analysis of its politics and economics

Abstract

The Organization of the Petroleum Exporting Countries (OPEC) is an international cartel of oil-producing nations that has controlled the major share of oil production and reserves during the past thirty-five years. OPEC was founded in 1960 by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela, a group of major oil producing nations with a focus on coordinating their national petroleum policies and forging a more united front in dealings with the multinational oil companies who were licensed to produce and export petroleum from their countries. Eight additional members (Algeria, Ecuador, Gabon, Indonesia, Libya, Nigeria, Qatar, and the United Arab Emirates) joined in, which brought the total membership of OPEC to 13 by 1973. At that time, the combined membership of OPEC accounted for over half of worldwide crude oil production. Two small producers (Gabon and Ecuador) withdrew during the 1990s, and in 2007 Angola joined OPEC, bringing current membership to 12 nations. 75% of the world‘s proved reserves of crude oil are located in OPEC nations. Proven reserves constitute that portion of the ultimate resource base that has already been discovered and is commercially producible. Additional reserves can and will be developed through exploration, discovery, and development of new fields, but this process has become increasingly difficult and expensive- especially outside OPEC nations than within. OPEC‘s ability to hold the price of oil above the competitive level is dependent upon barriers to entry, which in this case hinge upon OPEC‘s dominant ownership and control of low-cost oil reserves. Thus, while production of crude oil from non-OPEC sources does expand in response to the higher prices that result when cartel members restrict output, the scope for this is limited and will remain so. Moreover, OPEC‘s coordinated efforts to manipulate the price of oil are protected from anti-trust enforcement and legal intervention by the sovereign rights of its members.