Imperfect Cartelization in OPEC

Abstract

A model of global oil production is applied to study cartelization by OPEC countries. Writing out the shadow price on quota allocations so as to draw correspondence to coefficients of cooperation (Cyert et al. 1973), we examine the incentives that different OPEC members to collude. We find that heterogeneity in OPEC and the supplies of the non-OPEC fringe create strong incentives against OPEC cooperation. OPEC's optimal supply strategy although observed to be substantially more restrictive than that of a Cournot-Nash oligopoly, is found to still be more accommodative than that of a perfect cartel. The strategy involves allocating larger than proportionate quotas to smaller and relatively costlier producers as if to bribe their participation in the cartel. This is contrary to predictions of the standard cartel model that such producers should be allocated relatively more stringent quotas.Furthermore, we find that cartel collusion is likely to be sustained for elastic than inelastic demand. Since global oil demand is well known to be inelastic, this observation provides another structural explanation for why OPEC behavior is inconsistent with that of a perfect cartel. Our study points to multiple headwinds that limit OPECs ability to raise long-run global oil prices.

Did OPEC change its behaviour after the November 2014 meeting?

“…Smith ( 2005) argues for a model of the OPEC countries as a "bureaucratic production syndicate" and finds strong evidence of collusion, but with significant transaction costs regarding redistribution of output among members of the cartel. By contrast, Spilimbergo (2001) finds no support for the hypothesis that OPEC is a market sharing cartel and Okullo and Reynès (2016) show that heterogeneity within OPEC and non-OPEC supply create strong incentives against collusion.…”

OPEC, unconventional oil and climate change - On the importance of the order of extraction

“…2 While we follow a large strand of the literature and consider that OPEC acts as a cohesive cartel (see Withagen (2013) for a survey), there is recent empirical evidence for imperfect cartelization of OPEC (cf. Almoguera et al, 2011;Brémond et al, 2012;Kisswani, 2016;Okullo and Reynès, 2016). We have also examined the case where the cartel consists of subgroups that act as Cournot oligopolists (see Benchekroun et al (2019) for the characterization of the equilibrium).…”

OPEC, Shale Oil, and Global Warming - On the Importance of the Order of Extraction

“…2 While we follow a large strand of the literature and consider that OPEC acts as a cohesive cartel (see Withagen (2013) for a survey), there is recent empirical evidence for imperfect cartelization of OPEC (cf. Almoguera et al, 2011;Brémond et al, 2012;Kisswani, 2016;Okullo and Reynès, 2016). Following the suggestion of Brémond et al (2012) we have also examined the case where OPEC consists of two subgroups acting as Cournot duopolists.…”