The market power of OPEC 1973–2001

Abstract

We apply a multi-equation dynamic econometric model on monthly data to test if the behaviour of OPEC as a whole or different sub-groups of the cartel is consistent with the characteristics of dominant producers on the world crude oil market in the period 1973-2001. Our results indicate that the producers outside OPEC can be described as competitive producers, taking the oil price as given and maximizing profits. The OPEC members do not fit the behaviour of price-taking producers. Our findings of low residual demand price elasticities for OPEC underpin the potential market power of the producer group, and are in line with the results in some recent energy studies. On the other hand, our findings indicate that neither OPEC nor different sub-groups of the cartel can be characterized as a dominant producer in the period 1973-1994. However, we find that the characteristics of a dominant producer to some extent fit OPEC-Core as from 1994. Thus, although OPEC clearly has affected the market price, the producer group has not behaved as a pure profit-maximizing dominant producer.

Unilateral Climate Policy: Can OPEC Resolve the Leakage Problem?

“…The latter is reflected by the dominant producer hypothesis, where the dominant producer -in our case OPECmaximizes profits, taking into account price responses both on the demand side and among other producers (Smith, 2005;Hansen and Lindholt, 2008). …”

“…However, these studies are based on the assumption of competitive international oil markets, disregarding empirical evidence on non-competitive behaviour of OPEC (see e.g. Griffin, 1985;Alhajji and Huettner, 2000a,b;Smith, 2005;Hansen and Lindholt, 2008).…”

OPEC's Market Power: An Empirical Dominant Firm Model for the Oil Market

“…World production of crude oil plus the change in the OECD inventory of crude oil is used as a measure for total consumption of (demand for) crude oil. 1 Our data on OPEC's production costs combine annual data (for the period, 1986-2000) in Hansen and Lindholt (2008) and quarterly data (for the period, 2001-2016) from IHS CERA. Both series cover costs of exploration, development and production.…”

“…However, the residual demand function, as well as a first-order condition for OPEC, are not part of the empirical model. Alhajji and Huettner (2000) and Hansen and Lindholt (2008) also refer to the dominant firm model, but, again, OPEC's price-setting rule is not part of the empirical model in these papers. To the best of our knowledge, the present paper is the first to estimate the simultaneous dominant firm model for the oil market.…”

Fuel Efficiency Improvements: Feedback Mechanisms and Distributional Effects in the Oil Market

“…Smith, 2005;Hansen and Lindholt, 2008;Kaufmann et al,2008;Al-Qahtani et al, 2008;Huppmann and Holz, 2009;Huntington et al, 2013). We present a model where we assume Cournot behavior, which means that a core of countries within OPEC takes Non-OPEC's and non-Core OPEC's extraction path as given, but maximizes joint profits taking into account the price responsiveness on the demand side.…”