In order for a cartel such as the OPEC, to survive on the global oil market it has to create efficient barriers to entry that limits the number of firms (countries) and helps it detect and punish cheating. The fewer the member countries in a market, the more likely it is that other countries will know if a given member violates the cartel agreement. In this case particularly, OPEC’s ability to hold the price of oil above the competitive level is dependent upon such barriers to entry, which hinge upon the cartels dominant ownership and control of low-cost oil reserves.
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, the trust’s coordinated efforts to manipulate the price of oil are protected from anti-trust enforcement and legal intervention by the sovereign rights of its member countries. So, as to vividly depict the struggle to survive of such an important cartel as the OPEC, I have chosen three articles from the magazine “The Economist”, which focus both on how this trust gradually came to dominate the world oil market, but also on whether it can still survive, taking into consideration the fact that many non-OPEC countries with the most promising terrain for exploration have begun to develop a nationalist streak.

The first article takes us back in time and tries to analyze OPEC’s rise to power, from a historical perspective. During the first stage of its development, until the 1970s, the cartels primary objective was to win for its members a larger share of the oil profits that private companies generated within their territory. During this phase, there was no direct attempt by OPEC to raise the overall level of world oil prices. In those early years, OPEC was concerned with winning for itself a bigger share of the pie, rather than growing the size of the pie. From then on, the organization saw greater reliance on collective deliberations and coordinated actions designed to reverse a long period of decline in world oil prices that had set in after World War II, and the cartel started to hold the globe to ransom, pushing oil prices past $100 per barrel (in today’s money) and tipping the world economy into recession. Again the market panicked, and again the OPEC members were taught something about the value of their oil, mainly because rich nations began making more efficient use of the oil they bought, and demand for OPEC’s crude started growing far more slowly than the cartel had expected. As a result, the OPEC state-owned cartel was inevitably left with a lot of excess capacity.

To deal with the growing surplus of oil in the marketplace, OPEC adopted a formal system of production allocations that imposed, for the first time, individual ceilings on the output of each member. During this period of crisis, the members met regularly to review market conditions and adjust members’ quotas so as to support or “defend” the market price within a desired range. To my surprise, this stage of crisis is the only time this particular organization behaves and most resembles the definition of the cartel found in the textbook, at least from an outward point of view.

All the three articles underline the dominant figure of this trust on the oil global market. However, we can also see that behind this apparent iron fist, the power seems to diminish, mainly because the members lack timely and accurate information about changes in the level of demand for oil and the availability of non-OPEC supplies. For example, nobody anticipated the surge in Asian demand that triggered the sudden tightening of oil markets in 2005. Due to the amount of oil pumped each year, many energy analysts fear that the market is reaching its apogee and will soon be in a rapid decline. OPEC’s forecasting problem is compounded by the fact that several years may be missing, due to rigidities in both supply and demand, before the full impact of a price change can be observed, so if a mistake is made, it may go undetected for several years and then take several years more to rectify.

In my opinion, even if perfect information regarding the future market conditions were available, I do not believe that the interests of individual OPEC members could be easily aligned around a single “correct” price or production target. In part, this is due to the fact that OPEC has limited means by which to redistribute the revenue among its member countries. As a result, any given set of quotas determines not only the overall profit of the cartel, but also the individual earnings of each member. I strongly believe that, if the members were more homogeneous demographically and economically, the problem of misaligned interests would be less severe.
Unfortunately, as every journalist unwillingly admitted, the actions undertaken by the cartel are less predictable than the hurricane season or the politics of the Middle East.

Although, OPEC has in time become a major player in setting global oil prices, I dare to say that, its influence does not extend only to this economic playground. From my perspective, this international trust, plays a very important role in creating geopolitical tensions. A large portion of OPEC’s apparent historical impact on the price of oil has come about not as the result of deliberate plans crafted by a purposeful cartel, but as the by-product of clashing national agendas that encompass far more than the petroleum sector. During the past thirty-five years, most of the idle capacity held by OPEC members has been involuntary—taken out of production due to military conflict. Much of the hard work that any cartel has to do—commanding the determination and discipline to restrict output—has in OPEC’s case been provided fortuitously. For that reason, the ultimate strength and cohesion of OPEC has perhaps not yet been tested. The value of crude oil produced and sold on the world market exceeds $1 billion each day.

Even a relatively small impact on the unit price of oil represents an enormous transfer of wealth between consumers and producers. Moreover, the disruptive impact of sudden price “shocks” and heightened volatility threatens the goal of sustained and steady global economic growth. As consumers, investors, and government officials continue to wrestle with these problems, the range of influence of the OPEC is becoming ever more visible.

In conclusion, every article and piece of information I came upon in my need to clearly understand the concept and behavior of a cartel such as the OPEC, has helped me realize that on the global level, its survival and continuos development would not have been possible on a different type of market. In itself, the market structure breathe life into this organization, and although there had been some wobbles in the world’s economy, the OPEC managed to reinforce its position every time. I adopted this opinion after reading the endings of each article, and feeling the hopelessness and pessimism in the tone of the written paragraphs. This showed me that, although throughout the article the journalists may have tried to discover new rays of light on the oil market, and tried to emphasize the historical periods when the organization held an insecure position, they all had to admit in the end that no matter what happened, due to the eternally unquenched thirst of petroleum consumers market, for the time being, at least, the cartel manages to survive against all odds.