Has OPEC been a Successful Cartel?

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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
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Political events in the Middle East saw Iraq invade Kuwait, as a result oil sanctions were applied to the output of both countries by oil consuming countries. Other oil producing countries feared of a major shortage in supply as prices rose from $18 to $40 a barrel; as a result other non-OPEC countries reacted by increasing production in oil. Prices fell back as overall supply returned to normal. Since the successful counter by the US to retake Kuwait, the price of oil has seen a steady drift downwards in price. This has also led to OPEC losing out due to more countries increasing production in oil; causing an increase in competition.

Restricting competition is not necessarily easy. There are three potential problems that OPEC has to overcome due to it being a cartel. These are explained below:

An agreement has to be reached

The larger the number of firms, the greater the possibility that at least one key firm participant will refuse to collude. In the case of OPEC, this may well be difficult due to political disagreement that has regularly occurred during OPEC 's history.

Cheating has to be prevented

Once an agreement is made and profitability in the industry is raised, it would pay an individual firm to cheat so long as no other firms do the same. In the case of OPEC, with the increase in non-OPEC supply has led to strains among OPEC members. This has led to an increased incentive to cheat(mentioned further on in the essay).

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