Essay about Monopoly of Petroleum: OPEC

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Monopoly of Petroleum: OPEC
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A monopoly is evident where a firm is the sole seller of its product and if its product does not have close substitutes, as discussed in (Gans J., King S. Mankiw A. 2003). This essay will discuss the monopoly of petroleum by The Organization Of Petroleum Exporting Countries (OPEC), particularly how it controls the price of petrol, threats to its monopoly and the social costs involved.

OPEC was established in the 1960's and ever since, Saudi Arabia gained a reputation of being the major power of the organization. Saudi Arabia has the biggest oil reserves in the world and production costs lower than any country. (economist.com 2003)This means that it is a natural monopoly and
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(Gans, J. King, S., Mankiw, N., 2003)

Figure 2

Price A Monopolist's demand curve

Demand

Quantity of Output

To further strengthen this fact, we can observe the price plunge in the 1990's. OPEC's leader Mr. Ali Naimi collaborated with another OPEC member's leader, Mr. Hugo Chavez of Venezuela to impose a clever tactic to cut production. As in figure 2, the price for a barrel of oil rose from $10 in 1998 to nearly $30 in 1999.(economist.com 2003)

The downward sloping demand curve also tells us how OPEC gains its revenue. OPEC's marginal revenue, which is the amount of revenue it receives for each additional unit of output or the change of its total revenue divided by the change of quantity, will always be less than price due to the downward sloping demand curve. To increase the quantity sold, they must lower the price. In a recent OPEC meeting, inline with the Iraqi war, OPEC flooded the market with oil which now threatens a price collapse. .(economist.com 2003) Marginal revenue can be negative when the effect of a price reduction on quantity causes total revenue to decrease, as illustrated in figure 3. (Gans, J. King, S., Mankiw, N., 2003)

Figure 3.

Demand and
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