Essay on The Impact of OPEC on the World Economy

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The Impact of OPEC on the World Economy

The Organization of Petroleum exporting countries, better known as OPEC, is one of the most recognized cartels in the world. Yet, how many of those who can recognize the name really understand the cartel. I would venture to guess not many and even fewer know about the economic impact it has upon the world. To really get a feel for OPEC one has to delve deep into the heart of the cartel. This can be accomplished by looking at the economic definition of a cartel, the history of OPEC, OPEC today, OPEC and international trade, and the political questions that surround the cartel.

The Economics of a Cartel

Cartels in essence are simple devices. Basically, a group of suppliers band together
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• The product must be homogenous across all members. OPEC meets this with the two and only two types of oil that they sell (low and high-sulfur crude oil). This is important, LeClair says, because inhomogeneous products translate into complex pricing structures that lead to internal conflict.

• No direct supplement products exist. This is so that there will still be a demand for your product even if you raise prices. Oil is still the foremost energy supply and is used throughout the world. There is no direct supplement for oil, yet.

• There has to be a limited number of producers to make the quota system run easier. Quotas are needed to control the price and the bigger the cartel becomes the harder it is to figure out, employ, and regulate such a system. OPEC has limited itself to 11 countries.

• Barriers to entry must exist in the market. This is important because cartels can’t regulate prices if newer cheaper competitors enter the market constantly. Oil is a natural resource and thus there are natural barriers to entry.

• The cartel must be able to control prices by cutting back in overproduction and producing in underproduction. This is mostly accomplished by stockpiling and thus excludes perishable producers from the world of cartels. OPEC can choose to store their oil in barrels or leave it in the ground.

Cartels are notoriously hard to