Essay on Understanding OPEC: An Economic Analysis

1353 Words6 Pages
Understanding OPEC: An Economic Analysis In the last few months, much has been said of Iraq’s invasion of Kuwait in 1990. Interestingly enough, one of Iraq’s motivating factors was economics. Kuwait provided Iraq with a pretext for war as it violated the economic policies of the Organization of Oil-Exporting Countries by exporting oil above its quotas. This is but one chapter in the complicated history of OPEC. OPEC is an international assembly of nations which co-ordinates and unifies the petroleum policies of eleven countries and has enjoyed the highs and weathered the lows of oil prices in the last few decades. To solve their problems, both member countries and oil-importing countries must address the complex nature of oil price…show more content…
Furthermore, a 1999 study reveals that OPEC countries commands reserves of 8111,526 million barrels of crude oil, representing 77.8% per cent of the world total of 1,042,536 millions barrels of crude oil” (FAQ 8). While this block of countries does not qualify as a clear-cut monopoly, it exerts tremendous influence on world supply and prices. OPEC has little concern for maximizing consumer surplus at the point where marginal cost intersects marginal revenue. Instead, it prefers to maximize profits. It constitutes one of two main players in a duopoly (when non-OPEC countries are considered a bloc). In 1973, OPEC drastically cut oil supply and saw the price of one barrel of oil skyrocketed to ninety dollars per barrel. The OPEC member countries amassed massive profits which reinvigorated stagnant economies. Slowly, however, the price of oil dropped, reaching a low of ten dollars in 1998. Short and long-term elasticity explain this movement of oil prices. The decrease in supply of oil in 1973 and the ensuing price increase illustrates the short-term inelasticity of oil demand. Elasticity measures buyers’ and sellers’ response to market condition. A highly inelastic product does not see demand drop as prices increase. Conversely, a highly elastic product sees demand drop significantly as price increases. In the short run, oil proves to be almost perfectly inelastic. This good is a necessity for all oil-based economies such as that of the United States with
Open Document