OPEC Pricing Power: The Need for a New Perspective

Since the 1973 oil price shock, the history and behaviour of the Organization of Petroleum Exporting Countries (OPEC) have received considerable attention both inthe academic literature and in the media.1 Many conflicting theoretical and empirical interpretations about the nature of OPEC and its influence on world oil markets have been proposed. The debate is not centred on whether OPEC restricts output, but the reasons behind these restrictions. Some studies emphasize that production decisions are made with reference to budgetary needs which in turn depend on the absorptive capacity of the domestic economies (Teece, 1982). Others explain production cuts in the 1970s in terms of the transfer of property rights from international oil companies to governments which tend to have lower discount rates (Johany, 1980; Mead, 1979).  Others explain output restrictions in terms of coordinated actions of OPEC members.  Within the literature, OPEC behaviour ranges from classic textbook cartel to twoblock cartel (Hnyilicza and Pindyck, 1976), to clumsy cartel (Adelman, 1980), to dominant firm (Salant, 1976; Mabro, 1991), to loosely co-operating oligopoly, to residual firm monopolist (Adelman, 1982) and most recently to bureaucratic cartel (Smith, 2005). Others have suggested that OPEC oscillates between various positions
but always acts as a vacillating federation of producers (see for instance Adelman, 1982; Smith, 2005). The existing empirical evidence has not helped narrow these different views. Griffin’s (1985) observation in the mid-1980s that the empirical studies tend to “reach onto the shelf of economic models to select one, to validate its choice by pointing to selected events not inconsistent with model’s prediction” still dominates the empirical approach to studying OPEC behaviour and its pricing power.

By: Bassam Fattouh

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