Question

Over the past 20 years the 12 members of the Organisation of Petroleum Exporting Countries have made repeated attempts to restrict output in order to maintain high crude oil prices. Between 1990 and 1995, however, crude oil prices dropped by about 20%, due in part to increased production from the former Soviet Union, Latin America, Asia and the North Sea. In light of these increases in oil production from non-OPEC countries, what must OPEC do to maintain the price of oil at its desired level? Do you think this is easy for OPEC to do? Explain that in not less than 500 words.

Answer 1

Organization of the Petroleum Exporting Countries (OPEC) was founded in 1960. There are 14 members in this organization who maintain and influence the prices and output of crude oil in the global market. It is an example of a cartel among member countries due to which it reduces market competition. Initially OPEC had monopoly in the market for providing oil, so they had decided their prices high and restricts output less than the market demand to earn more profits and maintain demand for their oil in the market. But during 1990 & 1995 , the prices of crude oil has dropped by about 20% due to increased production of crude oil from the former Soviet Union, Latin America, Asia and the North Sea. With the increase in production or supply of oil, its prices has been reducing in the international market due to which the market share of OPEC has reduced leading to decline in the profits.

In order to maintain the oil prices in the international market OPEC can take following steps:

•   OPEC can increase its output of oil in the international market it will reduce the price of oil which will be helpful for OPEC to maintain its market share. If OPEC will increase the production of oil more than the non-OPEC countries than it will make oil more cheap commodity in the international market and will reduce the market share of non-OPEC countries which will further decrease the profits for producers. It can lead them to leave the market as no one wants to earn loss. If other countries will exit from the market and OPEC is left in the market than OPEC will reduce its output to maintain its high prices.   
• OPEC can also maintain its oil price in the global market by negotiation with non- OPEC countries. OPEC can make policy with non- OPEC countries to decide the output and price of oil in the international market. It will be helpful in maintaining the price level and market share which will increase the profits of OPEC. If the OPEC and non-OPEC countries will come together to provide oil supply in the international market than they can easily influence the prices of oil as per their benefits. The negotiation will be beneficial for both

No this is not easy for OPEC to maintain it prices as per its own ways because

• If they will try to influence the prices too much for their own profits leaving aside the welfare of nations it will adversely affect the market share of OPEC in the international market.
• To form a negotiation or policy it is important to consider the opinions of non- OPEC countries. It can be possible that non- OPEC countries are not ready to set higher prices to earn more profits. So to form a negotiation OPEC has to convince other countries.
• So we can say that it is not easy for OPEC to maintain its prices at desirable level because of increasing competition in the market.