Question

Perhaps the most famous example of oligopolistic collusion is the Organization of Petroleum Exporting Countries (OPEC).   During the 1970s, this cartel, which controlled much of the world supply of oil at the time, was able to control output and significantly raise world oil prices. However, since that time, OPEC has been largely unsuccessful in controlling the supply of oil.

Another factor that has weakened OPEC control is oil discoveries in other countries, induced in part by expected profits due to high prices. How does this increased supply of oil reduce OPEC’s ability to set world oil prices?

Answer 1

The organization of petroleum exporting countries(OPEC) is a trading organization formed in 1960 by major oil producing countries of the world that includes Saudi Arabia, Iran, Iraq, Kuwait and Venezuala. The main purpose of OPEC is to control world oil production and oil prices. Apart from regulating crude oil prices in the world market, OPEC also provides financial aid to member nations. For decades OPEC acted as a cartel to dictate world crude oil prices that also severely affected financial condition of oil importing countries. But now wiith the vast discoveries of new oil reserves in different countries such as new shale oil discoveries in Dakota and Texas of USA, indigenous crude oil production in USA has almost doubled since 2010s, that reduce US dependance on OPEC countries for crude oil imports. Also stiiff disagreement also has surfaced among OPEC members with Saudi Arabia, Iraq and Libya reluctant to slash oil production as proposed by OPEC. This also affected global crude oil prices. Moreover, Shale oil production in USA have tremendously risen to 4 million barrels/day in 2014 from 0.5 milliion barrels/ day in 2007. New cost cutting drilling technologies has also helped USA and many other countries like India to explore new oil reserves that also has reduced dependance on OPEC countries for importing petroleum and gas. Russia, USA, Brazil and Canada are also major oil producing nations out of OPEC group containing vast reserves of shale oil. Outside of USA, Canada is the only non-OPEC country that has been able to substaintially exploit its shale oil reserves. Currently shale oil production contribute to about 10% of total oil production in Canada. Russia, Brazil and China also have vast shale oil reserves but they have so far not been able to exploit potential oil reserves. With increasing shale oil production in USA and Canada, OPEC does not have monopoly in the world crude oil market and it has drastically reduced the world crude oil prices and also role of OPEC in setting crude oil production and crude oil prices.