Question

2. Problems and Applications Q2

The New York Times (Nov. 30, 1993) reported that "the inability of OPEC to agree last week to cut production has sent the oil market into turmoil...[leading to] the lowest price for domestic crude oil since June 1990."

Statements                                                                True False

The members of OPEC were trying to agree to cut production so they could save more oil for the future.

OPEC was unable to agree on cutting production because each country has an incentive to cheat on any agreement.

 

The newspaper also noted OPEC's view "that producing nations outside the organization, like Norway and Britain, should do their share and cut production."

 

What does the phrase "do their share" suggest about OPEC's desired relationship with Norway and Britain?

• OPEC would like Norway and Britain to act competitively.

• OPEC would like Norway and Britain to join the cartel

• OPEC would like Norway and Britain to keep their production levels high.

Answer 1

The members of OPEC were trying to agree to cut production so that they can have better control over the price, and by cutting the production, they wanted to raise the price of the oil. Thus, to keep the market price high in the market of high demand, OPEC was trying to cut production.

Thus, the statement that the members of OPEC were trying to cut production so they could save more oil for the future is false as it was to raise the price.

OPEC could not agree on cutting production because each country has an incentive to cheat on any agreement. There is always an incentive to lower the price and increase production to increase profitability.

Hence, the statement is true.

Norway and Britain did not form the part of OPEC, and their sole motive was to increase revenue and profit. Most OPEC members felt it was unfair and would want a collective decision to be taken, which requires a merger.

Thus, OPEC would want Norway and Britain to join Cartel.