OPEC, the Seven Sisters, and Oil Market Dominance: An Evolutionary Game Theory and Agent-Based Modeling Approach

ArticleinJournal of Economic Behavior & Organization · July 2016with33 Reads
DOI: 10.1016/j.jebo.2016.06.011
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  • [Show abstract] [Hide abstract] ABSTRACT: This paper extends the framework of Green and Porter (1984) and Porter (1983a) to nest the case of a cartel (OPEC) faced by a competitive fringe (non-OPEC oil producers). Estimation of a simultaneous equation switching regression model allows us to examine which market structure better characterizes the world oil market during the 1974-2004 period and to test whether switches between collusive and noncooperative behavior occurred. The null hypothesis that no switch occurred is rejected in favor of the alternative that both cooperative and non-cooperative behavior was observed. We find that, although there were periods in which oil prices were measurably higher due to collusion among OPEC members, overall OPEC has not been effective in systematically raising prices above Cournot competition levels. Our results suggest that, on average over the period of study, OPEC's behavior is best described as Cournot competition in the face of a competitive fringe constituted by non-OPEC producers. JEL Classification: D4, L11.
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  • [Show abstract] [Hide abstract] ABSTRACT: The economic literature provides specific characteristics for cartels. Although the theory of international cartels is not well developed in the literature, and every cartel is unique, some of these characteristics exist in each cartel. This study investigates the existence of these characteristics in six known commodity cartels including OPEC. In addition, it compares the oil companies’ cartel, `the Seven Sisters', to OPEC, and summarizes the findings of OPEC econometric models developed in the literature in the last 25 years and concludes that the results do not support cartel or competitive models for OPEC. Although other cartels are more successful than OPEC, many books and articles in economics use OPEC as a cartel example. Neither statistical tests nor theory support the popular use of OPEC as a cartel example. Indeed, this article concludes that OPEC is composed of Saudi Arabia, the dominant world producer, plus several distinct sub-groups and that separate models are required to explain the behavior of each. Assigning the power of some OPEC members to OPEC has caused confusion about its behavior. Recent OPEC success is attributed to political, natural, and technical capacity limitations in the oil fields that prevented countries from cheating on their quota. In other words, OPEC adherence to the quota, except for Saudi Arabia, is anything but voluntary.
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