AbstractThis essay paper basically will discuss how a cartel comes to existence, and how it influnce the markets. This discussion has been applied to the oil market and OPEC. A short history for OPEC and a short literature review on OPEC is given in the paper. The main idea is “if the OPEC's decisions are influencing the market price, then we can claim that OPEC is a cartel”. Consequently, we see that there is not study showing that the OPEC's decisions are influencing the market price for all years. Also considering that every country tries to be strong in the international market, thus the oil exporting countries are doing so. Consequently, there is no certain proof for a cartel in the oil market.
IntroductionOPEC is the union of petrol producing countries, founded in 1960, and it has 12 member countries in 2013. Before the foundation of OPEC, multinational petroleum companies were controlling the petrol market in the world (OPEC, 2013). As we know, less developed countries, in general, fails to develop themselves by using their natural resources, even they have very important and valuable natural resources. The reason behind this situation is that multinational companies takes the advantageous of poor countries' natural resources away from them to make more profits. The literature of economic development indicates us that a country selling its natural resources as raw material to the developed countries will have always a disadvantage in the international trade. Considering this, OPEC is an international institution protecting the petrol producers' economic rights on the petroleum they produce for their sake.
OPEC can control the price of the petrol and its side products at international level and that sounds like a cartel. Deciding whether is a cartel or not is not an easy task. It is necessary to define what cartel is and what cartel criterion is to be used to evaluate a union to make a decision on OPEC.
In this paper, basically, I will try to define what cartel is and what criterion can be used to determine a union is cartel or not. By using this criterion, I will evaluate OPEC and try to decide whether OPEC is a cartel or not.
This paper includes literature review, analysis and conclusion sections after introduction. In the second section, literature review, a short review of previous papers on OPEC is to be given. Also I will discuss cartel in this section. Analysis section provides you the evaluation of OPEC with the criterion for cartel I determine in the second section. The last sectin will give a conclusion on the subject.
Literature Review
Is it possible to claim that the oil market is not cartel? Researchers should be careful about differentiating cartel from non-competitive markets. A cartel causes a non-competitive market, however, it does not necessarily mean that all the non-competitive markets are because of cartels. The oil market is a non-competitive market, however, we need to figure out if it is because of a cartel. To understand this, we need to control the decisions taken by OPEC and their influences on the market (Loderer, 1985).
Many economists support the idea of “OPEC is a cartel” (Adelman, 1995; Jahangir, 2002). Their claim depends on basic definition of a cartel's characteristics: 1) Large and infrequent purchases, 2) Homogenous goods, 3) Less number of producers, 4) Barriers to entry, and 5) Divided market structure (Harrington, 2005). Testing these characteristics for the oil market indicates a cartel structure in the oil market according to many economists. There is one important characteristic among five: it is “Barriers to entry”. As we know, not many producers in the oil market, however, that is not because the producers create a barrier for the new entrants to the market, it is because the natural resource allocation which is not determined by humankind. Although all other characteristics hold for the oil market, no one can claim that barrier to entry is created by the OPEC countries. The OPEC countries try to protect their gains from their natural resources, however, it is not possible to say they are 100% guilty for the oil price increases (Plaut, 1981).
Analysis
Loderer (1985) creates a process to test a null hypothesis claiming that the OPEC countries' decisions has no influence on the market prices. In his study, he takes a term from 1974 to 1983 and he gives all the decisions taken by OPEC and its influence on the market price. At the beginning of the term, the OPEC countries have tried to make an agreement to decide the price together, however, we observe that the OPEC countries have not had an obvious consensus on the price. We see for certain years, while Saudi Arabia were increasing the price, the other countries have frozen their prices, or we observe that some countries have cheated others by producing and exporting overquota oil, or the OPEC countries could not make a decision together to determine the price. Although the OPEC has not been a successful organization for this term, we see that the oil price has risen continously.
The most important decision made by the OPEC countries has been to limit the quantity of oil production, even though some countries have cheated other for some certain years. That has been an eminent influence on the price. Loderer (1985) cannot find an obvious proof for the influence of the OPEC countries' decisions on the market price for the years of 1974-1980, however, he finds proof for the years of 1981-1983. One might claim that OPEC has influenced the prices by showing the proof for the years of 1981-1983, however, OPEC's existance holds for all the years, then no one claim that OPEC's decisions are the main reason behind the price increase. If it was, then the OPEC's decisions should have been influential for all the years.
After 1983, OPEC has continued taking decisions, however, there is no certain proof showing that the OPEC's decisions are influencing the prices.Especially considering that there are many other political and economic factors affecting the oil prices, no one can claim that OPEC is guilty to create a cartel. For instance, during the global financial crisis, the price of the oil increased, however, that was not because of OPEC, it was a result of logistics and other related costs. Also considering that the oil resources will be finished in next fifty years, an increase in the price of oil should be accepted normal.
Another decision making criterion can be checking other products in the international markets. For example, high-tech products are mostly produced by the developed countries and even though they do not have any union, the prices for these products always increases. For instance, the pharmaceuticals industry requires R&D continously. Only a few countries in this industry are producing most of the products traded in the international markets. Also the statistics shows us that more than 70% percent of the pharmaceuticals are exported by the U.S. Companies. Considering these things, can one claim that there is a cartel in the pharmaceutical industry? We can give many examples similar to the pharmaceutical industry. One might claim that the developed countries are developing technology and therefore they can claim their rights to sell their high tech products at higher prices. If we accept this assumption, we can apply the same assumption to the oil exporting countries. They also, like the developed countries, want to develop their economies and their societies and the most important resource they have is the oil. Therefore how the developed countries are trying to get the power in the international markets, the oil producer countries are trying to do same thing. Comparative to the developed countries, the oil exporting countries are even less successful to create a union. The developed countries, without a union, they can force higher prices to the other countries. Considering how much China exports are disturbing the western countries, the OPEC story has less importance in the international markets.
Conclusion
Although many politicians and many scientists blame the OPEC countries for creating a cartel in the oil market, there is no certain proof for this. For certain years, the OPEC decisions have influenced the price of oil, however, there are many other factors other than the OPEC's decisions influencing the price. The most eminent decision that the OPEC countries have made has been the limiting the quantity of production, however, some OPEC countries have cheated others and produced overquota quantities.
Also we should not forget that each country tries to get the market power for the products they export, thus they can afford their imports. The oil exporting countries aim the same, and they always want to sell the oil at higher prices. However, that cannot be a reason to blame them to create a cartel. Because, the developed countries do more than the oil exporting countries. The example of high-tech products exported by the developed countries prove this idea.
Another striking example can be the competition between the western countries and China. China can produce many products, even some high-tech products, at cheaper prices. This situation disturbs the western countries, and we see that some western countries are blaming China for producing cheaper products, and China blames them for creating non-competitive markets in the world.
Consequently, the international markets are not a fair ground, so claims and blames are mostly for political reasons. All the countries try to be strong and they do whatever necessary for their societies.
References
OPEC. (2013). Mission Statement and History. Retrieved from http://www.opec.org/opec_web/en/17.htm.
Johany, A. D. (1982). OPEC is not a Cartel: A Property Rights Explanation of the Rise in Crude Oil
Prices. Ann Arbor, University Microfilms International.
MacAvoy, P. W. (1982). Crude Oil Prices: As Determined by OPEC and Market Fundamentals.
Cambridge, Ballinger.
Loderer, C. (1985). A Test of the OPEC Cartel Hypothesis: 1974-1983. American Finance Association, Vol.40, No.3, pp.991-1006.
Adelman, M. A. (1995). The Genie Out of the Bottle: World Oil Since 1970. MIT Press, Cambridge: 1995.
Harrington, J. E. (2005). Detecting Cartels. John Hopkins University, Working Papers. Retrieved from http://econ.jhu.edu/wp-content/uploads/pdf/papers/wp526harrington.pdf.
Jahangir, A. (1999). Managing the Oil Wealth: OPEC’s Windfalls and Pitfalls, I.B. Taurus, London.
Plaut, S. E. (1981). OPEC is not a Cartel. Challenge, Vol.24, No.5, pp.18-24.
