Question:

0PEC, which stands for the Organization of Petroleum Exporting Countries, is often described in the media as a cartel with arbitrary power over the price of oil.

Is OPEC really a cartel that controls the price of oil?

Answer:

A cartel, by definition, has one indispensable characteristic: it must be able to restrict the supply of the commodity reaching the marketplace. OPEC, by its own charter, cannot interfere in the decisions of its 11 members sovereign members--- Saudi Arabia, Kuwait, Algeria, Iraq, Libya. Qatar, U.A.E., Iran, Venezuela, Nigeria and Indonesia. To be sure, the members themselves, who produce about 38 percent of the world' oil, can cut back the portion of oil that they supply. But, if they give up their share of the market, countries not in OPEC, such as Russia, Norway, Britain, Mexico, Angola, Malaysia, Peru, Brazil, China and Columbia, which produce over 60 percent of the world's oil (and refine over 90 percent of it) can increase their own production to compensate for the cutback. So can those OPEC countries which did not go along with the cutback. Because oil prices, like that of other commodities are set on the margin-- ie. the last sale sets the price-- OPEC has been unsuccessful during most of its 40 year history in controlling oil prices. Consider its history. For its first thirteen years-- 1960-1970, it had no effect on the posted price of crude, which was only $2.80 a barrel in 1973, even with Iran and Libya nationalizing part of their oil fields, It was war that increased the price of crude. First, in October 1973, Egypt invaded the Sinai, causing an oil-buying frenzy in Europe and Japan, which doubled the posted price to,$5.60 a barrel. Then Saudi Arabia, on its own, announced it was cutting back oil its oil production and embargoing shipments of oil to the United States. This resulted in a further panic that pushed prices to over $20 a barrel. Another such spike occurred when two OPEC countries, Iran and Iraq, went to war with each other. When that wars ended in the early 1980s, the price of oil plunged, and continued to fall for nearly 20 years. OPEC members are, and will always be, competitors, not allies. While they may try to hide their fighting from outsiders by means of unenforceable paper agreements, it will persist until it is resolved the old fashioned way: price wars or real wars.