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Oil Cartels


did I choose this topic?

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The primary reason I selected this topic is because it interests me
to know more and more about oil exporting countries in the world. Since this
topic interests me, I thought researching issues related to oil cartels would
be stimulating. Specifically, I wanted to learn about how oil cartels like OPEC
which is the largest oil cartel in the world is operating, and what steps are
being taken to control oil production.

I thought it is quite easy to gather information about oil cartels
and there is many websites government and non-government websites which we can
find the related data to this topic.



Origin & nature

A cartel is an organization created from a formal agreement between
a group of producers of a good or service to regulate supply in an effort to
regulate or manipulate prices. In other words, a cartel is a collection of
otherwise independent businesses or countries that act together as if they were
a single producer and thus are able to fix prices for the goods they produce
and the services they render without competition.

The term cartel, can be defined as “a group of parties,
factions, or nations united in a common cause; a bloc” as well as “a
combination of independent business organizations formed to regulate
production, pricing, and marketing of goods by the members.” History shows
many examples of successful and not so successful cartels – they have been
around for hundreds of years. The steel industry and diamond industries are
some examples. However, one of the most powerful modern cartels is the
Organization of the Petroleum Exporting Countries more commonly referred to as

Literature Review

interest in oil market modeling grew rapidly right after the Arab embargo and
the quadrupling of the oil price in 1973. Stephen Powel (1990) mentions that by
the late seventies there were more than thirty publicly available oil market
models. Since then the oil market modeling efforts have slowed down
significantly. In this part of the review, we briefly present the more popular
oil market models that were mentioned in surveys and studies conducted to date
and then elaborate more on the optimization models as they are more related to
our proposed model.

1990, Stephen Powel noted that most existing oil market models are either
inter-temporal optimization or behavioral simulation and listed three models as
inter-temporal optimization models including ETAMACRO (Manne, 1981), Salant
(1981) known as Salant-ICF, and Marshalla and Nesbitt (1981) known as DFI-CEC.
Eight years later, Baldwin and Prosser (1998) conducted a similar survey and
followed the same classification as that of Powel (1990) and believed that most
of the oil market models belong to either recursive simulation models or
inter-temporal optimization models.

1998, Mabro surveyed and criticized the literature on OPEC behavior for the
period 1960-1998 and grouped it into six categories including: history,
previous literature surveys, economic modeling, political economy, policy
proposals, and trade journals reporting. More surveys but rather shorter ones
are included as part of the literature reviews in studies conducted by Moran
(1982), Griffin (1985), Dahl and Yucel (1991), Al-Yousef (1998), Alhajji and
Huettner (2000 a, b and c), Ramcharran (2001 and 2002), Smith (2005) and
Kaufmann et al (2006).

(1984), Griffin and Teece (1982), Griffin (1985), Bockem (2004), and Smith
(2005) where Gatley noted “it remains an open question how best to design a
model of the behavior of OPEC”. Twenty years later, Bockem still noted, “there
exists neither an accepted theoretical model, nor an econometric model of this
market. Moreover, there is a surprising dispute between economic theorists and
energy economists whether OPEC can be regarded as a cartel or not.” Similarly,
Smith concluded that contributions “remain largely inconclusive regarding the
behavior and impact of OPEC, despite the best efforts of those authors.”

2005, Smith briefly surveyed and criticized the literature on OPEC behavior and
applied an econometric production-based approach to examine alternative
hypothesis regarding the world oil market. He conducted two analyses: price
analysis (assuming that market price greater than marginal cost indicates
market power) and production decision analysis (testing responses to exogenous
shocks for evidence of interdependence among firms). In the former case, the
null hypothesis of perfect competition (price equals marginal cost) was tested
against the alternative of a perfect cartel. In the latter case, the study
tested four null hypotheses relating to OPEC and Saudi Arabia competitiveness.

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