Does OPEC Cheating on Quotas Matter? When the price od on plunged trom its July
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Does OPEC Cheating on Quotas Matter? When the price od on plunged trom its July 2008 high itable, M517 per barrel OPEC o ministers began a series now that unilateral cheating can be prof try to cheat secretly By takingg on the role of sowing ar any other OPEC nation r tht o and they expes their limat quota. This would ot oil prics in the quota is the hest will likely see a loss of sales as one secretly" cheat and grab mar- 1994) found that of this nttes, Geite and analyst at Sanfond Crire other n in out prices as ket share Once a midst of the worst giobal a small arpount of ch fell below 540 betore the slide s but will cut its Arabia seems to follow a tit for-tat stralegy to punuh menber nations that cheat "U you esceed your persha cheat in a big way" When the level of h Arabia to punish other OPEc nstions by pouring a lang all sharply and painfully for all el producers g substantial sales to cheating nations, history shows begin cheating as welil ce that "OPEC is turning into an s markets that nation wili The nearby table shows the individual quota 200% alter Saudi Oil l new OPEC cuts in for each OPEC nation and the percentage a 1456-2004. These values for cheating by Diboogla and AlGudhea (2007) in per day, ol market traders which each nation, on average, has cheato output of 2.2 million b They me thly production data for and sels the maximum rate for each member nation (i e, a quota) in onder to control, to some degree, the total sured cheating by using n each country and computing for each month the percentage difference betwe OFEC began its production quota system in 1982. their empirical study of OPEC cheating You might think that Saudi Araba's thaoat of tit-for en actual daily would prevent OPtC members troe but, as the data in the table show, global supply ot crude oil and the wonid price of oul. duction and the level of production allowed to quota systent. Acursory look at the table changes in the target price OPEC hopes to achieve and in response to changes in global demand and supply nearly every member of OPEC his been, on ave tions do not view Saudi Arabia's threat as credible, Quotas are adjusted from time to time a cheater. Only Indonesia was not, on ave lit-for-tat dumping of Seudi crude col hburts Saudi or was more profitability during the p the Saudi oil minister might ra hort-term profit loss in order to create longet term onditios. Wile i it is unclear how OPEC leaderslup but the seemingly "cooperative" behavi sets individual quotas, each nation's productive capa- likely caused by high domestic demand for dropped out of OPEC because it had be- it is interesting to note that lran and Venez1zela in OPEC. These statistics, then, seem to support the Dibooglu and AlCudhea applied rather sophisti. t role in allocating quotas relative to l pnaduce and sell more oil than allowed by their come a net importer of crude oil. Accordin C's success as a cartel has always have been historicaily the smallest member nations. OPEC members tat cheater who individual quotas are ia has a telatively high trigger level for cheating At low levels of cheating "quotas Saudi Arabia plays the role of higher levels ot cheating, S strated a willingness to and then hat Saud matter because Saudi Arabia has demon- e as a tit-for-tat cheater tracked its ability to control cheating by its m tention that cheating is widespread in OPEC As we showed you in this chapter, cheating is a pre contentic dlictabie outcome of strategic decision making by cartei members, whether they are managers firms rs of business firms cated econometric methods to investigate whether the v knows that if all seemingly widespread cheating in the table actually total cartel tev undermined OPEC's ability to influence world crude cated quolas don't matter in all of this discuasion of OPEC cheating, you should not lose sight of OPEC's serious lunitations that have nothing to do with its ability to tion and everything to do with the availability o substitutes for OPEC crude oil Even when OPEC nembers cooperate c there remains o0 percent of global oid supply that comes trom non-OPEC exporters Norway, Meuo, and Russi or national oil miristers. Each countr e in oil production and decline in sue had to be addressed: Did Suudi Arabia, the world's ude od, act as an "enforcer of the enue and profit will be higher than if widespread cheat oil prices through is quola system. One important is world price ot oil. However, a situation where all mem largest exporter of cr ber countries comply with their quotas is strategically OPEC quota system by a auses ion unstable because each nation knows that it can gain of cheaters? If so, then widespread cheating by other substantial sales and profit by secretly and unilaterally nations could be offset by Saudi Arabia acting as a iowering its price (i.e, move to a cheating cell B or C in "swing" producer by reducing its own production our examples of prisoner's dilemmas). AJl 12 OPEC level enough to stabilize aggregate OPEC production. with the quota systom,Explanation / Answer
The Organisation of Petroleum Exporting Countries, OPEC, has managed to come to agreement on cuts in production quotas among the various members.The recent surge in crude oil prices necessitates a close examination of the world oil market and the behavior of the players therein. Undoubtedly, OPEC is one such player and one of its principal strategies is the quota share system. The role of OPEC in the world oil market has been examined by both the press and the academic community over the last few year.As above discuss OPEC's ability to affect real prices has diminished (Belton 1998). They point out that the general decline in real oil prices during much of the 1990s coincides with an increase in OPEC,s market share. OPEC's ability to influence real oil prices has diminished and that the relationship between real oil prices and OPEC production can be used to test competing hypotheses about OPEC behavior An econometric analysis indicates that there is a statistically significant relationship among real oil prices, OPEC capacity utilization, OPEC quotas, the degree to which OPEC exceeds these production quotas, and OECD stocks of crude oil. These variables "Granger cause" real oil prices but real oil prices do not "Granger cause" these variables. These results imply that OPEC influences oil prices and that previous models cannot be used to test competing models for OPEC production behavior. The effect of OECD oil stocks on real oil prices indicates that there may be an important externality in private decisions regarding optimal crude oil stocks.
So,we as consumers should and do hate such behavior–it makes us poorer, we have less oil to use and yet must give up more of our incomes to have it. This is why most countries have anti-monopoly and anti-trust laws and enforcement. For the artificial creation of such monopolies is known to be something that harms consumers. In fact, if you try that sort of action inside the European Union you can be fined up to 10% of your global turnover for trying it on. Sadly, OPEC, being a governmental organization, doesn’t get dinged with those same laws. But this still leaves them with the basic economic problem faced by all cartels. A true monopoly has it easier–everyone, all production, is under the same control. A cartel is by definition a number of individual actors who have joined together to achieve their goal. And the problem with such a cartel is that every single member has an incentive to cheat all the other members.OPEC’s problem is that the organization itself doesn’t control enough of the world’s supply to really control the oil price.
Being the world’s largest oil producer, Saudi Arabia’s role within the OPEC has
been discussed extensively in the literature. It is argued that in the beginning of 1980s,
Saudi Arabia acted as a swing producer within OPEC where Saudi Arabian oil output adjusted to stabilize the OPEC production and the target price.Cheating by OPEC members other than Saudi Arabia responds to restore the long run equilibrium.The Granger causality results in the extended model indicate that the real oil price is Granger caused by Saudi Arabian cheating and “other cheating”. Thus there is stronger evidence in the extended model that cheating in the OPEC does have some significant influence on the real oil price, which implies that the quota share system is not effective.This extends the results of Dahl and Yucel (1991), who found that the Saudi
Arabian oil production does not have any relationship with the oil production of other OPEC members. Finally, the symmetry hypothesis is soundly rejected for Saudi Arabian cheating and other cheating in the extended model,hence, cheating exhibits more momentum in one direction than the other.However, Saudi Arabia does seem to respond to a large incidence of cheating by
other OPEC members by responding in kind: this forceful response is in line with a tit-
for-tat strategy when there is “too much” cheating.
(Then you can write the last paragraph of 2nd page starting from -" In all the discussion of OPEC cheating " write upto the mentioned table.)
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