Question

Explain how OPEC and non-OPEC countries share the world oil production. How would you derive OPEC’s demand function under the circumstances? Under what conditions there could be incentives to cheat for an OPEC member country?

Answer 1

The Organization of Petroleum Exporting Countries (also termed to be OPEC) are categorised to be an example of cartel as a type of oligopoly. In OPEC, the governments in agrees on the coordination with petroleum organisations (both state as well as the private owned) for the manipulation of the world's oil production and its price. In the long run the cartels are likely to be unstable due to the inherently instability of cooperative agreements among the members of cartel. The forces of demand and supply would affect the OPEC’s demand function although the announcements by OPEC may temporarily impact the oil's price by altering expectations. Thus the cartel will produce a quantity where marginal revenue (MR) is equal to marginal cost (MC). The incentives to cheat for an OPEC member country when the firm's demand curve will be more elastic compared to the cartel’s demand curve