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The political economy of OPEC

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  • Hochman, Gal
  • Zilberman, David

Abstract

We develop a conceptual model that captures OPEC pricing behavior, and apply it to explain the large gap observed between domestic fuel prices in OPEC countries and prices in the rest of the world. We model OPEC as a cartel of nations, not firms, and assume that politicians use two instruments: production quotas and domestic fuel consumption subsidies. The cartel-of-nations model suggests that introduction of alternatives to petroleum products may lead OPEC to reduce exports and increase domestic fuel consumption. The empirical analysis suggests that when OPEC sets production quotas, it places similar weights on consumer and producer surplus. But when OPEC countries set domestic fuel subsidies, on average 6% more weight is given to consumer surplus with some of the OPEC countries pursuing very aggressive domestic cheap fuel policies.

Suggested Citation

  • Hochman, Gal & Zilberman, David, 2015. "The political economy of OPEC," Energy Economics, Elsevier, vol. 48(C), pages 203-216.
    • Handle: RePEc:eee:eneeco:v:48:y:2015:i:c:p:203-216
    DOI: 10.1016/j.eneco.2015.01.002
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    3. Medel, Carlos A., 2015. "Geopolitical Tensions, OPEC News, and Oil Price: A Granger Causality Analysis," MPRA Paper 65667, University Library of Munich, Germany.
    4. Ansari, Dawud, 2017. "OPEC, Saudi Arabia, and the shale revolution: Insights from equilibrium modelling and oil politics," Energy Policy, Elsevier, vol. 111(C), pages 166-178.
    5. Genc, Talat S., 2017. "OPEC and demand response to crude oil prices," Energy Economics, Elsevier, vol. 66(C), pages 238-246.
    6. Scobie, Michelle, 2017. "Fossil fuel reform in developing states: The case of Trinidad and Tobago, a petroleum producing small Island developing State," Energy Policy, Elsevier, vol. 104(C), pages 265-273.
    7. Heubaum, Harald & Biermann, Frank, 2015. "Integrating global energy and climate governance: The changing role of the International Energy Agency," Energy Policy, Elsevier, vol. 87(C), pages 229-239.

    More about this item

    Keywords

    Big economy; Cartel of firms; Cartel of nations; Cheap oil policies; Crude oil; Domestic fuel subsidies; Export-tax model; Fuel; OPEC; Political economy; Production quotas;

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q37 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Issues in International Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F53 - International Economics - - International Relations, National Security, and International Political Economy - - - International Agreements and Observance; International Organizations
    • F55 - International Economics - - International Relations, National Security, and International Political Economy - - - International Institutional Arrangements

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