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Inscrutable OPEC? Behavioral Tests of the Cartel Hypothesis

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  • James L. Smith

Abstract

Although OPEC is commonly viewed as a syndicate of producers engaged in cooperative efforts to restrict production and raise price, to date there is a surprising dearth of supporting statistical evidence to that effect. I show that standard statistical tests of OPEC behavior have very low power across a wide range of alternative hypotheses regarding market structure. Consequently, it is difficult, given the current availability and precision of data on demand and costs, to distinguish collusive from competitive behavior in the world oil market. I apply a new, production-based approach for examining alternative hypotheses and find strong evidence of cooperative behavior among OPEC members. My results also suggest that OPEC’s formal quota mechanism, introduced in 1982 to replace a system based on posted prices, increased transactions costs within the organization. Statistical evidence is mixed on the question of whether Saudi Arabia and other core producers have played a special role within the cartel. (JEL: D43, L11, L13, Q41)

Suggested Citation

  • James L. Smith, 2005. "Inscrutable OPEC? Behavioral Tests of the Cartel Hypothesis," The Energy Journal, , vol. 26(1), pages 51-82, January.
    • Handle: RePEc:sae:enejou:v:26:y:2005:i:1:p:51-82
    DOI: 10.5547/ISSN0195-6574-EJ-Vol26-No1-3
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    References listed on IDEAS

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    1. Ramcharran, Harri, 2002. "Oil production responses to price changes: an empirical application of the competitive model to OPEC and non-OPEC countries," Energy Economics, Elsevier, vol. 24(2), pages 97-106, March.
    2. Libecap, Gary D., 1989. "The Political Economy of Crude Oil Cartelization in the United States, 1933–1972," The Journal of Economic History, Cambridge University Press, vol. 49(4), pages 833-855, December.
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    More about this item

    Keywords

    OPEC; cartel; quotas; cooperative behavior;
    All these keywords.

    JEL classification:

    • F0 - International Economics - - General

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