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Why World Oil Monopolization Lowers Oil Prices: A Theory of Involuntary Cartelization

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  • Earl Thompson

Abstract

This paper first shows that, in the absence of long-term production commitments, time-consistent monopolistic sellers of a wasting natural resource will underconserve their resource. Since the present values of the profits of these uncommitted monopolists are generally much lower than under competition, the only rational explanation for the persistent recurrence of such monopolies in the oil industry is the high profits to current generations of oil buyers, who unite to establish such a producer monopoly. The victims of such a monopolistic cartel, besides future generations of consumers, are the producers who must involuntarily expand their current productive capacities in order to benefit the cartel leaders, who stand to benefit from the higher future prices. OPEC, rather than being a monopolistic cartel, is an excess-capacity cartel, one that has been induced by current generations of buyers to supply sufficient excess capacity to efficiently accommodate their prospective future emergencies.

Suggested Citation

  • Earl Thompson, 2000. "Why World Oil Monopolization Lowers Oil Prices: A Theory of Involuntary Cartelization," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 7(1), pages 63-78.
    • Handle: RePEc:taf:ijecbs:v:7:y:2000:i:1:p:63-78
    DOI: 10.1080/13571510084069
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    References listed on IDEAS

    as
    1. Thompson, Earl A & Faith, Roger L, 1981. "A Pure Theory of Strategic Behavior and Social Institutions," American Economic Review, American Economic Association, vol. 71(3), pages 366-380, June.
    2. Robert M. Solow, 1974. "The Economics of Resources or the Resources of Economics," Palgrave Macmillan Books, in: Chennat Gopalakrishnan (ed.), Classic Papers in Natural Resource Economics, chapter 12, pages 257-276, Palgrave Macmillan.
    3. Malueg, David A & Solow, John L, 1990. "Monopoly Production of Durable Exhaustible Resources," Economica, London School of Economics and Political Science, vol. 57(225), pages 29-47, February.
    4. Thompson, Earl A., 1980. "Characteristics of worlds with perfect strategic communication," Journal of Economic Theory, Elsevier, vol. 23(1), pages 111-119, August.
    5. Thompson, Earl A, 1981. "Who Should Control the Money Supply?," American Economic Review, American Economic Association, vol. 71(2), pages 356-361, May.
    6. William D. Nordhaus, 1973. "The Allocation of Energy Resources," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(3), pages 529-576.
    7. Stiglitz, Joseph E, 1976. "Monopoly and the Rate of Extraction of Exhaustible Resources," American Economic Review, American Economic Association, vol. 66(4), pages 655-661, September.
    8. Thompson, Earl A, 1974. "Taxation and National Defense," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 755-782, July/Aug..
    9. Harold Hotelling, 1931. "The Economics of Exhaustible Resources," Journal of Political Economy, University of Chicago Press, vol. 39(2), pages 137-137.
    10. Thompson, Earl A, 1979. "An Economic Basis for the "National Defense Argument" for Aiding Certain Industries," Journal of Political Economy, University of Chicago Press, vol. 87(1), pages 1-36, February.
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