Has Opec Misused its power?

OPEC is the organisation for Oil Producing and Exporting Countries.

OPEC tries to control the price of oil within a certain target price.

Because demand is inelastic OPEC can increase the profits of its member countries by keeping prices high. Therefore, if prices start to fall below the target price, OPEC may set output quota’s to restrict supply and keep prices high.

OPEC did this in 1973, when the price of oil was tripled in response to events in the middle east. This caused significant economic hardship in the West, who had grown accustomed to cheap oil.

In a way this is a classic example of abuse of monopoly power. If this cartel occurred in the UK between different companies it would be declared illegal and the firms would be prevented from doing it. However, because it is a global cartel there is nothing that other countries can do.

From 2000-07  OPEC started to lose control over the price of oil. They have struggled to keep price within their target of $20-$24, although they are probably quite pleased about the recent increase in the price of oil.

The high price of oil in the 1970s encouraged production to start in other non-opec countries like USA and Russia. Because supply now comes from more non-opec countries it is more difficult for OPEC to control the supply and price.

Also the high prices of oil have encouraged people to look for alternatives to oil. Oil and petrol and not the only way to fuel transport. In the future, it is likely that economies will increasingly look for alternatives to oil, such as hydrogen powered cars.

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By on October 29th, 2007

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