The members of the Organization of Petroleum Exporting Countries (OPEC) control the world’s largest and most accessible petroleum resources, and have undertaken a collaborative effort to maximize their collective profits through output restrictions over the past four decades. In this academic analysis, two leading petroleum economists present an overview of the many market failures which exist in the global oil market, and present a comprehensive literature review to reach an academic consensus: the international market for oil is not free.
Andrew P. Morriss: D. Paul Jones, Jr. and Charlene A. Jones Chairholder in Law & Professor of Business, University of Alabama School of Law.
Roger E. Meiners: Goolsby-Rosenthal Chair in Economics and Law, Department of Economics, University of Texas at Arlington.
The OPEC cartel has affected the oil market for four decades. An unstable cartel representing the interest of the major oil exporting nations, OPEC has at times been effective in forcing up the price of oil and, thereby, allowing the export nations to obtain a significant premium captured by national oil companies on behalf of their sovereigns. At times, this means a transfer of wealth from oil-consuming nations to oil-producing nations totaling hundreds of billions of dollars more than what the competitive-market price of oil would suggest. When the cartel has failed in its objective, the price of oil has collapsed, possibly lower than would have been the case were the market not subject to cartelization. The instability of the cartel means the price of oil has been highly variable over time, making it difficult to predict the future direction of oil prices. A review of the literature indicates that there is a general consensus that the oil market is greatly affected by the cartel. That is, the international market for oil is not a free market.