Give five reasons for the continued existence of the Organization of Petroleum Exporting Countries (OPEC). [20 marks]

Answer Details

OPEC is an intergovernmental cartel of major crude-oil exporting nations formed in 1960 to co-ordinate and unify the petroleum policies of its members. Its continued existence rests on the shared economic interests that a single producer, acting alone, cannot secure. Five reasons are:

1. To stabilise crude-oil prices. Oil demand is price-inelastic in the short run, so uncontrolled competition among exporters would cause violent price swings. By co-ordinating supply, OPEC smooths prices and protects members from ruinous price collapses.
2. To regulate output through production quotas. Members share the world market by agreeing on how much each may produce. Restricting total supply keeps prices at a remunerative level and prevents a glut that would depress revenue.
3. To secure fair and stable revenue for member states. Most members are developing, mono-cultural economies that depend heavily on oil earnings to finance national budgets and development plans; OPEC helps guarantee a steady and adequate income stream.
4. To present a united bargaining front against powerful buyers. Acting collectively gives members far greater negotiating strength against the large multinational oil companies and consuming nations than any single country would have alone.
5. To protect the long-term value of an exhaustible resource and share technical information. Members co-operate to conserve a wasting asset, ensure a steady supply to consumers, and exchange technical, geological and market expertise for mutual benefit.

Examination reminder: frame each reason around a collective economic gain that individual action could not achieve, since that co-operative logic is the reason the cartel survives.