OPEC- cartel

OPEC is probably the best known of all cartels.it was set up in 1960 by the major oil exporting countries. Saudi Arabia,Iran,Iraq.Kuwait and Venezuela. its starting objectives were as follow

• the co ordination and unification of the petroleum policies of member countries.
• the organization of means to ensure the stabilisation of prices,eliminating harmful fluctuations.

the years leading up to 1960 had been the oil producing countries increasingly in conflict with the international oil companies,which extracted oil under concessionary agreement. under this scheme oil companies were given the right to extract oil in return for royalties.this means that the oil producing countries had little say over output and price levels.

despite the formation of OPEC in 1960,it was not until 1973 that control of oil production was effectively transferred from the oil companies to the oil countries,with OPEC making the decisions on how much oil to produce and thereby determining its oil revenue.by this time OPEC consisted of 13 members.

OPEC's pricing policy over the 1970s consisted of setting a market price for Saudi Arabian crude [the market leaders],and leaving other OPEC members to set their prices in line with this:a form of dominant firm price leadership.

as long as demand remained buoyant,and was price inelastic,the policy allowed large price increases with consequent large revenue increases. in 1973/4 after the Arab Israel war OPEC raised the price of oil from around $3per barrel to over to $12. the price was kept at roughly this level until 1979.and yet the sales of oil did not fall significantly.

after 1979 however following a further increase in the price of oil from $15 to $40 per barrel,demand did fall. this was largely due to recession of the early 1980s.

faced by declining demand OPEC after 1982 agreed to limit output and allocate production quotas in an attempt to keep the price up. a production celling of 16 million barrels per day was agreed in 1984.