Question

The Organization of Petroleum Exporting Countries (OPEC) is made up of 12 developing countries. The countries that make up OPEC produce over 50% of the world's supply of crude oil. OPEC influences the world price of a barrel of crude oil by setting production quotas for each of its members. Discuss the problems inherent in setting and maintaining production quotas in a cartel like OPEC. How has changes in oil prices affected the economy of OPEC countries?

Answer 1

Answer:

As normal cartel there is a possibility of cheating by memeber countries. Member country may prefers to deviate from the quotas and produce more output. Another problem is that under reporting production level. This is a case of producing more output but showing that the output is under quotas. It causes shadow economy.

As the OPSEC countries supplies more than 50% of world demand. Hence it can be assumed that they have comparative advantage in crude oil production. Most of their economy depends on demand for oil. World prices can affect the economy of OPEC countries by influencing export demand and so as exchange rate. These are countries who has largets export earning from crude oil. Nation nal and growth of GDP depends on export demand.