The Need for a New Perspective
by Bassam Fattouh
1. INTRODUCTION
Sincethe 1973 oil price shock, the history and behaviour of the Organizationof Petroleum Exporting Countries (OPEC) have received considerableattention both in the academic literature and in the media.1 Manyconflicting theoretical and empirical interpretations about the natureof OPEC and its influence on world oil markets have been proposed. Thedebate is not centred on whether OPEC restricts output, but the reasonsbehind these restrictions. Some studies emphasize that productiondecisions are made with reference to budgetary needs which in turndepend on the absorptive capacity of the domestic economies (Teece,1982). Others explain production cuts in the 1970s in terms of thetransfer of property rights from international oil companies togovernments which tend to have lower discount rates (Johany, 1980;Mead, 1979).
Others explain output restrictions in terms ofcoordinated actions of OPEC members. Within the literature, OPECbehaviour ranges from classic textbook cartel to two-block cartel(Hnyilicza and Pindyck, 1976), to clumsy cartel (Adelman, 1980), todominant firm (Salant, 1976; Mabro, 1991), to loosely co-operatingoligopoly, to residual firm monopolist (Adelman, 1982) and mostrecently to bureaucratic cartel (Smith, 2005). Others have suggestedthat OPEC oscillates between various positions but always acts as avacillating federation of producers (see for instance Adelman, 1982;Smith, 2005). The existing empirical evidence has not helped narrowthese different views. Griffin’s (1985) observation in the mid-1980sthat the empirical studies tend to “reach onto the shelf of economicmodels to select one, to validate its
choice by pointing to selectedevents not inconsistent with model’s prediction” still dominates theempirical approach to studying OPEC behaviour and its pricing power.2In this paper, we examine OPEC’s ability to influence oil prices. As inany other issue related to OPEC, there are divergent views regardingits pricing power.
More importantly, there seem to be switchesin perceptions shifting from one end where OPEC is perceived to play norole or a very limited role to the other where it is perceived to be aprice-setter. These switches in perception became very apparent in theevents that surrounded the oil price collapse in 1998 3 and the oilprice hike in 2004. In 1998, when the Dubai price approached $10 perbarrel, many observers claimed that OPEC had lost its ability to defendoil prices with many observers predicting its demise.
This viewof an ineffective OPEC was however reversed only a few months laterwith many observers in the media considering the events of 1997 asinducing great cooperation among members and ushering in a new era.4During March 1998 and March 1999, OPEC embarked on two production cutsin an attempt to put an end to the slide in oil prices. Theseproduction cuts were implemented with a high level of cohesivenessamong members, contradicting the view that OPEC is not able toimplement cuts.5 In the high oil price environment of 2004, there wasanother switch in perception were doubts re-emerged about OPEC’spricing power. But unlike ....
Sincethe 1973 oil price shock, the history and behaviour of the Organizationof Petroleum Exporting Countries (OPEC) have received considerableattention both in the academic literature and in the media.1 Manyconflicting theoretical and empirical interpretations about the natureof OPEC and its influence on world oil markets have been proposed. Thedebate is not centred on whether OPEC restricts output, but the reasonsbehind these restrictions. Some studies emphasize that productiondecisions are made with reference to budgetary needs which in turndepend on the absorptive capacity of the domestic economies (Teece,1982). Others explain production cuts in the 1970s in terms of thetransfer of property rights from international oil companies togovernments which tend to have lower discount rates (Johany, 1980;Mead, 1979).
Others explain output restrictions in terms ofcoordinated actions of OPEC members. Within the literature, OPECbehaviour ranges from classic textbook cartel to two-block cartel(Hnyilicza and Pindyck, 1976), to clumsy cartel (Adelman, 1980), todominant firm (Salant, 1976; Mabro, 1991), to loosely co-operatingoligopoly, to residual firm monopolist (Adelman, 1982) and mostrecently to bureaucratic cartel (Smith, 2005). Others have suggestedthat OPEC oscillates between various positions but always acts as avacillating federation of producers (see for instance Adelman, 1982;Smith, 2005). The existing empirical evidence has not helped narrowthese different views. Griffin’s (1985) observation in the mid-1980sthat the empirical studies tend to “reach onto the shelf of economicmodels to select one, to validate its
choice by pointing to selectedevents not inconsistent with model’s prediction” still dominates theempirical approach to studying OPEC behaviour and its pricing power.2In this paper, we examine OPEC’s ability to influence oil prices. As inany other issue related to OPEC, there are divergent views regardingits pricing power.
More importantly, there seem to be switchesin perceptions shifting from one end where OPEC is perceived to play norole or a very limited role to the other where it is perceived to be aprice-setter. These switches in perception became very apparent in theevents that surrounded the oil price collapse in 1998 3 and the oilprice hike in 2004. In 1998, when the Dubai price approached $10 perbarrel, many observers claimed that OPEC had lost its ability to defendoil prices with many observers predicting its demise.
This viewof an ineffective OPEC was however reversed only a few months laterwith many observers in the media considering the events of 1997 asinducing great cooperation among members and ushering in a new era.4During March 1998 and March 1999, OPEC embarked on two production cutsin an attempt to put an end to the slide in oil prices. Theseproduction cuts were implemented with a high level of cohesivenessamong members, contradicting the view that OPEC is not able toimplement cuts.5 In the high oil price environment of 2004, there wasanother switch in perception were doubts re-emerged about OPEC’spricing power. But unlike ....
