Opec Cartel; Price Setter or Price Taker

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The OPEC cartel: price setter or price taker? Table of contents Page Content 2 Table of contents 3 I. Introduction 3 II. The undesirability of a cartel 4 III. The 1973 oil crisis 5 IV. 2000’s energy crisis 7 V. Conclusion 8 References I. Introduction The Organisation of Petroleum Exporting Countries(OPEC) is the world’s most famous cartel. In the early 1960’s some of the most oil-rich countries nationalised the oil facilities that were previously in the hands of big western companies. These countries agreed to “devise ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations.”(OPEC, 2008). Although this might seem to be a noble statement, OPEC is often accused of manipulating the market in their own interest. That OPEC would manipulate the market does not seem to be awkward since ‘the purpose of forming a cartel is to exercise market power by pushing prices higher than they would be under market conditions and thus reap profits’(Gülen, 2007). The question that follows is: who is right and who is wrong? This answer might seem obvious taking into consideration OPEC’s best-known actions, or actions that are attributed to OPEC, such as the 1973 oil embargo and its part in the oil glut in the 1980’s. The paper examines whether or not the behaviour of OPEC can be seen as the behaviour of a cartel. First, this paper shows why a cartel is not desirable according to the free market theory. The paper continues with two important events in the history of the global crude oil market and the part OPEC played in this events. Thus the paper investigates the oil crisis of 1973 and, second, the increase in price in the 2000s which peaked in 2008. II. The undesirability of a cartel The main purpose of forming a

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