OPEC behavior

Type Thesis

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Summary

This thesis aims to contribute to a further understanding of the real dynamics of OPEC production behavior and its impacts on the world oil market. A literature review in this area shows that the existing studies on OPEC still have some major deficiencies in theoretical interpretation and empirical estimation technique. After a brief background review in chapter 1, chapter 2 tests Griffin's market-sharing cartel model on the post-Griffin time horizon with a simultaneous system of equations, and an innovative hypothesis of OPEC's behavior (Saudi Arabia in particular) is then proposed based on the estimation results. Chapter 3 first provides a conceptual analysis of OPEC behavior under the framework of non-cooperative collusion with imperfect information. An empirical model is then constructed and estimated. The results of the empirical studies in this thesis strongly support the hypothesis that OPEC has operated as a market-sharing cartel since the early 1980s. In addition, the results also provide some support of the theory of non-cooperative collusion under imperfect information. OPEC members collude under normal circumstances and behave competitively at times in response to imperfect market signals of cartel compliance and some internal attributes. Periodic joint competition conduct plays an important role in sustaining the collusion in the long run. Saudi Arabia acts as the leader of the cartel, accommodating intermediate unfavorable market development and punishing others with a tit-for-tat strategy in extreme circumstances.