OPEC The power of OPEC to raise prices depends upon its ability to restrict the supply of oil to Q2 in Figure 7.9. If there are non-members of OPEC who produce and export oil, then supply cannot be restricted to Q2 and the higher price therefore cannot be maintained. The same thing will happen if any members of OPEC cheat and increase their production levels above their specified quotas. The problem with cartels is that there is an inherent incentive to cheat, since if one country exceeds its quota, its profitability will be increased at the expense of other countries. Such cheating was commonplace in OPEC from the late 1970s onwards. In addition to these internal disagreements, the very success of OPEC in raising prices in 1973 sowed the seeds of its own demise, as higher prices encouraged energy saving and the search for alternative sources and forms of energy. As a result of these two forces, since the 1980s, the price of oil has fluctuated considerably. In January 1999, the price of oil stood at less than $9.00 per barrel. In 1999, OPEC once again exercised its power over the market by announcing restrictions in the supply of oil. At the Vienna conference in March 1999, OPEC agreed to cut back on the production of oil by 4.3 million barrels of oil per day for one year. With a world supply of oil of around 75 million barrels per day, such a cutback in supply can have dramatic effects on the price of oil. Almost immediately after the announcement (and even before the cutback in supply had been made), the price of oil rose from $9 per barrel in January 1999 to $15 per barrel in May 1999 and peaked at $32 per barrel in 2000 – the highest price for over ten years. In 2000, it was agreed that the target price for oil would be between $22 and $28 per barrel. If the price of oil went below this band for a period of time, OPEC would reintroduce quotas and if the price strayed above this band, production would be increased. If OPEC was successful in this strategy, there would be stability in oil prices, but as always there was much internal disagreement about the quotas within OPEC. Quotas are not the same as production and in the past there has been widespread quota breaking. Within OPEC, however, there are the ‘doves’, who are more sympathetic to the views of the non-oil producing countries and might break the quotas, and the ‘hawks’, who are not. Saudi Arabia has moved from being a dove to being a hawk due to the need for higher oil revenues to support a growing population. In April 2004, the price of a barrel of oil stood at over $38 per barrel, well in excess of the target price range. One of the main reasons for this was the Iraq crisis – the invasion of Iraq in 2003 led to much greater instability in oil supplies. In addition to this, the fall in the value of the dollar reduced the revenue earned from selling oil as oil prices are designated in dollars. For this reason, and despite this high price, in April 2004, OPEC announced further cutbacks in production which could cause the price of oil to rise above $40. This occurred in May 2004.

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