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Inscrutable OPEC? Behavioral Tests of the Cartel Hypothesis
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Inscrutable OPEC? Behavioral Tests of the Cartel Hypothesis

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  • James L. Smith

Abstract

We show that standard statistical tests of OPEC behavior have very low power across a wide range of alternative hypotheses regarding market structure. Consequently, it is difficult, given the current availability and precision of data on demand and costs, to distinguish collusive from competitive behavior in the world oil market. This, along with other factors, may account for the largely inconclusive nature of findings so far reported in the empirical literature on OPEC. We apply a new approach for examining alternative hypotheses and find strong evidence of cooperative behavior among OPEC members. Our results also suggest that OPEC’s formal quota mechanism, introduced in 1982 to replace a system based on posted prices, increased transactions costs within the organization. We do not find strong evidence to support the view that Saudi Arabia has played the role of dominant producer within the cartel.

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  • James L. Smith, 2003. "Inscrutable OPEC? Behavioral Tests of the Cartel Hypothesis," Working Papers 0305, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
    • Handle: RePEc:mee:wpaper:0305
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    1. Ramcharran, Harri, 2002. "Oil production responses to price changes: an empirical application of the competitive model to OPEC and non-OPEC countries," Energy Economics, Elsevier, vol. 24(2), pages 97-106, March.
    2. Libecap, Gary D., 1989. "The Political Economy of Crude Oil Cartelization in the United States, 1933–1972," The Journal of Economic History, Cambridge University Press, vol. 49(4), pages 833-855, December.
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