Question

Over the last 40 years the Organization of Petroleum Exporting Countries (OPEC) has had varied success in forming and maintaining its cartel agreements. Explain how the following factors may contribute to the difficulty of forming and/or maintaining its price and output agreements. a. New oil fields are discovered and increased drilling is undertaken in the Gulf of Mexico and the North Sea by nonmembers of OPEC. b. Crude oil is a product that is differentiated by sulfur content: it costs less to refine low-sulfur crude oil into gasoline. Different OPEC countries possess oil reserves of different sulfur content. c. Cars powered by hydrogen are developed.

Short answer

Answer: Factors that contribute to the difficulty of forming and maintaining price and output agreements in OPEC include new oil fields discovered by nonmembers, different sulfur content in crude oil from OPEC countries, and the development of hydrogen-powered cars. These factors affect the global oil supply and demand, as well as influence the preferences and profitability of OPEC member countries, making it challenging to reach and sustain unified decisions.

Step-by-step solution

Factor A: New oil fields discovered by nonmembers

The discovery of new oil fields and increased drilling by nonmembers of OPEC affects market prices and supply. These new oil sources can increase the global oil supply, causing prices to decrease as consumers have access to oil from other sources. This makes the coordination of price and output agreements harder for OPEC members, as they need to consider the impact of these nonmember producers on the global market. It might also lead to disagreements among the OPEC members, which can affect the stability of the cartel.

Factor B: Different sulfur content in crude oil from OPEC countries

Crude oil with different sulfur content affects the cost of refining the oil into gasoline. Low-sulfur crude oil is less expensive to refine compared to high-sulfur crude oil. This differentiation in sulfur content causes differences in the cost structure among OPEC members who possess oil reserves of varying quality. As a result, OPEC countries might have different preferences when it comes to price and output agreements. For example, a country with low-sulfur reserves may be more willing to accept lower prices as they can enjoy higher profit margins due to lower refining costs. These differences create further difficulties in forming and maintaining unified decisions within OPEC.

Factor C: Development of hydrogen-powered cars

The development of alternative fuel sources, such as cars powered by hydrogen, can potentially change the demand for crude oil. As more consumers switch to alternative fuel sources, the demand for oil decreases, leading to lower market prices for crude oil. This can create challenges for OPEC members, as they need to adapt to the changing market conditions and find a balance between price and output agreements that keep them competitive in the emerging alternative fuel market. Additionally, the shift to alternative energy sources may cause internal disagreements within OPEC, as member countries with significant investments in the oil industry may be more reluctant to change their strategies and policies. This can further complicate the process of forming and maintaining price and output agreements among OPEC members.