Question

When OPEC raised the price of oil dramatically in the mid-1970s, experts said it was unlikely that the cartel could stay together over the long term- that the incentives for individual members to cheat would become too strong. More than forty years later, OPEC still exists. Why do you think OPEC has been able to beat the odds and continue to collude? Hint: You may wish to consider non-economic reasons.

Short answer

In conclusion, OPEC has managed to beat the odds and continue to collude for over forty years due to a combination of economic and non-economic factors. Economic factors such as market power, coordination, and price stability incentivize member countries to remain in the cartel. Meanwhile, non-economic factors like shared political values, cultural connections, and geopolitical influence strengthen collaboration and unity among the member countries.

Step-by-step solution

Understand the situation and context

Oil and Petroleum Exporting Countries (OPEC) is a cartel formed by some of the largest oil-producing countries in the world. The main purpose of the cartel is to control the supply of oil to the global market and thereby influence oil prices. Despite predictions that members would cheat or betray the cartel, OPEC still exists and has been able to collude to influence oil prices.

Analyze economic reasons for OPEC's resilience

Even though individual members may have incentives to cheat, several economic factors contribute to OPEC's ability to stay united and collude successfully. Among them are: - Market power: As a cartel, OPEC can exert significant influence on oil prices, which is beneficial to its members. - Coordination: OPEC provides a platform for its members to coordinate their production policies, negotiate, and collectively exert pressure on non-member countries. - Price stability: By regulating oil production, OPEC helps to maintain price stability in the oil market, which is essential for its member countries.

Analyze non-economic reasons for OPEC's resilience

Some non-economic factors that may contribute to OPEC's ability to stay together and continue colluding include: - Political factors: Many OPEC members share certain political values and ideologies, which facilitates their cooperation within the cartel. - Cultural connections: OPEC members often have strong cultural and historical ties, which can help strengthen their cooperation and maintain unity within the organization. - Geopolitical influence: OPEC provides its member countries with a means to exert geopolitical influence through their control over such a vital resource.

Weigh the economic and non-economic factors

Both economic and non-economic reasons have contributed to OPEC's ability to beat the odds and continue to collude for more than forty years. While economic factors likely play a significant role, non-economic factors such as political alignment, cultural connections, and geopolitical influence seem to provide a cohesive force that helps the cartel maintain its unity.

Conclude

In conclusion, OPEC has been able to stay together and continue colluding despite individual incentives to cheat because of a combination of economic and non-economic factors. Economic factors such as market power, coordination, and price stability act as incentives for members to remain within the cartel, and non-economic factors like shared political values, cultural connections, and geopolitical influence provide a strong foundation for collaboration and unity.

Key concepts

Market Power

OPEC, or the Organization of the Petroleum Exporting Countries, holds considerable market power due to its effective control over a significant portion of the world's oil supply. This advantage allows OPEC member countries to influence global oil prices by adjusting their production levels. When a group like OPEC controls such a vital resource, they can dictate the market's supply and demand balance to a great extent, impacting prices accordingly.
This capability provides economic benefits to its members, encouraging them to stick together to maximize their collective profits. OPEC's market power is strengthened by its ability to coordinate the output among member countries, ensuring that supply adjustments effectively lead to the desired price changes.
With a unified approach, OPEC can exert pressure on non-member oil-producing countries, further consolidating its control over the market. This market power acts as a glue that helps keep the cartel intact, despite the potential for some members to stray for individual short-term gains.

Geopolitical Influence

Beyond economic considerations, OPEC wields significant geopolitical influence, which plays a crucial role in its ability to maintain unity. Controlling oil, a critical global resource, gives OPEC members a strategic advantage over other nations. They use this power to gain political leverage and influence global events.
By acting in concert, the cartel can negotiate not just on oil-related matters but also on broader international political stages. This unity allows its members to make strategic geopolitical decisions, like supporting member countries during international disputes or affecting the policies of non-OPEC countries.
The geopolitical clout gained through collective collusion offers incentives for member countries to remain part of the organization, as leaving could reduce their individual influence on global affairs. Thus, geopolitical influence serves as a binding force, supplementing the economic benefits of being part of OPEC.

Cultural Connections

Cultural connections among OPEC member countries play an understated yet pivotal role in maintaining the cartel's cohesion. Many member countries share historical, linguistic, religious or cultural ties, which facilitate diplomatic interactions and foster a sense of fraternity and shared purpose.
These shared cultural traits enhance trust among members, reducing the likelihood of conflicts that could arise from competing interests. Additionally, members often face similar social and economic challenges, bonding them through a common understanding of their domestic contexts.
Cultural ties also help mediate and resolve disputes since cultural familiarity can lead to better communication and conflict management practices.
Consequently, cultural connections work alongside economic and geopolitical factors to help OPEC maintain its unity over the decades, standing as a testament to the strength of cultural solidarity in international cooperation.