South-Western College Publishing - Economics  
OPEC tries to prove that it's still the Alpha-leader.
Subject OPEC wants other oil-producing nations to increase their production.
Topic Supply and demand; Oligopoly
Key Words

oil, price, quantity, OPEC, non-OPEC nations

News Story

OPEC has agreed to increase its targeted oil production rate by 1 million barrels a day, and wants other nations outside the cartel to do the same. However, since OPEC already produces more than the "new target" of 27 million barrels, few consider the agreement to be anything more than a symbolic gesture.

However, other nations around the world are not quite so interested in raising their production. For example, Norway, the world's third largest oil producer, has expressed no intentions of increasing its oil production from its current 2.9 million barrels a day. Neither has second-largest Russia announced any plans to increase production.

OPEC seems to be suffering from a credibility problem with its claim to increase production. OPEC claims that it has 1.5 million barrels a day of excess capacity, with more on the way. However, energy economists dispute that OPEC has any excess production capacity at all.

(Updated November, 2004)

Questions
1.

Does the typical production outcome of OPEC constitute a prisoner's dilemma? Why or why not?

2. Can the interaction between OPEC and non-OPEC nations around the world in the global oil market be described as a prisoner's dilemma game? Why or why not?
3. Suppose that OPEC increases its production by 1 million barrels a day, and the price doesn't change in response. Using a graph of supply and demand, explain how this phenomenon could unfold.
Source Susanna Loof. "OPEC lobbying non-cartel members." The Associated Press, 16 September 2004.

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