Question

The New York Times (Nov 30, 1993) reported that 'the inability of OPEC to agree last week to cut production has sent the oil market into turmoil...[leading to] thelowest price for domestic crude oil since June 1990.'
a) Why were the members of OPEC trying to agree to cut production?
b) Why do you suppose OPEC was unable to agree on cutting production? Why did the oil market go into 'turmoil' as a result?
c) The newspaper also noted OPEC's view 'that producing nations outside the organization, like Norway and Britain, should do their share and cut production.' What doesthe phrase 'do their share' suggest about OPEC's desired relationship with Norway and Britain?

Answer 1

A.)
Because oil is not limitless, so if they reduce production they can artificially drive up the price of oil, increasing their profit margin per barrel andtheir long-term economic profits.

B.) They sacrifice immediate short-term profit (though profit per barrel would increase) by limiting production. So it's like a classic Prisoner's Dilemma,where each individual cartel has an incentive to renege on the deal while they would benefit tremendously if they all stuck to it.

C.) Only OPEC stands to benefit form Britain and Norway reducing production. It's really a pitiful PR attempt to muscle their agenda along.

Answer 2

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