A Theoretical Analysis of OPEC with Economic Cartel Theory and Saudi Arabia’s Dominance in the Oil Market
The purpose of this study is the examine economic cartel theory as it applies to modern markets, including factors that make cartelization likely, incentives for firms to create cartels, and how cartels regulate competition. Specifically, this paper analyzes the Organization of Petroleum Exporting Countries (OPEC), their history as a cartel, and game theory applications to common cartel problems. The analytical section of this paper will employ theoretical models of oligopoly, particularly the Cournot and Stackelberg model. These models will demonstrate the incentives for countries to collude to assert market dominance, as well as incentives for OPEC member countries to cheat the cartel agreement. Further, this paper will take special interest in Saudi Arabia: the commanding country leading OPEC’s production and cartel agreement. We explore whether Saudi Arabia’s best interest is to remain leading OPEC’s endeavors, or become a powerhouse oil producer in the international market on their own terms.
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