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OPEC and Oil Prices

http://topics.nytimes.com/top/reference/timestopics/organizations/o/organization_of_petroleum_exporting_countries/index.html

http://online.wsj.com/article/SB10001424053111904265504576566281818778532.html

When looking at oil prices and the supply of oil OPEC always comes up as a major player.  OPEC is the Organization of Petroleum Exporting Countries and is comprised of Algeria, Angola, Indonesia, Iran,  Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.  They control 77% of the worlds known oil reserves, make up about a third of the world’s current oil production and are responsible for over 40% of the world’s exports.  By colluding and forming this cartel they are able to control the price of oil, by coordinating their production efforts to limit the supply of oil.

The article mentions that some members of OPEC may be reducing their production of oil in the next few months due to slowing demand for oil due to the poor global economic situation, as well as Libya appears to be resuming its production faster than expected now that Qaddafi  is no longer in power.  This reduction in production and the production levels of each of these countries relates to game theory as discussed in class.  Each country is a player in the game and they can choose set their oil production together or separately, and they can also choose to follow the quotas, or as mentioned in the article unilaterally adjust their quotas.

By working together they can get the highest total utility(price) for the oil they produce.  By all working together instead of each working by themselves they all receive a higher price for their oil.  If everyone worked by themselves their best strategy would be to produce as much as they can, because the more they sell the more they money they receive, but it will be at a lower price, because the total supply will be higher.  Also, if all the players stick to the quotas, except one, than the player who doesn’t follow the quota but instead produces more will be at an advantage.  That player will receive more than if he had worked alone, because everyone else will be limiting their production, lowering the supply.  This is similar to the prisoner’s dilemma, except in this case the players can talk to each other, so they can choose the option that is mutually the best even if it isn’t a dominant strategy, their is much less uncertainty in what the other player will do.

OPEC has been around for a long time and continues to control the supply of oil as it is beneficial for all players involved.

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