OPEC’s Prisoner’s Dilemma
The attached article on OPEC outlines the role of national interest in the production of crude oil, focusing particular attention on Iran and the miniscule likelihood that the country will participate in an output freeze plan alongside other OPEC producers. OPEC, which retains significant influence over the total global supply of oil and global oil prices, can be looked at as a relevant example of an agency experiencing the prisoner’s dilemma. OPEC countries have divergent aims, which can be generalized into two categories. The first group of countries, such as Saudi Arabia and Kuwait have larger oil reserves relative to their populations, whereas countries like Iran and Iraq have relatively less oil. The countries contained in the former group share the aim of maintaining low prices in an effort to discourage non-OPEC competition, while those in the latter seek to maximize the current value of oil because of their comparably smaller supply.
In essence, if all OPEC countries decided to cooperate with the goals of the group and decreased their production of oil, the price for crude oil would increase, leading to high payoffs for all member states. However, if even one member of OPEC decides not to cooperate and instead maintains current levels of production, that member would receive a higher payoff than if they had cooperated with the other members, leaving the rest of OPEC with low payoffs. The result is that the best response of all OPEC members is to not cooperate and maintain high levels of production, because if other members cooperate, they can cheat and receive a higher payoff, and if the other members cheat, they have no incentive not to as well. Thus, the dominant strategy of any one country is to not cooperate. The prisoner’s dilemma is a useful tool for framing an issue such as this one, demonstrating how even a seemingly coordinated group such as OPEC can face obstacles in improving the outcomes for all of its members when individual self-interest constitutes rationality.
http://www.bloomberg.com/news/articles/2016-09-05/iran-s-ready-to-pump-more-as-speculation-swirls-over-oil-accord