1 OPEC is a wellknown cartel with Saudi Arabia acting as the

1. OPEC is a well-known cartel with Saudi Arabia acting as the enforcer of the quotas. In recent years, the world price of oil has fallen as the world oil supply (especially that from OPEC) has increased. If OPEC member cheating is behind the increase in oil supply, why would the members continue to do it, knowing that their collective action is driving down the price? Do not do any research about OPEC for this question.

Solution

1. The members are cheating on each other to increase supply because it is difficult for OPEC to enforce the cartel. When OPEC members collude and decide to cut oil production, the reduced production artificially increases the price. The higher the price become, the higher is the incentive of each member to break the cartel, increase production and earn more revenue from the high oil price. Therefore, the cartel is never sustainable without any coercive action, which OPEC cannot take easily. Any artificial increase oil price by cutting oil production by member countries will make it more and profitable for members to cheat and increase production. And when a member starts cheating, others follow suit to earn higher revenue till the oil price is high. Eventually, all members increase production and the cartel breaks.