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Oligopoly: OPEC

Oligopoly: OPEC
In an oligopoly market structure, there are few firms which produce almost similar products. Such companies have exclusive control of all market forces, and they create barriers of entry to minimize competition[1]. The firms in such an industry monitor the business activities of each other, and they respond accordingly to ensure that they make the highest possible profits. There is a high temptation for the firms in such an industry to collude. The industry has many barriers for investors to enter into such markets. These barriers may be natural or may be caused by legal frameworks in the industry. Firms in an oligopoly market differentiate their products to capture the demand of many customers. Various companies in the global markets have developed cartels to come up with profitable strategies, and to control the market. However, cartels have been restricted by many governments to ensure that firms compete in the market. Despite the many restrictions enacted to control establishment of cartels, the Organization of Petroleum exporting Countries (OPEC) has been successful in forming a cartel[2]. The organization was developed as a combination of all oil exporting countries, and this cartel has caused the oil prices to increase tremendously. For example, in the 1970’s, the oil prices increased uncontrollably. This caused inflation in many countries which depend entirely on oil[3].
Characteristics of an oligopoly
Oligopolies have the characteristics of a few players in the industry. The number of firms may range from 2 to 20. Such firms are large enough, and the capital required to establish such companies is large. This aspect gives oligopolies enough control over the market. The number of firms determines the level of control of such firms. In addition, the size of individual firms also determines the control of the firms in the industry[4]. Firms in an oligopoly manufacture products which are similar. Another characteristic of an oligopoly is that there are natural or artificial barriers of entry into the market[5]. In an oligopoly, firms may produce differentiated products or similar products. When the products are differentiated, the firms apply innovative products to attract as many customers as possible[6]. Oligopolies fix prices which are higher than the cost of production. As such, they make abnormal profits because the prices are usually exaggerated[7]. Various governments have established by-laws to restrict cartels in their economies. A free and fair market has been encouraged to allow competition in the market. This offers equal opportunities to all firms in the industry. Despite the restrictions established to control the activities of cartels, OPEC has been successful in operating in the global markets. OPEC has been successful in operating a cartel because oil has a high demand[8].
Oligopolistic nature of OPEC
OPEC is an organization that has united countries which produce oil. It was established in 1960 at the Bagdad conference by leaders from Iran, Venezuela, Saudi Arabia, Iraq and Kuwait. Other countries later joined the organization, but currently, OPEC has 12 member countries. However, Indonesia and Ecuador have withdrawn from membership of OPEC. The headquarters of the company were based in Geneva, during the initial five years. The headquarters was later relocated to Vienna in 1965. The main objectives of OPEC are to co-ordinate and unite oil producing countries. Various policies have been developed to protect the interest of all member countries. OPEC has maintained fairness and stability in the petroleum industry. As such, the organization has created opportunities for oil producing countries to get fair returns on the capital invested. The organization has created mechanisms of providing regular supply of oil to sustain the global economies[9].
OPEC has established an oligopolistic market structure to control the prices of oil in the global markets. The member countries are few, and they produce the same product. This has made it possible to establish a cartel to regulate the market prices of oil. The main goal of OPEC was to regulate oil prices, and this has been achieved by imposing better prices for oil products. Fluctuations in oil prices have been controlled, and the member countries enjoy stable oil prices. The cartel has been criticized by many countries in the world because it has been setting oppressive prices[10].
The demand for oil has been increasing because many countries use oil in large scale. On the other hand, the supply for oil and oil products has been decreasing. The forces of demand and supply have caused the prices of oil to increase. Since oil is a natural resource which is found in specific countries, the supply has been limited. This scenario has made it possible for the oil producing countries to form cartels. These cartels have increased the oil prices to the highest levels possible[11].
Saudi Arabia produces the largest amount of crude oil, and has dominated the market. The country has been a market leader in the industry but it has to adhere to the provisions of OPEC. Saudi Arabia does not need to depend on other countries to control the industry. The country is the major oil producer, but has maintained its membership in OPEC for a long time[12].
Various countries have been opposed to the activities of OPEC because the prices have been too high. The pricing mechanism of OPEC has caused economic and financial crisis in the global economies. This has been as a result of the fact that many countries depend on oil for their provision of energy. In the year 2007/2008, the global economies experienced financial crisis because the prices of products increased uncontrollably. Since oil is used as a major source of energy, the production of products is determined by this essential commodity. As such, when the oil prices increase, the prices of other products increase accordingly[13].
Oil is a natural resource which is found in a few countries in the world. Various countries, which produce oil, have experienced a shortage in the oil reserves. This has caused deregistration of membership from OPEC. Other countries, such as Indonesia, have decided to quit the cartel to safeguard its economy. The government of Indonesia decided to withdraw from OPEC so that it can offer lower oil prices to the domestic market. The government had a program to offer subsidies to reduce the cost of energy, and the government decided to withdraw from OPEC so that it can have better prices for the domestic prices[14].
Oligopoly is a market structure which allows firms to collude in the way they operate in the market. The firms are few and large, and they can form cartels to control the market forces. The firms in an oligopoly produce, either similar products or differentiated products. OPEC is an example of an oligopoly that produces similar products. OPEC has been a big cartel that has made oil prices increase uncontrollably. The market for oil has been dominated by OPEC because it has gained control by establishing a cartel. The cartel has regulated the prices of oil in the industry, and the member countries have enjoyed stable prices for oil products. OPEC has been a successful oligopoly because there are few firms in the industry selling the similar products. Some countries have withdrawn their membership from OPEC to regulate the domestic economies. This has been implemented by offering subsidies to various sectors of such economies. Indonesia is an example of a country which has adopted such a strategy to regulate its economy.
[1], W D, Folsom and Rick Boulware. Encyclopedia of American Business. (New York: Facts On File, 2004), 338.
[2] Robert L. Sexton. Exploring Economics. (Mason, OH: Cengage, 2010), 469.
[3] Juliet, Kaarbo and James L. Ray. Global Politics. (Boston, MA: Wadsworth, Cengage Learning, 2011), 397.
[4] James D. Gwartney. Economics: Private and Public Choice. (Australia: South-Western Cengage Learning, 2009), 516.
[5]Piyali Ghosh, Geetika and Purba R. Choudhury. Managerial Economics. (New Delhi: Tata McGraw-Hill Pub, 2008), 323.
[6] Charles W. L Hill and Gareth R. Jones. Strategic Management Theory: An Integrated Approach. (Boston, MA: Houghton Mifflin, 2010), 161.
[7] Robert J. Carbaugh. Contemporary Economics: An Applications Approach. Mason, OH: Thomson/South-Western, 2006), 147.
[8] Carbaugh, 148.
[9] OPEC. Brief history, 2012. Viewed April 20, 2012
[10] Māniʻ S. ʻUtaybah. Opec and the Petroleum Industry. (London: Croom Helm, 1975), 9.
[11] “Commodity Prices, Capital Flows and the Financing of Investment”. (New York: United Nations, 2008), 26.
[12] Robert, Dubil. An Arbitrage Guide to Financial Markets. (Chichester, West Sussex, England: John Wiley & Sons, 2004), 111.
[13] Gawdat, Bahgat, and Gawdat Bahgat. Energy Security: An Interdisciplinary Approach. (Chichester, West Sussex, U.K: Wiley, 2011), 254.
[14] Stephen Fitzpatrick,Indonesia to withdraw from OPEC. The Australian. viewed 19 April, 2012 http://www.theaustralian.com.au/news/world/indonesia-to-withdraw-from-opec/story-e6frg6so-1111116451981

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