The Effectiveness of OPEC

In the wake of the technological age we live in, most of our daily activities consist of the usage of oil as a form of energy. This means from an economic standpoint that the demand in the market for oil is highly inelastic. This gives oil producers high incentive to produce so they can achieve large profits. Unfortunately supply for this industry is also inelastic and due to the nature of oil as a natural resource there is a limit to how much producers can produce. Due to its worldwide need, the exporting and production of oil is done at a worldwide level. Hence suppliers in the oil industry are the countries themselves, which creates an oligopoly. Oligopoly's are known for having kinked demand curves meaning that when left to the free market competitors will keep undercutting each other until neither are making the large revenue's they projected when they entered. It is at this point that OPEC, the organization for petroleum exporting countries steps in. Using strategy following game theory they control supply so that they can maintain prices at a level where member countries of OPEC can increase their individual revenue as a group. In the short term, OPEC's pricing policies increase revenue for its member countries, protect and maintain the price of oil, and reduce the rate of depletion of oil reserves. In the long term however OPEC's pricing policies lead to a decrease in world market share as non-OPEC producers increase production of oil. This seems to lead to a point where OPEC's policies will become less and less effective in controlling the market price of oil.
OPEC controls and maintains oil prices by changing supply. The reason they are successful in being able to control market prices is due to their large market share in the oil industry coming from the large oil reserves in the member countries demographic. Hence they are able to succeed according to the game theory model to maximize profit and revenue for all of their members. There is though a