The political economy of OPEC

Gal Hochman and David Zilberman

Energy Economics, 2015, vol. 48, issue C, 203-216

Abstract: We develop a conceptual model that captures OPEC pricing behavior, and apply it to explain the large gap observed between domestic fuel prices in OPEC countries and prices in the rest of the world. We model OPEC as a cartel of nations, not firms, and assume that politicians use two instruments: production quotas and domestic fuel consumption subsidies. The cartel-of-nations model suggests that introduction of alternatives to petroleum products may lead OPEC to reduce exports and increase domestic fuel consumption. The empirical analysis suggests that when OPEC sets production quotas, it places similar weights on consumer and producer surplus. But when OPEC countries set domestic fuel subsidies, on average 6% more weight is given to consumer surplus with some of the OPEC countries pursuing very aggressive domestic cheap fuel policies.

Keywords: Big economy; Cartel of firms; Cartel of nations; Cheap oil policies; Crude oil; Domestic fuel subsidies; Export-tax model; Fuel; OPEC; Political economy; Production quotas (search for similar items in EconPapers)
JEL-codes: F12 F53 F55 Q37 Q41 Q43 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:48:y:2015:i:c:p:203-216

DOI: 10.1016/j.eneco.2015.01.002

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