A widespread popular opinion, shared by many market specialists, holds that OPEC's market interventions since the early 1970s have made all the difference in price performance between oil and other commodity groups. While there is no denial that OPEC policies (predominantly production quotas) have had some impact on oil prices in the shorter run, deep skepticism is in place about the sufficiency of the group's supply interventions for explaining the huge difference in the development of the two price series contained in Figure 2.1.

IS OPEC A CARTEL?

Introductory economics textbooks define cartels as two or more producers, within an industry, who collude in order to regulate prices. This can typically be achieved by limiting or expanding output. Although success depends on several factors (see Levenstein and Suslow, 2006, among others), the cartel must generally possess significant market power – i.e., account for a significant share of the market's output – and its members abide by decided output allocations as a single entity.

A number of careful analytical studies have contended that referring to OPEC as a cartel is a misnomer. Others have not gone that far, but nonetheless have expressed serious doubts about the efficacy of the group's market management. More than 30 years ago, Plaut (1981) claimed that OPEC was not a cartel since it did not follow the cartel pattern of restricting supply and allocating output. That, of course, was two years before OPEC's production quota system was put in place. In Plaut's view, OPEC behaved more like an oligopoly with Saudi Arabia as price leader and largest producer. At about the same time, MacAvoy (1982) argued that the observed trend of oil prices could be adequately explained by a competitive model. Somewhat later, Griffin (1985) tested the validity of alternative market models and concluded, with several caveats, that a partial market sharing cartel model provides the best fit to the actual behavior of OPEC members.

Alhajji and Huettner (2000) went even further in denying that OPEC is a cartel. They contended that statistical tests fail to support a cartel model of OPEC behavior. A valuable contribution of their study is a comparison of market characteristics for oil with those for diamonds, coffee, bauxite, tin and rubber – commodities in which temporary price raising cartels have occurred in the past.