The OPEC cartels colludes in order to exercise power over both oil production and prices, therefore this affect both the link between oil prices and scarcity, and an investors decision as to whether they should open a well in the North Seas.
OPEC is refusing to cut production despite calls by members such as Venezuela to reduce output, this is largely due to Despite having over 80% of the worlds reserves OPEC only accounts for roughly 33% of the worlds supplies, this means that if OPEC were to cut production in order to raise prices, the reduction in output would now be made up for by countries like Russia. Furthermore this would reduce OPEC market share, which was already threatened by the emergence of Shale producers in the US. The average …show more content…
OPEC produce roughly 45% of the worlds oil, therefore if all the remaining producers were able they would massively increase supply and decrease OPEC market share, with a big enough response the price of oil would be near to competitive allocation. Therefore OPEC must take into account non-members when setting the price. Slants model argues that due to the presence of a competitive fringe the cartel must set the price lower than the monopoly price and let the price rise rapidly. This has the effect of causing the competitive fringe to produce more in early periods as a result of higher demand, this causes their reserves to deplete before raising the price to the monopoly price and increasing it slowly. Therefore the optimal strategy for the cartel is to reduce output initially and let other suppliers exhaust their reserves. As a result the profits and output of the fringe reduces over time while the profits and outputs of the cartel rise and they gain market share. This model implies that the cartel raises the present value of the competitive fringe by a greater value than the present value of cartels. This empowers those without power, as in order to keep the price high the cartel must reduce production whereas the unconstrained fringe can take advantage of these higher prices while the cartel has to wait for these producers to reduce their supply. Slant estimates that as long as the competitive fringe holds 30% of the market it is a strong force in the market. Therefore an investor in the North Sea could gain from becoming a member of the competitive fringe in the short run gaining prices above the competitive efficient price, though by waiting and following the cartel’s pricing and output strategy he could see greater profits over the long
OPEC is refusing to cut production despite calls by members such as Venezuela to reduce output, this is largely due to Despite having over 80% of the worlds reserves OPEC only accounts for roughly 33% of the worlds supplies, this means that if OPEC were to cut production in order to raise prices, the reduction in output would now be made up for by countries like Russia. Furthermore this would reduce OPEC market share, which was already threatened by the emergence of Shale producers in the US. The average …show more content…
OPEC produce roughly 45% of the worlds oil, therefore if all the remaining producers were able they would massively increase supply and decrease OPEC market share, with a big enough response the price of oil would be near to competitive allocation. Therefore OPEC must take into account non-members when setting the price. Slants model argues that due to the presence of a competitive fringe the cartel must set the price lower than the monopoly price and let the price rise rapidly. This has the effect of causing the competitive fringe to produce more in early periods as a result of higher demand, this causes their reserves to deplete before raising the price to the monopoly price and increasing it slowly. Therefore the optimal strategy for the cartel is to reduce output initially and let other suppliers exhaust their reserves. As a result the profits and output of the fringe reduces over time while the profits and outputs of the cartel rise and they gain market share. This model implies that the cartel raises the present value of the competitive fringe by a greater value than the present value of cartels. This empowers those without power, as in order to keep the price high the cartel must reduce production whereas the unconstrained fringe can take advantage of these higher prices while the cartel has to wait for these producers to reduce their supply. Slant estimates that as long as the competitive fringe holds 30% of the market it is a strong force in the market. Therefore an investor in the North Sea could gain from becoming a member of the competitive fringe in the short run gaining prices above the competitive efficient price, though by waiting and following the cartel’s pricing and output strategy he could see greater profits over the long