Answer to Question #318323 in Microeconomics for Hasthea

Question

1.    The opening statement on the Web site of the Organization of Petroleum Exporting Countries (OPEC) says, “... OPEC’s eleven members are all developing countries whose economies are heavily reliant on oil export revenues. They therefore seek stable oil prices that are fair and reasonable for both producers and consumers of oil.” To achieve this goal, OPEC attempts to coordinate and unify petroleum policies by raising or lowering their collective oil production. However, increased production by Russia, Oman, Mexico, Norway, and other non-OPEC countries has caused the price of crude oil to fall dramatically in recent years. To achieve its goal of stable and fair oil prices, what must OPEC do to maintain the price of oil at its desired level? Do you think this will be easy for OPEC to do? Explain.

Answer 1

1)The Oil and Energy Ministers of OPEC Member Countries meet at least twice a year to coordinate their oil production policies in light of market fundamentals, such as the likely future balance of demand and supply. During these regular Meetings and any Extraordinary Meetings of the OPEC Conference, the Member Countries, represented by their respective Heads of Delegation, may or may not alter production levels. Given that OPEC countries produce approximately 41% of the world's oil and 55% of the oil traded internationally, any decisions to increase or decrease production may cause the price of crude oil to fall or rise. The impact of OPEC output decisions on crude oil prices should be considered independently of the issue of price changes of petroleum products such as gasoline and heating oil.There are numerous factors that influence the prices paid by end users for petroleum products. Taxes account for 70% of the final price paid by consumers in some countries.

It could be easy since OPEC has had the most influence on oil supplies and pricing since its inception, because its current 13 members control nearly 82 percent of the world's proven oil supplies.