In 1960 OPEC, or the Organization of Petroleum Exporting Countries, was formed by Venezuela, Iran, Iraq and Kuwait. Later other major exporters such as Saudi Arabia joined the group. The purpose of OPEC was to restrict the amount of oil produced and exported. By restricting the production of oil, OPEC was able to essentially fix oil prices and receive maximum profits from the sale ofthis commodity.

In economic terms OPEC is a cartel. A cartel is an organization of independent members that is able to create a monopoly over a given industry or commodity. OPEC's member nations collectively control two thirds of all known oil reserves in the world. Oil is one of the world's most important commodities.The United States, as well as many other industrialized nations, uses oil to run its factories, transportation systems, power plants and other industries. Without an inexpensive and available oil supply, the economy can contract to the point of recession.

CS Question #1: How does OPEC meet the definition of a cartel?

In 1973 OPEC began restricting the oil production of its member nations. The price for oil immediately inflated and the member nations profited greatly. Since industrialized nations were so dependent on oil to run their industries, they were forced to pay the higher prices and watch their own collective profits shrink. The effect of OPEC's restrictions was felt throughout the world economy. Inflation rose as almost every consumer good became more expensive. From the price of gasoline at the pump, to the price of white bread on the grocery store shelf, nearly all products became more expensive to the point of crisis. At service stations in the United States, long lines formed of people trying to buy gasoline for their cars. Many service stations ran out of gasoline to sell, while others rationed out the fuel by allowing each customer to buy only so much at a time. As inflation rose, investment fell and job growth shrank.The United States, as well as much of the world, was in the grip of an economic crisis.

CS Question #2: What effect did the OPEC restrictions on the production of oil by its member nations have on the U.S. economy?

By 1981 the price of oil had risen to $35 USD and had affected governmental policies. Many nations were encouraged to begin producing what oil they could from their own supplies. Others began stockpiling all the oil they could. Alternative energy sources were also beginning to be explored. In addition, governments began putting political pressure on OPEC nations to ease the restrictions. Yet all of these methods of ending the world's extreme dependency on oil essentially failed, and OPEC's restrictions were dropped because of other factors.

CS Question #3: What policies did governments form to deal with the high price of oil?

The problem faced by any cartel is that of its members cheating in order to capitalize on the high profit margins created by restrictions on production. OPEC has had this problem since its inception. Maintaining a cartel is difficult since it is in each member's short-term interests to cheat and produce oil beyond the restrictions.
Another problem of cartels, including OPEC, is that of preventing non-members from producing oil. OPEC does not include every oil-producing nation and cannot control the amount of oil these nations produce. Often non-member nations benefit from the high prices created by OPEC but never have to make any of the sacrifices that membersdo .

CS Question #4: What are the difficulties in running a cartel?

Further Thought:

1. Why is the world so dependent on oil?
2. What did OPEC have to gain politically by controlling the production of oil?
3. Despite the glaring problems of U.S. industries being almost completely dependent on oil, little has changed in the federal government's energy policy. Why? What changes, if any, should be made?