This article in the WSJ reports that OPEC members' discord adds to slide in oil prices. .
SUMMARY: Discord at OPEC is turning into a price war, loosening the cartel's grip on oil markets and exacerbating a recent steep selloff. The U.S. oil shale boom, the slowing economic growth in Asia, and political problems in the Middle East are affecting the incentives of OPEC members to set prices unilaterally.
CLASSROOM APPLICATION: Students can discuss the effect of reduced demand for oil, increased supply by competitors, and strained relations among cartel members on cartel stability. In the context of a repeated Cournot mode, Advanced students can examine cartel agreements and the incentives of members to abide by agreements.
QUESTIONS:
1. (Introductory) What factors have led to Saudi Arabia's decision to lower the price of its oil?
2. (Advanced) The article notes a price war among OPEC member countries. But, this is not a price war in the usual sense of firms competing aggressively on price. Rather this price war refers to cartel members unilaterally setting prices below the cartel's agreed price. Demonstrate that cartel members have an incentive to cheat on cartel agreements.
3. (Advanced) Research question. Why has Saudi Arabia historically been the most powerful of OPEC members?
CLASSROOM APPLICATION: Students can discuss the effect of reduced demand for oil, increased supply by competitors, and strained relations among cartel members on cartel stability. In the context of a repeated Cournot mode, Advanced students can examine cartel agreements and the incentives of members to abide by agreements.
QUESTIONS:
1. (Introductory) What factors have led to Saudi Arabia's decision to lower the price of its oil?
2. (Advanced) The article notes a price war among OPEC member countries. But, this is not a price war in the usual sense of firms competing aggressively on price. Rather this price war refers to cartel members unilaterally setting prices below the cartel's agreed price. Demonstrate that cartel members have an incentive to cheat on cartel agreements.
3. (Advanced) Research question. Why has Saudi Arabia historically been the most powerful of OPEC members?
Reviewed By: James Dearden, Lehigh University
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