Gasoline Price Changes - Federal Trade Commission

THE DYNAMIC OF SUPPLY, DEMAND, AND COMPETITION
rarely. 33 The reluctance of other countries to produce below capacity has contributed to the
historic instability of the OPEC cartel. Although the cartel appears to be able to exercise some
market power, it does so only imperfectly. In recent years, OPEC has tried to cut or increase
production to enforce a per-barrel price band. 34 These efforts were only sporadically effective,
however. Considerable price fluctuations can occur when OPEC members ignore current
production agreements. As with any cartel, OPEC’s members often can make even greater
profits by “cheating” on the cartel – that is, by producing more crude oil to sell at the high prices
that result from other countries’ restrictions on their crude oil output. Of course, if cheating on
the cartel is widespread, the supply of crude oil increases, and crude oil prices will fall.
The effectiveness of OPEC in controlling world oil prices has been the subject of
numerous studies. These studies generally find that OPEC members collectively exert market
power. No consensus exists, however, on how successful OPEC has been in consistently
achieving supracompetitive prices. The studies indicate that, although OPEC has been unable to
achieve a perfectly functioning cartel, it generally has been successful in exercising a significant
degree of market power and in obtaining prices above competitive levels. 35
OPEC’s influence has been an important determinant of higher prices since 1973, but
other factors also contribute. Significantly increased long-run demand from industrializing
countries has exacerbated the price-increasing effects of OPEC’s production cutbacks.
Production and transportation economies, new supplies from non-OPEC areas, 36 and fluctuating
demand due to a volatile world economy, however, have kept the cartel from exercising wholly
dominant control over crude supplies and prices.
3. Trends in crude oil prices.
OPEC’s varied success in controlling crude supply may explain some pricing trends in
crude oil prices. As noted earlier, crude oil prices tripled after the OPEC oil embargo of 1973.
Crude prices increased sharply again between 1978 and 1981, but then gradually declined during
the early 1980s, although remaining at historically high levels.
Beginning in 1985, however, crude prices began to collapse, when certain OPEC
members decided to abandon a policy of propping up prices through curtailed production. 37
From 1987 until 1997, crude prices generally centered around $20 per barrel, with the exception
of the second half of 1990, when the average price exceeded $29 per barrel as a result of
increased demand for crude oil due to the first Gulf War (and other factors arising out of that
war). Throughout most of the 1990s, however, crude prices remained relatively stable,
suggesting that crude producers increased production to meet increased demand.
CHAPTER 2: WORLDWIDE SUPPLY, DEMAND, AND COMPETITION FOR CRUDE OIL 23