Abstract
The Organization of the Petroleum Exporting Countries (OPEC) has gone through turbulent times since its inception in 1960. The decade of the 1970s represented the peak of its power; however, the 1980s and 1990s are characterized by the erosion of OPECs position. After a brief exposition of the principles of resource economics and their relevance to OPEC, we review oligopoly theory and its specific application to OPEC. A model of cartel behavior will then be presented and its relevance to OPEC will be emphasized. Our theory is that OPEC can use a trigger price strategy (a punishment phase when overproduction occurs, followed by a resumption phase of full compliance of the quota agreement) to stabilize output. An insurance policy scheme will be presented in combination with the trigger price strategy, the goal of which may improve the stability of OPEC. Finally, we shall show how the present organization may evolve over time into a much smaller entity by the late 1990s composed of the Gulf producers.
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