Annual OPEC report 1986: OPEC The Secretariat, Organisation of the Petroleum Exporting Countries, Vienna, Austria, 1987, 36 pp

Abstract

Oil dependence is defined as a dynamic problem of short- and long-run market power. The potential monopoly power of an oil cartel depends on its market share and the elasticities of oil supply and demand, while the economic vulnerability of oil-consuming states depends most directly on the quantity of oil imported and the oil cost share of gross domestic product (GDP). Of these factors, only the market share of the Organization of Petroleum Exporting Countries (OPEC) cartel and the rate of growth of world oil demand are clearly different than they were 25 years ago. OPEC still holds the majority of world oil and, in the future, will regain market share. A hypothetical 2-year supply reduction in 2005–2006, similar in size to those of 1973–1974 or 1979–1980, illustrates the potential benefits to OPEC and harm to the US economy of a future oil price shock. OPEC's revenues are estimated to increase by roughly $0.7 trillion, while the US economy loses about $0.5 trillion. Strategic petroleum reserves seem ineffective against a determined, multi-year supply curtailment. Increasing the market's price responsiveness by improving the technologies of oil supply and oil demand can greatly reduce the costs of oil dependence. Each element of this interpretation of the oil dependence problem is well supported by previous studies. This paper's contribution is to unite these elements into a coherent explanation and to point out the enormously important implications for energy policy.