OPEC's Current $18/Barrel Price Policy: Its Rationale, Member Country Economic Consequences, and Future Implications

Abstract

ABSTRACT The increasing oil market share strategy, orchestrated by the Saudis in late 1985, brought about the most precipitous decline in oil prices in the history of OPEC within a very short time period. The major implication of this exercise, contrary to prevailing conventional wisdom, was that there existed a short run price elasticity of demand for OPEC oil, of substantial magnitude and effectiveness. The immediate task faced by OPEC was to implement a market clearing oil price strategy that: would balance the member countries' current economic utility, would effectively represent the marginal cost of crude oil production by non-OPEC producers, would curtail substitution of other competing fuels (gas, coal, nuclear, etc.) The present paper, in applying the short run oil supply elasticity algorithm to the actual crude production and price data globally, postulates the possible rationale behind OPEC's nearly unanimous decision to maintain the crude oil price at the $18/B level. Furthermore, in analyzing the incremental revenue vector for the member countries at various prices, and by scrutinizing the OPEC countries' current account deficits, it is illustrated why the Saudis, under the current quota system, are extremely reluctant to increase the oil price from the $18/B- $20/B range, in the short term; while most other members would like to see the price in the $25/B-$27/B range. Finally, expected medium term (1988-1992) and long range (1993 and after) scenarios for crude oil prices are outlined.