OPEC and the Economics of Cartels

A cartel is a group of independent producers who agree to limit how much they sell so that prices stay higher than open competition would allow. The most famous example in energy is the Organization of the Petroleum Exporting Countries, or OPEC, founded in 1960 and made up of oil-exporting nations such as Saudi Arabia, Iraq, the United Arab Emirates and Kuwait. Studying OPEC is a practical way to understand how cartels work, and why they so often struggle.

How a cartel tries to raise prices

A single small producer cannot change the world price of oil; if it pumps less, others simply sell more. But when producers together control a large share of supply, cutting output as a group can lift the price for everyone. OPEC does this by setting a production quota for each member, an agreed ceiling on how many barrels it will pump each day. Because oil demand responds slowly to price, a modest cut in supply can raise prices enough that members earn more in total even while selling fewer barrels.

The temptation to cheat

Every cartel faces the same problem. Once the group has pushed prices up, each individual member can earn even more by quietly pumping above its quota and selling extra barrels at the high price. If only one member cheats, it gains. But if many members reason the same way, supply rises, prices fall, and the whole group loses. This is a classic example of the prisoner’s dilemma from game theory: what is best for each member alone is harmful for the group. Members also differ in their needs. A country with a large population and heavy government spending may need revenue urgently, while a wealthier member with fewer people can afford to wait.

Spare capacity and the swing producer

Oil producers that can quickly raise output hold spare capacity, meaning wells and equipment ready to pump more at short notice. Saudi Arabia has historically held much of the world’s spare capacity, which has made it the cartel’s swing producer: the member that raises or lowers output to steady the market, and sometimes to discipline members who overproduce. At times, Saudi Arabia has flooded the market with oil to push prices down and pressure rivals, as it did in the brief price war with Russia in early 2020.

OPEC+ and the limits of cartel power

In 2016, OPEC began coordinating with other large exporters, most notably Russia, in a wider group known as OPEC+. This gave the group control over a larger share of world supply. Even so, its power has limits. When prices stay high, producers outside the group, such as shale oil companies in the United States, can drill more and win market share. High prices also encourage consumers to save fuel and switch to alternatives over time. A cartel can influence prices, but it cannot fully control them for long.