Modeling OPEC behavior: economic and political alternatives

Abstract

The predominant approach to modeling OPEC behavior depends upon the assumption that economic self-interest provides the best predictor of the cartel's price and production strategy. With rational monopoly behavior, the exogenous characteristics of the oil market determine an optimal price path for the group. But OPEC members have diverse economic as well as political goals. And uncertainty about oil market responses provides substantial leeway to argue about what is optimal. An examination of the five key OPEC price decisions since 1973 shows that an operational code of advancing political priorities on Arab-Israeli issues while deflecting security challenges better explains Saudi Arabia's decision-making than the economic optimizing approach. Moreover, no economic formula alone is consistent with Saudi behavior. The balance of internal and external forces of a political or security character on Saudi leadership suggests more of a tilt toward price hawkishness than pure considerations of economic self-interest would indicate. This tilt is reinforced by a systematic weakness on the part of the U.S. government to exercise a sustained countervailing influence on the Kingdom on behalf of moderation.