The New York Times (Nov 30, 1993) reported that \'the inability of OPEC to agree

Question

The New York Times (Nov 30, 1993) reported that 'the inability of OPEC to agree last week to cut production has sent the oil market into turmoil...[leading to] the lowest price for domestic crude oil since June 1990.'
a) Why were the members of OPEC trying to agree to cut production?
b) Why do you suppose OPEC was unable to agree on cutting production? Why did the oil market go into 'turmoil' as a result?
c) The newspaper also noted OPEC's view 'that producing nations outside the organization, like Norway and Britain, should do their share and cut production.' What does the phrase 'do their share' suggest about OPEC's desired relationship with Norway and Britain?

Explanation / Answer

a) Crude oil is inelastic in the short run. That means that in the short run, an increase in price results in an increase in revenue. By cutting production, they are decreasing supply, thus increasing the price and increasing their revenues. Also, since oil is in a finite supply, some countries in OPEC may be reaching the limit of the amount of oil they can produce. b) OPEC consists of many nations, and creating a unified policy among different countries, with possibly competing interests, is difficult to do. The market would have gone into "turmoil" because there was uncertainty about what OPEC would decide. The future expectation of the price of oil was uncertain thus making investors and consumers unsure of what action they should take. It likely would have caused the lowest prices because the inability of OPEC to cut production was promising that they would not be able to agree to cut production in the future. c)The phrase "do their share" suggests that OPEC wants Britain and Norway to adopt OPEC's policies so that the policies are more effective. If OPEC cuts production and Britain and Norway increase production to keep the world supply of petroleum constant, then OPEC's goal of increasing revenue would not be achieved. In fact, if this were the case, OPEC would lose revenue. I hope this helps

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