ATMC BUS102 (2019): Analysis of OPEC Cartel's Petrol Market Impact

This assignment examines the impact of the OPEC cartel on the petrol market, addressing key economic concepts. The analysis begins by illustrating how OPEC's output restrictions lead to higher petrol prices using supply and demand diagrams. It then explains the operational mechanics of a cartel, specifically focusing on OPEC's role in influencing global oil prices. The assignment further explores the policy dilemmas arising from supply shocks, the concept of stagflation, and the effects of expansionary demand shocks on price and quantity. Additionally, it investigates the role of Saudi Arabia in shaping oil prices, including its competitive strategies within the market. The student uses economic diagrams to illustrate the concepts and references relevant sources to support the analysis.

Running head: IMPACT OF OPEC CARTEL IN PETROL MARKET
Impact of OPEC Cartel in Petrol Market
Name of the Student
Name of the University
Author Note

1IMPACT OF OPEC CARTEL IN PETROL MARKET
Table of Contents
Answer to question 1: OPEC cartel leads to higher petrol price.....................................................2
Answer to question 2: Explanation of the cartel operation of OPEC..............................................3
Answer to question 3: Policy dilemma leads to stagflationary........................................................3
Answer to question 4: Impact of the expansionary demand shock.................................................3
Answer to question 5: Role of Saudi Arabia to determine the oil price..........................................4
References........................................................................................................................................5

2IMPACT OF OPEC CARTEL IN PETROL MARKET
Answer to question 1: OPEC cartel leads to higher petrol price
Figure 1: Contraction in the petrol supply
Source: (Created by the author)
The members of OPEC intensively attempt to keep the petrol price by means of a cartel.
The objective of OPEC cartel is to enhance profits with the help of restraining supplied amount,
imposing trade barriers or fixing the market product price level (Juvenal and Petrella 2015). The
figure 1 depicts the situation where OPEC cartel limits the supplied amount of petrol owing to
intensify the market price. In this diagram, the petrol price is measured along the perpendicular
axis, whereas, quantity of petrol production is labeled on the horizontal axis. Initially, the market
produces equilibrium output of Q* corresponding to the price level of P*. Both supply and
demand get equal at that equilibrium level. Afterwards, the equilibrium level gets altered due to
curtailing in the petrol supply (Loutia, Mellios and Andriosopoulos 2016). The market
equilibrium reaches higher price level as the level of demand remains same. Meanwhile, the oil
P
Q
E
E*

3IMPACT OF OPEC CARTEL IN PETROL MARKET
producers hike the price level in order to meet the existing demand. Therefore, the economy
obtains a new equilibrium level at E along with higher price level of P and lower quantity of
petrol of Q as compared to the initial level of E*.
Answer to question 2: Explanation of the cartel operation of OPEC
The cartel operates as to enhance the cumulative profit of the members. OPEC is a group
of fifteen member nations and functions as a cartel in the international oil market. Cartel is
formed with a few numbers of powerful producers (Ft.com 2019). Theses producers can
apparently influence the market scenario by means of restricting the supply size, setting the fixed
price level or stringent trade policies. The consumers are often experienced to receive the
detrimental impact due to cartel operation of OPEC (Huppmann and Holz 2015). The associates
intentionally limit the supplied amount in order to raise the aggregate level of profit. Further, the
group is aimed at acquiring the market share of the USA which is considered as another giant oil
producer in the world.
Answer to question 3: Policy dilemma regarding the consequences of supply shock
Augmented oil supply of the USA and OPEC played a key role during the course of sharp
fall in the price of oil in 2014. However, the price level has been started to revive since the
couple of years ago (Kilian 2016). This recovery is considered as a consequence of the
improvement in the demand level. As per the economists, limitation in the supply results in the
occurrence of the stagflation and this implies output shrinkage and rising inflation. The policy
makers consider that shock in demand compared to supply brings effective outcome for the
economic progress as this stimulates both the price and quantity in the same direction (Davis
2014).

4IMPACT OF OPEC CARTEL IN PETROL MARKET
P2
P1
S
D2
D1
Q1 Q2
Quantity
Price
E2
E1
Answer to question 4: Impact of the expansionary demand shock
Figure 2: Expansionary demand shock leads to increasing price and quantity
Source: (Created by the author)
In regards of expansionary demand shock, demand increases at a considerable level. The
figure 2 considers that demand for the petrol increases from D1 to D2, resulting in that upward
shift in the demand curve. Nevertheless, the supply remains constant. The oil producers will raise
the market price in order to meet the augmented demand for the oil (Samargandi, Fidrmuc and
Ghosh 2014). On the account of rising demand and restricted supply, the economy achieves a
new equilibrium position at a relatively high level, such that E1 to E2. In this case, both the price
and output get improved corresponding to the new equilibrium level. In terms of the economists,
the expansionary demand shock brings favorable economic impact by means of improving both
the price and productivity of the oil (Colgan 2014). Although, the impact of this sort of demand

5IMPACT OF OPEC CARTEL IN PETROL MARKET
P1
S1
D1
Q1 Q2
Quantity
Price
S2
P2
E
1
E2
shock depends on the duration of the shock’s persistency. The impact will not be effective if the
shock persists for a short duration. The monetary authority generally pays no attention when the
duration of the inflationary demand is short in nature.
Answer to question 5: Role of Saudi Arabia to determine the oil price
Figure 3: Expansionary supply policy leads to falling price
Source: (Created by the author)
The USA is considered as a major competitor for the Saudi Arabia in the oil market. Saudi
Arabia strives to acquire the oil market of the USA by the means of intensifying the production
level (Kalyanaraman and Tuwajri 2014). Therefore, augmented supply compared to the constant
demand level drops down the price level. In the above diagram, the price falls from P1 to P2 as a
consequence of rise in supply from S1 to S2. Meanwhile, the equilibrium level of quantity also
gets improved from Q1 to Q2 in correspondence with the change in market equilibrium position
from E1 to E2.

6IMPACT OF OPEC CARTEL IN PETROL MARKET
References
Colgan, J.D., 2014. The emperor has no clothes: The limits of OPEC in the global oil market.
International Organization, 68(3), pp.599-632.
Davis, L.W., 2014. The economic cost of global fuel subsidies. American Economic Review,
104(5), pp.581-85.
Ft.com. (2019). Oil shock fails to disturb optimistic mood | Financial Times. [online] Available
at: Ft.com/content/3ec84c62-fe8f-11e7-9650-9c0ad2d7c5b5 [Accessed 19 Sep. 2019].
Huppmann, D. and Holz, F., 2015. What about the OPEC Cartel? (No. 58). DIW Roundup:
Politik im Fokus.
Juvenal, L. and Petrella, I., 2015. Speculation in the oil market. Journal of Applied
Econometrics, 30(4), pp.621-649.
Kalyanaraman, L. and Tuwajri, B., 2014. Macroeconomic forces and stock prices: some
empirical evidence from Saudi Arabia. International journal of financial research, 5(1).
Kilian, L., 2016. The impact of the shale oil revolution on US oil and gasoline prices. Review of
Environmental Economics and Policy, 10(2), pp.185-205.
Loutia, A., Mellios, C. and Andriosopoulos, K., 2016. Do OPEC announcements influence oil
prices?. Energy Policy, 90, pp.262-272.
Samargandi, N., Fidrmuc, J. and Ghosh, S., 2014. Financial development and economic growth
in an oil-rich economy: The case of Saudi Arabia. Economic Modelling, 43, pp.267-278.

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