Using Force to Help OPEC Members Go Along With Quotas

The OPEC could benefit itself by using some sort of threat to its members in cases where quota violation occurs. Obviously we are not talking about the same type of threat the mafia uses on its members. However, Saudi Arabia has tried in some cases to make economic threats against those who violate their quotas.

The economic threat is presented by the way of ground prices for petroleum. Saudi Arabia is in the best position to be able to carry out this threat in the following way:

Saudi Arabia is the greatest petroleum producer in the entire world and Saudi Arabia produces around twenty five percent of the world’s petroleum.

Saudi Arabia has the lowest costs of petroleum in the world. This means that Saudi Arabia is able to produce profitably even though the price of petroleum reduces per barrel. In general the prices oscillate from $30 to $40 per barrel, and in other countries they need at least $10 per barrel in order to cover the costs.

These two facts mean that if the other countries were not to follow along with their quotas, Saudi Arabia could if they wanted to, increase their production so much that the price of petroleum would go down too low. Let’s suppose the price were to go down to $5 per barrel. The only OPEC member country that would benefit from this price would be Saudi Arabia, whereas all the rest of the countries would be losing money.

For this reason, Saudi Arabia seems to be in a position where it could threaten the other OPEC members into bankruptcy if they were not to go along with their quotas. Unfortunately, the threat does not work as well as we would like it to though.

The problem that Saudi Arabia has is limited extraction. While it is true that Saudi Arabia can produce around twenty or thirty percent more petroleum per day then what it normally produces, this increase would not be enough to lower the prices of the petroleum down to $5 and make the other OPEC member countries go into bankruptcy.

Due to this, the threat from Saudi Arabia would not be strong enough to change the dominating strategy there is of not going along with the quota and following it. And given that the OPEC has not found a way of threatening those that violate the quota effectively, the cartel does not work all that well.