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Principles of Economics- Mankiw (5th) 347

Principles of Economics- Mankiw (5th) 347 - CHAPTER 16 O L...

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CHAPTER 16 OLIGOPOLY 357 CASE STUDY OPEC AND THE WORLD OIL MARKET Our story about the town’s market for water is fictional, but if we change water to crude oil, and Jack and Jill to Iran and Iraq, the story is quite close to being true. Much of the world’s oil is produced by a few countries, mostly in the Mid- dle East. These countries together make up an oligopoly. Their decisions about how much oil to pump are much the same as Jack and Jill’s decisions about how much water to pump. The countries that produce most of the world’s oil have formed a cartel, called the Organization of Petroleum Exporting Countries (OPEC). As origi- nally formed in 1960, OPEC included Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. By 1973, eight other nations had joined: Qatar, Indonesia, Libya, the United Arab Emirates, Algeria, Nigeria, Ecuador, and Gabon. These coun- tries control about three-fourths of the world’s oil reserves. Like any cartel, OPEC tries to raise the price of its product through a coordinated reduction in quantity produced. OPEC tries to set production levels for each of the member
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