CHAPTER 16OLIGOPOLY357CASE STUDYOPEC AND THE WORLD OIL MARKETOur story about the town’s market for water is fictional, but if we change waterto crude oil, and Jack and Jill to Iran and Iraq, the story is quite close to beingtrue. 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 abouthow much oil to pump are much the same as Jack and Jill’s decisions about howmuch 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, andVenezuela. 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 inquantity produced. OPEC tries to set production levels for each of the member
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