The countries that produce most of the worlds oil have formed a cartel called

The countries that produce most of the worlds oil

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The countries that produce most of the world's oil have formed a cartel, called the Organization of Petroleum Exporting Countries (OPEC). As originally 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 countries 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 countries. The problem that OPEC faces is much the same as the problem that Jack and Jill face in our story. The OPEC countries would like to maintain a high price for oil. But each member of the cartel is tempted to increase its production to get a larger share of the total profit. OPEC members frequently agree to reduce production but then cheat on their agreements. OPEC was most successful at maintaining cooperation and high prices in the period from 1973 to 1985. The price of crude oil rose from $3 a barrel in 1972 to $11 in 1974 and then to $35 in 1981. But in the mid-1980s, member countries began arguing about production levels, and OPEC became ineffective at maintaining cooperation. By 1986 the price of crude oil had fallen back to $13 a barrel. In recent years, the members of OPEC have continued to meet regularly, but the cartel has been less successful at reaching and enforcing agreements. Although the price of oil rose significantly in 2007 and 2008, the primary cause was increased demand in the world oil market, in part from a booming Chinese economy, rather than restricted supply. While this lack of cooperation among OPEC nations has reduced the profits of the oil-producing nations below what they might have been, it has benefited consumers around the world. 17-2C Other Examples Of The Prisoners' Dilemma We have seen how the prisoners' dilemma can be used to understand the problem facing oligopolies. The same logic applies to many other situations as well. Here we consider two examples in which self-interest prevents cooperation and leads to an inferior outcome for the parties involved. Arms Races In the decades after World War II, the world's two superpowers—the United States and the Soviet Union—were engaged in a prolonged competition over military power. This topic motivated some of the early work on game theory. The game theorists pointed out that an arms race is much like the prisoners' dilemma. To see why, consider the decisions of the United States and the Soviet Union about whether to build new weapons or to disarm. Each country prefers to have more arms than the other because a larger arsenal would give it more influence in world affairs. But each country also prefers to live in a world safe from the other country's weapons.
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