OPEC Oil Production Strategy and Its Implication on Global Oil Market Stability

Abstract This paper applies statistical analysis to data describing the trends in OPEC oil production ceiling allocations from 1982-2001 The empirical analysis presupposes that a corporate decision framework guides OPEC production ceiling allocations subject to individual member characteristics and objectives. On average, and with a highly significant confidence interval, the empirical results indicate that the responsiveness of production quota to capacity, crude oil prices, reserves and other determinants are relatively small but inelastic. The empirical results also show the contemporaneous nature of each of OPEC's allocation criteria. This suggests that if OPEC really wants to accomplish a stable oil market, then each member nation must accept some joint responsibility and bear some equitable production reduction based on these criteria as and when necessary. Such an agreeable mechanism governing production ceiling allocations on the basis of concrete factors/criteria can significantly reduce the apparent lack of production discipline among members that has hitherto plagued OPEC1.