Imagine you are the advisor to the Secretary General of OPEC. You are Essay

Imagine you are the advisor to the Secretary General of OPEC. You are asked to assess the ability of OPEC to manage the price of - Essay Example These members supply around 40% of the world’s oil (USA Congressional Record, 2007). Law of Supply and Demand (Mankiw, 2008) OPEC’s economic goal is to control production in order to raise the price of oil and eventually increase the generation of its members’ substantial profit. In a free market, the supply and demand tend to push the price at the level in which quantity supplied and quantity demanded are equal (Baumol and Blinder, 2008). Based on this law, it can be pictured out that when the supply of a normal good is low but its demand is higher, it substantially results to price increase. Thus, OPEC is on the right track of controlling production in order to maximise the oil resources of its members. In fact, it has a significant power to control the entire market considering that 70% of world oil reserve belongs to the cartel. Furthermore, OPEC targets to supply only 40% of the world’s oil consumption. This means that it has created influence on the world’s oil supply provided that the demand is higher and even reaching to an upward spiral due to rising economies. Oil is the lifeblood of the modern economy (Navarro, 2008). This means that every economy, developing or even highly developed will tend to maximise resources and even operations, but this cannot be addressed efficiently without relying heavily on oil supply. For instance, oil has become the very reason for every business to operate. From production, down to transportation and inside every household, oil is gaining a wide range of importance, function and economic role. Thus, oil is considered as a normal good and becomes the basic commodity in the world. Oil therefore has created a specific level of demand depending on a certain economy’s requirements in order to sustain and enhance its development and growth. However, from 1972 to 2008, it is noted that OPEC has been ineffective at maintaining cooperation among its members due to issues concerning rest riction of production (Mankiw, 2008). Mankiw explained that members were tempted to cheat their productions just to gain more profit advantage. As a result to this, the increase of oil price was never been successful on restricting production, but because of the increase in demand of worldwide consumption. As shown in Table 1, the price of oil per barrel increases over time. However, this increase was pointed out as barely influenced by OPEC’s success in restricting its production, but due to increase in market demand for the said commodity (Mankiw, 2008). In the mid-1980s OPEC members were having misunderstanding regarding on the regulatory issues of production. As a result, the production increased beyond the controllable limit as specified by OPEC. As the production of oil in the world market increased, there was more supply available leading to the decrease in price. Such decrease in price was clearly due to availability of supply, but what seems to be obvious was the des ire of some OPEC members to gain productive output from their oil resource. In 2007 to 2008, the price of oil substantially was higher. However, it was due to the increase of demand in the world oil market as there was an increasing number of emerging economies such as China (Mankiw, 2008). Table 1. History of oil price as influenced by OPEC regulation of production (Mankiw, 2008) Year Price per barrel 1972 $3 1974 $11 1981 $35 1986 $13 Income and substitution effect The positive income effect states that when the price of normal good decreases it leads to