Monopoly of Petroleum: OPEC Essay -- Business Case Studies Oil Essays

Monopoly of Petroleum OPECImages Not Included A monopoly is evident where a tight is the sole seller of its product and if its product does not have sloshed substitutes, as discussed in (Gans J., King S. Mankiw A. 2003). This essay will discuss the monopoly of crude oil colour by The Organization Of Petroleum Exporting Countries (OPEC), particularly how it controls the price of petrol, threats to its monopoly and the affectionate tolls involved. OPEC was established in the 1960s and ever since, Saudi Arabia gained a record of being the major power of the organization. Saudi Arabia has the biggest oil reserves in the world and production costs lower than any country. (economist.com 2003)This means that it is a natural monopoly and economies of scale arises when the long run average total cost falls as the quantity of outfit increases as illustrated in control 1. (Gans, J. King, S., Mankiw, N., 2003) Saudi Arabia is the undisputed leader of OPEC. Figure 1 Economies of Scale as a factor of MonopolyCost Average Total Costs measure of outputSaudi arabias petroleum monopoly is very much its governments major interest. The landed estate earned over $80 billion in revenue from oil in 2000.(economist.com 2003) OPECs ability to influence the market price is the key of its power. Compared to a competitive firm, the demand curve for a monopoly is a horizontal i as it bum set any quantity it wants for a precondition price. The demand curve slopes downwards... ... production costs is amongst the lowest in the world. Iraq has the authority of overthrowing OPECs regime if OPEC countries like Russia and France are ready to develop Iraqs oilfields so that it can be used to full efficiency. Does thi s mean that, to stop a monopoly, other monopoly must be used to overcome it? Time will tell, specially when UN sanctions are lifted and the bran-new Iraqi government is formally established.In conclusion, OPECs monopoly of the petroleum industry has been a strong one since the 1960s since its members enjoy economies of scale. Its decisions concerning the output of petrol have always been strong affecting the rest of the world. This monopoly is socially inefficient due to the output and the deadweight loss that results. Interestingly enough, to break this monopoly, the new Iraq has the potential to turn the market power around.