Industrial organization in oil markets since the embargo

Recently it has become obvious that OPEC, a cartel which only a few years ago could cause substantial redistribution of wealth in its favor, is now hard pressed to protect these gains. In the history of cartels the phenomenon is not new, and the conventional tools of industrial organization analyses are used here to provide insights into the process. The dynamics of structural change and the conduct of market participants have undermined OPEC's dominance in world crude oil trading. Strategies adopted by major energy companies which have contributed to weakening the cartel are examined. The development of crude reserves alternate to those held by OPEC has been the focus of large investment expenditures. In addition, the development of flexible trading policies for purchases of crude oil has enhanced bargaining power with alternate suppliers. The paper also examines marketing and organizational changes within OPEC. Less and less are OPEC members simply sellers of crude oil. Increasingly, crude is bartered or sold in packages containing mixtures of LNG or refined products. Moreover, corporate diversity among various OPEC national oil companies is growing as major new facilities in refining, marketing, transportation and chemical production come into operation. The very fact that this complexity reflects explicit decisions by participants indicates the growing force of individual as opposed to group interest maximization and permanently weakens the cartel's ability to exercise market power.