Is OPEC a Cartel?
Watching CNBC this morning, I saw a very amusing segment about OPEC. The story being discussed was today's news that OPEC is maintaining oil quotas. But the side story was about a conversation between their correspondent Melissa Francis and Saudi Arabian Oil Minister Ali al-Naimi. While walking back to his Vienna hotel with him, she made the mistake of referring to OPEC as a cartel. Here's the video, and the transcript:
Francis: When do you think we'll hit that $75 to $80 range that it seems like almost everybody in the cartel believes is the equilibrium price range?
al-Naimi: You have to be careful calling OPEC a "cartel." I resent that. "Cartel" does not apply to OPEC. I know the press uses "cartel" in a derogatory manner, but it shouldn't be.
Francis: What's a better word?
al-Naimi: It's an organization.
I think the mafia likes to be called an "organization" too. Afterwards, he complained that the press doesn't call the G8 and other organizations (like the auto companies) a cartel. Francis then quipped that "cartel" must be the new "c" word.
But this actually raises a question: is it fair to call OPEC a cartel? Just to get technical, I thought it might be useful to dust off my old textbook from Econ 101. Microeconomics by Michael Parkin defines a cartel as follows:
A group of firms that has entered into a collusive agreement to restrict output and increase prices and profits is called a cartel.
Call me crazy, but I can't see how that definition could much more accurately describe OPEC. They're a group of firms that meets and agrees to increase or restrict output of oil. Often, that leads to an increase in prices and/or profits.
How about his complaint that they're no different than the G8? I am not intimately acquainted with everything the G8 does, but increasing and restricting output for some given market is not one of their charges, to my knowledge. They discuss a variety of issues, including economics and trade, but I don't think they actually establish quotas.
He also complained (separately, in a prior segment) that the auto companies should be considered a cartel too, because they sometimes close down their factories to control supply. Here's the difference: I am pretty sure that the Detroit 3 do not have closed door meetings where they attempt to identify what the auto market is doing, and then all agree to revise output accordingly.
If I'm wrong about that, and they do behave in this way, then I agree that they too should be called a cartel. But I've never heard about such meetings, as I can't imagine that the Department of Justice would tolerate it. If they decrease output, it's on an individual basis, without any collusion.
So is OPEC a cartel? Absolutely. Are other "organizations" also cartels that the press unfairly characterizes otherwise? Perhaps, but to prove his point al-Naimi needs to come up with some better examples.