Two subdivisions of literature have discussed this theoretical account. One subdivision argues the function of Saudi Arabia as a dominant manufacturer within OPEC, whereas in another one a nucleus group is defined as dominant manufacturers. The latter subdivision consists of two versions: two portion trust and three portion trust. Quite similar to each other ; they consist of a nucleus group and some sub-groups.
Saudi Arabia as the dominant house
Mabro ( 1975 ) is one of the early surveies, consistent with the dominant function of Saudi Arabia, bespeaking that the “ OPEC is Saudi Arabia ” . Later on, Erickson ( 1980 ) analyzes the market, claiming that Saudi Arabia is the dominant manufacturer. He mentioned the remainder of oil market as a competitory periphery. Plaut ( 1981 ) believes that OPEC behaviour is more like an oligopoly. He noted that “ Saudi Arabia, OPEC ‘s monetary value leader and largest manufacturer, is the chairing force that reflects that state ‘s alone economic function in OPEC. ” Griffin and Teece ( 1982 ) define OPEC as the dominant manufacturer in the universe oil market. They mention Saudi Arabia as the swing manufacturer in this community. That is, Saudi Arabia adjusts its production harmonizing to the other member ‘s end product degree. In their sentiment, Saudi works as the “ balance wheel ” , absorbs the supply and demand fluctuations to acquire the monopoly monetary value. Griffin and Nielson ( 1994 ) investigate schemes adopted by the OPEC members for the period 1983 to 1990. Harmonizing to their empirical research, Saudi Arabia worked as a swing manufacturer between 1983 and 1985. However, in instance of any rip offing observation, Saudi would halt its actions. Adelman ( 1995 ) provinces in his book that “ The Saudis have acted as what they are: the taking house in the universe oil market ” . Alhajji and Huettner ( 2000a ) see different economic literature features for a trust and seek to look into the being of those features in some trade good trusts. They found that none of the specified features would suit OPEC. Their survey besides introduces a theoretical account to cipher the snap of demand for OPEC ‘s oil. Result show that this snap is less than 1 for OPEC as a whole between 1973 and 1994, while it ‘s greater than 1 for Saudi Arabia. This contradicts both net income maximizing and gross maximising conditions in a trust. In contrast to stable snap of OPEC as a whole community, snap of demand for Saudi Arabia fluctuates a batch. This shows the swing function of Saudi Arabia in the oil market. All in all, they believe that OPEC is non a trust. It ‘s chiefly Saudi Arabia and other members merely benefit from some side advantages by this rank. Regular diplomatic dealingss with other members, sharing the cost of energy market research, and hearing the voice of little members through OPEC are some of these advantages. They conclude that “ OPEC is composed of Saudi Arabia, dominant universe manufacturer, plus several distinguishable sub-groups ” . Alhajji and Huettner ( 2000b ) cover some possible market behaviours to prove if OPEC as whole or different sub-groups of the trust exercises any market power on the rough oil market. Therefore, they apply a multi-equation dynamic econometric theoretical account for the period 1973 to 1994. Result show that OPEC and OPEC nucleus ( Saudi Arabia, Kuwait, UAE, and Qatar ) are non able to move as dominant manufacturers while Saudi Arabia entirely can play this function in the oil market.
Spilimbergo ( 2001 ) tests the hypothesis of dynamic competitory behaviour versus market sharing ( that is, each member in OPEC gets a fixed fraction of entire gross ) trust within OPEC members between 1983 and 1991. Consequences reject the market sharing behavior hypothesis at a really high assurance degree. However, Saudi Arabia is an exclusion in this instance. De Santis ( 2003 ) efforts to explicate oil monetary values fluctuations in the short tally. From his point of position, the chief ground of these fluctuations is OPEC quota government understanding. Saudi Arabian ‘s oil supply is inelastic in the short tally, so a big daze to the oil market instantly changes the monetary value but in the long tally its dominant function will alter the end product with lower monetary value. To happen out the impact of rough oil demand and supply dazes on monetary values and end product, he constructs a estimable general equilibrium ( CGE ) theoretical account for Saudi Arabia. Result back up his analysis about oil monetary values overshooting. Bukenya and Labys ( 2009 ) look into whether Saudi Arabian ‘s petroleum oil monetary values lead the universe petroleum oil monetary values. They test this hypothesis utilizing six OPEC and six non-OPEC states for the period 1970 to 2007. Dynamic correlativity, co-integration and vector auto-regression analyses are econometrics techniques which were employed in their survey. Results support the being of a long tally equilibrium relationship between Saudi Arabia and every other state for the rough oil monetary value.
A nucleus group as the dominant house
Another subdivision of literature attempts to demo that OPEC power dressed ores in a group of states called the nucleus group. Large militias, low population, and wastes desert geographics are common features of members in nucleus group. They have the potency to significantly increase their exports because of economic and political events. Harmonizing to Singer ( 1983 ) , Saudi Arabia and smaller Arab states are able to make full the spread between universe oil demand and other providers ‘ production. These states are able to impact the oil monetary value by seting their production. Dahl and Yucel ( 1991 ) analyze several hypotheses to pattern OPEC behaviour. They besides believe on the power of nucleus group and reference that “ OPEC, instead than being a weak trust, consists of a non-competitive nucleus of swing manufacturers ” . Hansen and Lindholt ( 2008 ) use a multi-equation econometric theoretical account to prove if OPEC behaves as a dominant manufacturer in the oil market during 1973-2001. Furthermore, they test the being of a dominant manufacturer within OPEC members. To this terminal, they use an equilibrium rectification mechanism theoretical account to mensurate the market power. Theoretical theoretical account of their survey follows the dominant manufacturer theoretical account outlined in Alhajji and Huettner ( 2000b ) . However, Hansen and Lindholt ( 2008 ) distinguish between the oil monetary value for the manufacturer and the consumer. The logic of their paper refers to short run snap that is by and large smaller than the long tally one. Due to provide and demand side jobs, complete accommodation requires a drawn-out clip, normally in the order of few old ages. Hence, dominant manufacturers have more market power in the short tally. Empirical consequences in Hansen and Lindholt ( 2008 ) show that the features of dominant manufacturer fitted OPEC nucleus group after 1994.
Hnyilicza and Pindyck ( 1976 ) present OPEC as an illustration of a two parts trust: a block of rescuer and a block of Spender states. The states that have small immediate demand for hard currency and low rate of price reduction are known as rescuers while the states with larger demand of hard currency and higher rate of price reduction are called Spenders. Their survey considers Saudi Arabia as a portion of rescuer states and Iran among the Spenders. Cartel policies define harmonizing to the understanding between two groups based on their bargaining power and theory of concerted games determines the bargaining solution. Consequently, pricing policies follow those of a monopolistic trust if end product portions are fixed. Otherwise, optimum way depends on the bargaining power. Tourk ( 1977 ) besides divides OPEC into two blocks, one with big oil reservoirs and little population ( Saudi Arabia, UAE, Kuwait and Qatar ) and the other 1 with big population but little reservoirs ( the remainder of OPEC ) . Maximizing the net present value of their future net incomes is considered to be the chief aim of these two blocks in his survey. Bremond et Al. ( 2012 ) look into the nexus between production of each state and the remainder of the OPEC members to see if concerted behaviour exists. For this intent, they apply Engel and Granger trial. They besides use Granger causality trial to look into the influence of production on oil monetary value. Analyzing OPEC behaviour in different sub-periods from 1973 to 2009, they found that OPEC production policy have an consequence on monetary value merely in the sub-period after the counter daze. To demo that OPEC act as a trust, they classify OPEC members to saver and Spenders groups. This survey considers Iran as a member of rescuer group because of its big oil ( and gas ) reservoirs and its political government.
Three-part trust theoretical account divides members into a nucleus group, states which try to maximise the monetary value and the other group which maximizes the measure. Eckbo ( 1976 ) , Noreenge ( 1978 ) , Houthakker ( 1979 ) , Daly et Al. ( 1982 ) and Griffin and Steele ( 1986 ) are in line with this thought. In these surveies, Saudi Arabia is chiefly grouped as a member of the nucleus while Iran is a monetary value maximizer.
3.2. One portion trust theoretical account
In contrast to the first group and its subgroups, which introduce Saudi Arabia as a dominant manufacturer or portion of it, this sub-section will discourse the opposite side which considers OPEC as a one portion trust. To gauge the market behaviour, Griffin ( 1985 ) tests several alternate hypotheses including trust, competitory, mark grosss, and belongings right theoretical accounts for the OPEC members. Evidence shows that for the period 1971 to 1983, other theoretical accounts are often rejected except the partial market sharing trust hypothesis which proved to be rightful for all 11 members. Based on his empirical consequences, OPEC appears to be a existent trust with partly effectual end product coordination. He states that “ OPEC is much more than Saudi Arabia ” . Later on, Jones ( 1990 ) finds the same consequences for the period 1983 to 1988. That is, most of the OPEC members continued to act as a partial market sharing theoretical account whilst the bulk of the non-OPEC manufacturers did non follow the same behaviour. In his paper, Loderer ( 1985 ) considers monetary value impact as a status for any effectual trust and trials if OPEC is able to impact the monetary value. To analyse the market reaction, he implies hebdomadal colony monetary values for future contracts. His trust hypothesis is supported by the results of his informations analysis for the period 1981 to 1983. After that, Youhanna ( 1994 ) tries to update Griffin ‘s ( 1985 ) survey. In this survey, the partial market-sharing theoretical account dominates other theoretical accounts, nevertheless, with different strength. Although the competitory theoretical account was rejected by all states, the market sharing theoretical account proved to be righteous for seven OPEC members. Following Dahl and Yucel ( 1991 ) , Gulen ( 1996 ) tests the effectivity of OPEC as a trust. In instance, there should be a long tally relationship between member ‘s and the OPEC production. He made usage of monthly series informations obtained from all OPEC members covering January 1965 to February 1993. To happen the overall success of OPEC, he estimates all co-integration vectors. Using a causality trial, he besides checks if OPEC can impact oil monetary value by seting its production. Results show grounds of end product coordination for the beginning of the 1980 ‘s. Bockem ( 2004 ) attempts to analyze if OPEC can move as a trust. For that intent, he uses New Empirical Industrial Organization ( NEIO ) thought. In this Approach, demand and supply of the industry are at the same time estimated and used to happen the market power parametric quantity. This parametric quantity is One in instance of perfect trust market. A choice of campaigner theoretical accounts is examined and values for market power parametric quantities are predicted. His survey rejects all market theoretical accounts except the one which describes OPEC as a monetary value leader while non-OPEC states moving as monetary value takers. Using econometric methodological analysis, Kaufmann et Al. ( 2008 ) effort to gauge theoretical accounts of rough oil production sing economic and organisational determiners for eight OPEC states. Consequences of their survey show that quotas have an impact on OPEC oil production both in the short tally and long tally. That is, OPEC exercises market power by finding quota for each state. In contrast to some other surveies, none of the analyzed OPEC members in Kaufmann et Al. ( 2008 ) survey show negative relationship between monetary values and production. So due to market sharing behaviour of all members ( except Saudi Arabia ) and the function of quota, a non-competitive behaviour is suggested for OPEC in their survey.
Keeping the position that OPEC members may move as a dominant house theoretical account or a trust theoretical account, utilizing dominancy and market sharing definition, we expect different oil production for each state in the market.
Iran as the 2nd largest oil manufacturer in OPEC after Saudi Arabia, and the 3rd largest exporter in the universe plays an of import function in universe oil market. Current oil trade stoppage on Iran will convey some effects for the universe and altering the universe oil monetary value can be one of these possibilities. If OPEC members behave as one of the dominant house theoretical account versions, Iran oil production could n’t hold any consequence on the universe oil monetary value. To the best of our cognition, Iran has ne’er been categorized in the group of dominant manufacturers, neither as a dominant manufacturer entirely nor as a portion of dominant nucleus manufacturers. It has merely seldom been mentioned as a saver state in the literature. Sing the whole organisation as a one portion market sharing trust, monetary value is expected to see a alteration under trade stoppage. To demo the relationship between Persian oil production and international oil monetary values, the modified Wald Granger causality trial with the void hypothesis of no causality is used in this survey. Sample period covers monthly observations from January 1973 to September 2011. Result show that there is no Granger causality relationship between the Persian oil production and international oil monetary values. For comparative analysis, we examine the same relationship for the instance of Saudi Arabia. In the latter instance, consequences show a extremely statistically important causal relationship between the Saudi oil production and international oil monetary values.