The Political Economy of OPEC

We study oil supply decisions in OPEC and non-OPEC countries. In any model of oligopolistic competition in quantities agents' production choices are strategic substitutes. Thus, after controlling for demand-side factors the correlation between changes in the oil supply of two oil fields located in different countries should be weakly negative. Nevertheless, such correlation is consistently positive across OPEC countries. This finding suggests that the behavior of OPEC counties is collusive. We propose a dynamic principal-agent model with asymmetric information to capture such collusion. The model features a dynamic contract between a principal (Saudi Arabia) and a number of agents (the other OPEC countries), in presence of a competitive productive fringe. This structure generates the right sign for the correlation of interest. We derive the structural equations for the field-level cost functions and delta-supply functions. We estimate such functions using a dataset from Rystad, that covers an average of 91.05% of the world's total oil production over 34 years. We use such estimates in order to identify the marginal effect of a change in the world demand of oil on the marginal production of each oil field.