| Summary: | Although conventional wisdom suggests that OPEC is a cartel, many studies since 1973 have focused on other underlying forces to explain and forecast OPEC behaviour. Economic theory suggests that natural resource producers should dynamically optimize, and a variety of studies have relied on dynamic optimization. Hence, we build a model consistent with dynamic optimization and jointly test dynamic optimization with other hypotheses prevalent in the literature. We use econometric analysis of quarterly data from 1971:l to 1986:4.<br/><br/> We find that individual OPEC countries behave in quite dissimilar ways, suggesting that a cartel hypothesis is not appropriate. Under our specification, there was no evidence of dynamic optimization or a strong target revenue model. Some evidence indicated that Iran, Libya, Saudi Arabia, and the United Arab Emirates (UAE) may include a form of target revenue in their goals. Iraqi behaviour was most consistent with a static competitive market structure. While a static non-competitive market structure was not rejected for Algeria, capacity constraints are more likely to have dictated Algerian policy. A static non-competitive market structure was not rejected for Nigeria, Saudi Arabia, Kuwait, and Venezuela. Given the divergent behaviour of OPEC countries, we conclude that OPEC, rather than being a weak cartel, consists of a non-competitive core of swing producers, each swinging to its own rhythm.
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