The Clumsy Cartel

Abstract

The recent price explosions in the world oil market result from the tardy recognition of the post-1973 consumption slowdown. Such odd results could not happen in a competitive market, but they are not at all strange in the world of the cartel. An analogy may help explain. A diver in the sea cannot go lower than the sea floor, nor higher than the water's surface. He is nearly weightless, and can float at any depth between these extremes, but the slightest impact or effort sends him up or down. Similarly, in any market, the price cannot drop below incremental cost, since such a drop would choke off supply, nor can it rise above the level that would maximize profit to a monopoly, since the monopoly would gain by putting the price back down. But in a once-competitive market, where the price has been rising toward some unknown monopoly optimum, the price can hold steady or can move drastically up or down in response to very slight impulses. In this range the price may show no response, or even a perverse response, to changes in demand. Since 1973, price response has been perverse. This was clearly the case in 1974, as the world headed into recession. It is so again in 1979. During 1973-1978, real incomes in the non-Communist indus- trialized countries rose 13 percent, but oil use nevertheless was flat at approximately 50 million barrels daily (MBD). Exports