Abstract

this paper. 2. BACKGROUND Over the past 25 years, the Organization of Petroleum Exporting Countries (OPEC) cartel has used its market power to create or capitalize on oil market disruptions. In October of 1973, the Arab members of OPEC announced an oil boycott against countries that aided Israel during the "October War." From September 1973 to December 1973, they reduced their crude oil production by 4.2 million barrels per day (mmbd), about 7 percent of 1972 world oil supply (U.S. DOE/EIA, 1997b, table 4.4). World oil prices doubled. Again in 1979-80 the loss of 5.4 mmbd of production from warring Iran and Iraq, about 8 percent of world supply, produced another doubling in the price of oil. Following both shocks, OPEC members restrained their oil output, with the expressed intent of maintaining the new, higher price of oil. From May to December of 1990, total oil output from Kuwait and Iraq fell by 4.8 mmbd, about 7.6 percent of world production. From the second to the fourth quarter of 1990, oil prices jumped from $18.50 to $34.50 per barrel (1995 $). In contrast to previous price shocks, this one was short-lived as OPEC members, especially Saudi Arabia, responded by increasing output by more than 3 mmbd to replace most of the shortfall (Tatom, 1993, p. 138). The oil market machinations of the 1970s and 1980s were very costly to oil consumers and very profitable for oil producers. The price shocks and subsequently higher price levels of the 1970s and 1980s cost the economies of oil importing nations trillions of dollars (U.S. DOE, 1988, p. 6). Greene and Leiby (Greene and Leiby, 1993) estimate the costs from 1972 to 1991 to the U.S. economy alone at over $4 trillion dollars, 80 percent as large as the Nation's total expenditures on national defense over the same perio...

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