The purpose of OPEC is to restrict the amount of oil produced. By doing so, OPEC can make sure that it receives a high price for its oil by only selling at the quantity where marginal cost equals marginal revenue. Restricting the
quantity of output drives up the price, allowing OPEC to set the quantity that maximizes its profits.
In economic terms, OPEC is a cartel. This means that its members come together to form an organization that is basically a monopoly. OPEC's member countries currently hold about 2/3 of the known oil reserves in the world.
One major difficulty faced by all cartels is restricting production among members. OPEC has been plagued by this historically, as members "cheat" by
selling more than they are allowed to at the inflated price. Maintaining a cartel is difficult because it is in the short-term interests of every member to cheat.
The other major problem faced by cartels such as OPEC is preventing non-members from entering the market. OPEC has never included every oil-producing nation in the world, so there have always been countries that have sold as much as they have wanted, taking advantage of the high price
made possible by the sacrifices of OPEC member states.
In 1973, OPEC began restricting oil production among its members. Prices rose greatly, and all the members nations benefited. Ultimately, the price rose to US$35 per barrel in 1981. Changes in prices, as well as wars and political issues, caused supply shocks in oil. This meant that oil was suddenly unavailable, creating major problems in economies worldwide.
However, the high price discouraged use of oil and increased the inclination of other countries to begin producing what oil they could. In addition, research into