《国际政治经济学》文献资料（Institutions and International Political Economy）The Emperor Has No Clothes The Limits of OPEC in the Global Oil Market

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The Emperor Has No Clothes:The Limits of OPEC in the Global Oil Market Jeff D.Colgan Abstract Scholars have long debated the causal impact of international institutions such as the World Trade Organization or the International Monetary Fund.This study investigates Organization of Petroleum Exporting Countries (OPEC),an organization that purports to have significant influence over the market for the world's most important commodity-petroleum.Using four empirical tests,I find that OPEC has little or no impact on its members'production levels.These findings prompt the question of why so many people,including scholars,believe in OPEC's influence over the world's oil supply.The idea of OPEC as a cartel is a"rational myth"that supports the organization's true principal function,which is to generate political benefits for its members.One benefit it generates is international prestige.I test this idea using data on diplomatic rep- resentation and find that OPEC membership is associated with increased international recognition by other states.Overall,these findings help one to better understand inter- national regimes and the process of ideational change in world politics. Scholars have long debated the causal impact of international institutions.Existing research considers the impact of the World Trade Organization(WTO)on trade,the International Monetary Fund (IMF)on fiscal and monetary policies,2 and human rights treaties on state behavior.3 Notable mostly for its absence within political science is the Organization of Petroleum Exporting Countries(OPEC),an institution that many people believe can and does manipulate the global price of oil.This is surprising.Oil is the world's most important commodity,4 and changes in its price are commonly believed to have powerful economic and political consequences. Moreover,OPEC represents an intriguing test case for theories of international cooperation.Like the WTO but unlike human rights treaties,there is a direct material I thank Michael Aklin,Andre Bernier,David Bosco,Sarah Bush,Ashley Connor,Sikina Jinnah,Robert Keohane,Kristina Johnson,Moonhawk Kim,James Morrison,Margaret Peters,Margaret Roberts,David Steinberg,Jordan Tama,Felicity Vabulas,Sharon Weiner,and participants at the Princeton University Conference on Environmental Politics,the EPSA 2012 meeting,and the University of Wisconsin- Madison Interational Relations Colloguium,for helpful feedback on early versions of this article. Special thanks to David Parker and Laina Stuebner for research assistance.Any remaining errors are my own.I gratefully acknowledge support from American University and the Woodrow Wilson International Center for Scholars. 1.See Rose 2004 and 2007;and Goldstein,Rivers,and Tomz 2007. 2.See Simmons and Hopkins 2005;and von Stein 2005. 3.See Sikkink 2011:and Hafner-Burton and Ron 2009. 4.By "most important commodity market,"I mean oil is the most valuable commodity traded inter- nationally.measured by total market. International Organization 68.Summer 2014,pp.599-632 The IO Foundation,2014 doi:10.1017/S0020818313000489

The Emperor Has No Clothes: The Limits of OPEC in the Global Oil Market Jeff D. Colgan Abstract Scholars have long debated the causal impact of international institutions such as the World Trade Organization or the International Monetary Fund. This study investigates Organization of Petroleum Exporting Countries (OPEC), an organization that purports to have significant influence over the market for the world’s most important commodity–petroleum. Using four empirical tests, I find that OPEC has little or no impact on its members’ production levels. These findings prompt the question of why so many people, including scholars, believe in OPEC’s influence over the world’s oil supply. The idea of OPEC as a cartel is a “rational myth” that supports the organization’s true principal function, which is to generate political benefits for its members. One benefit it generates is international prestige. I test this idea using data on diplomatic representation and find that OPEC membership is associated with increased international recognition by other states. Overall, these findings help one to better understand international regimes and the process of ideational change in world politics. Scholars have long debated the causal impact of international institutions. Existing research considers the impact of the World Trade Organization (WTO) on trade,1 the International Monetary Fund (IMF) on fiscal and monetary policies,2 and human rights treaties on state behavior.3 Notable mostly for its absence within political science is the Organization of Petroleum Exporting Countries (OPEC), an institution that many people believe can and does manipulate the global price of oil. This is surprising. Oil is the world’s most important commodity,4 and changes in its price are commonly believed to have powerful economic and political consequences. Moreover, OPEC represents an intriguing test case for theories of international cooperation. Like the WTO but unlike human rights treaties, there is a direct material I thank Michael Aklin, André Bernier, David Bosco, Sarah Bush, Ashley Connor, Sikina Jinnah, Robert Keohane, Kristina Johnson, Moonhawk Kim, James Morrison, Margaret Peters, Margaret Roberts, David Steinberg, Jordan Tama, Felicity Vabulas, Sharon Weiner, and participants at the Princeton University Conference on Environmental Politics, the EPSA 2012 meeting, and the University of WisconsinMadison International Relations Colloquium, for helpful feedback on early versions of this article. Special thanks to David Parker and Laina Stuebner for research assistance. Any remaining errors are my own. I gratefully acknowledge support from American University and the Woodrow Wilson International Center for Scholars. 1. See Rose 2004 and 2007; and Goldstein, Rivers, and Tomz 2007. 2. See Simmons and Hopkins 2005; and von Stein 2005. 3. See Sikkink 2011; and Hafner-Burton and Ron 2009. 4. By “most important commodity market,” I mean oil is the most valuable commodity traded internationally, measured by total market. International Organization 68, Summer 2014, pp. 599–632 © The IO Foundation, 2014 doi:10.1017/S0020818313000489

600 International Organization reward for collective action in OPEC's case,so one might expect deep cooperation. Popular wisdom also holds that OPEC is influential,but economic studies investi- gating OPEC's market impact have had difficulty finding conclusive evidence. This generates two questions.First,does OPEC operate as a cartel,meaning that it significantly restricts its members'oil production in order to affect prices?Second, if OPEC is not actually a cartel,why do so many people believe that it is? The first step is to investigate whether OPEC actually acts as a cartel.5 Using some of the same tests that in the past have helped evaluate the impact of the WTO and other organizations,I find that OPEC rarely if ever constrains or influences the oil production rate of its member states.Although this article is not the first to question OPEC's effec- tiveness in restricting the oil supply,6 there is sufficient debate and ambiguity in the existing literature to sustain OPEC's image,even among scholars,as a cartel that manipulates the price of oil by restricting supply.Therefore,I conduct four empirical tests in search of OPEC's effect on oil production,at least two of which are entirely novel.I find that OPEC membership is not significantly correlated with lower oil pro- duction once other relevant factors are controlled for.At a minimum,there is no good evidence to believe that OPEC is a cartel,and I shift the burden of proof to those who would claim that OPEC facilitates economic collusion.I make no claim about whether OPEC could restrict oil supply in principle;I simply argue that it does not do so in prac- tice.This is due in part,but not principally,to endemic cheating by OPEC members (that is,oil production in excess of their quotas).A cartel needs to set tough goals and meet them;OPEC sets easy goals and fails to meet even those. There was one occasion on which OPEC did have a significant impact on the world oil market,namely the 1973 oil crisis,but OPEC's role in the crisis has been greatly misunderstood.That event helped to endow OPEC with a reputation as a manipulator of world oil markets. If OPEC does not operate as a cartel,why do so many people believe that it does? The idea of OPEC as a cartel is a"rational myth"that supports the organization's true principal function,which is to generate political benefits for its members.Scholars have found that various organizations adopt rational myths,?and OPEC would not be the first international institution to outlive its original mandate.8 OPEC's current role is obscured in part by the complexity of the world oil market,in part by the fact that one of its members,Saudi Arabia,probably does have some market power on its own (distinct from the organization to which it belongs),and in part by misdirection by OPEC itself.OPEC's perceived market power is a useful fiction that generates pol- itical benefits for its members with domestic and interational audiences. 5.A cartel is defined as a group of firms(or states,in this case)that creates agreements about quantities to produce or prices to charge.Mankiw 2011,351.More details later. 6.As I show,the debate thus far has been principally among economists;the paucity of attention given to OPEC noted earlier describes political science.This disciplinary divergence has consequences:economic analyses of OPEC typically omit important political variables,potentially biasing the results. 7.See McNamara 2002;Boiral 2007;and Meyer and Rowan 1977. 8.See Bamett and Finnemore 1999:Gray 2011:Duffield 1994:and Wallander 2000

reward for collective action in OPEC’s case, so one might expect deep cooperation. Popular wisdom also holds that OPEC is influential, but economic studies investigating OPEC’s market impact have had difficulty finding conclusive evidence. This generates two questions. First, does OPEC operate as a cartel, meaning that it significantly restricts its members’ oil production in order to affect prices? Second, if OPEC is not actually a cartel, why do so many people believe that it is? The first step is to investigate whether OPEC actually acts as a cartel.5 Using some of the same tests that in the past have helped evaluate the impact of the WTO and other organizations, I find that OPEC rarely if ever constrains or influences the oil production rate of its member states. Although this article is not the first to question OPEC’s effectiveness in restricting the oil supply,6 there is sufficient debate and ambiguity in the existing literature to sustain OPEC’s image, even among scholars, as a cartel that manipulates the price of oil by restricting supply. Therefore, I conduct four empirical tests in search of OPEC’s effect on oil production, at least two of which are entirely novel. I find that OPEC membership is not significantly correlated with lower oil production once other relevant factors are controlled for. At a minimum, there is no good evidence to believe that OPEC is a cartel, and I shift the burden of proof to those who would claim that OPEC facilitates economic collusion. I make no claim about whether OPEC could restrict oil supply in principle; I simply argue that it does not do so in practice. This is due in part, but not principally, to endemic cheating by OPEC members (that is, oil production in excess of their quotas). A cartel needs to set tough goals and meet them; OPEC sets easy goals and fails to meet even those. There was one occasion on which OPEC did have a significant impact on the world oil market, namely the 1973 oil crisis, but OPEC’s role in the crisis has been greatly misunderstood. That event helped to endow OPEC with a reputation as a manipulator of world oil markets. If OPEC does not operate as a cartel, why do so many people believe that it does? The idea of OPEC as a cartel is a “rational myth” that supports the organization’s true principal function, which is to generate political benefits for its members. Scholars have found that various organizations adopt rational myths,7 and OPEC would not be the first international institution to outlive its original mandate.8 OPEC’s current role is obscured in part by the complexity of the world oil market, in part by the fact that one of its members, Saudi Arabia, probably does have some market power on its own (distinct from the organization to which it belongs), and in part by misdirection by OPEC itself. OPEC’s perceived market power is a useful fiction that generates political benefits for its members with domestic and international audiences. 5. A cartel is defined as a group of firms (or states, in this case) that creates agreements about quantities to produce or prices to charge. Mankiw 2011, 351. More details later. 6. As I show, the debate thus far has been principally among economists; the paucity of attention given to OPEC noted earlier describes political science. This disciplinary divergence has consequences: economic analyses of OPEC typically omit important political variables, potentially biasing the results. 7. See McNamara 2002; Boiral 2007; and Meyer and Rowan 1977. 8. See Barnett and Finnemore 1999; Gray 2011; Duffield 1994; and Wallander 2000. 600 International Organization

The Limits of OPEC in the Global Oil Market 601 I test this argument using a cross-national data set on diplomatic recognition,and show that OPEC membership is significantly correlated with increased ambassadorial representation from other countries.Consequently,policy-makers within OPEC have no incentive to undermine the idea that OPEC influences the world oil market.This does not necessarily mean that they are actively lying,but rather that they have an incentive to behave in ways that are consistent with the cartel idea so long as that be- havior is not too costly.Other knowledgeable actors outside of OPEC fail to dispel the myth for various reasons.In sum,the story of OPEC is mostly about politics, not economics. Beyond the intrinsic importance of OPEC and the world oil market,this inquiry offers three important lessons about international politics.First,the fact that such a widespread belief could be wrong sheds light on the process of ideational change and the failure to update beliefs.This contributes to a growing literature suggesting that actors'knowledge of causation,especially in economic affairs,is imperfect. Second,the case of OPEC offers a complement to understanding international organ- izations as a product of rational design.10 Most accounts assume that there is a good fit between an organization's original mandate and its enduring function,but OPEC's history suggests that at least some organizations are designed long before their event- ual function is fully understood.Third,the article fills a gap in the research assessing the impact of institutions,moving beyond the oft-studied WTO and IMF/World Bank.It contributes to recent work on oil-producing states'participation in inter- national organizations.12 Finally,the evidence that OPEC is not a cartel calls into question research in political science that is based on that premise.13 Existing Ideas About OPEC OPEC was established in 1960.Its founders,modeling it after the Texas Railroad Commission,hoped that it would act as a cartel.14 Initially this proved impossible because OPEC member countries did not gain control of their own oil production decisions until the 1970s.OPEC began to assign formal production quotas only in 1982.The organization meets regularly and makes decisions by consensus,which effectively gives each state a veto.15 OPEC currently has twelve member states: 9.See Darden 2009;Legro 2005;Blyth 2002;and MeNamara 2002. 10.Koremenos,Lipson,and Snidal 2001. 11.See Martin and Simmons 1998;and Botcheva and Martin 2001. 12.See Lesage,Van de Graaf,and Westphal 2010:Ross and Voeten 2011;Rudra and Jensen 2011; Goldthau and Witte 2011;Colgan,Keohane,and Van de Graaf 2012;and Baccini,Lenzi,and Thurer 2013. 13.See Blaydes 2004;and Alt,Calvert,and Humes 1988. 14.See Parra 2004;and Yergin 2008. 15.OPEC can set or change its members'quotas for oil production at any of its regular meetings,or it can do so in an"extraordinary session."Each member state appoints a delegate to represent it at OPEC meet- ings,typically the Minister of Oil or its equivalent

I test this argument using a cross-national data set on diplomatic recognition, and show that OPEC membership is significantly correlated with increased ambassadorial representation from other countries. Consequently, policy-makers within OPEC have no incentive to undermine the idea that OPEC influences the world oil market. This does not necessarily mean that they are actively lying, but rather that they have an incentive to behave in ways that are consistent with the cartel idea so long as that behavior is not too costly. Other knowledgeable actors outside of OPEC fail to dispel the myth for various reasons. In sum, the story of OPEC is mostly about politics, not economics. Beyond the intrinsic importance of OPEC and the world oil market, this inquiry offers three important lessons about international politics. First, the fact that such a widespread belief could be wrong sheds light on the process of ideational change and the failure to update beliefs. This contributes to a growing literature suggesting that actors’ knowledge of causation, especially in economic affairs, is imperfect.9 Second, the case of OPEC offers a complement to understanding international organizations as a product of rational design.10 Most accounts assume that there is a good fit between an organization’s original mandate and its enduring function, but OPEC’s history suggests that at least some organizations are designed long before their eventual function is fully understood. Third, the article fills a gap in the research assessing the impact of institutions,11 moving beyond the oft-studied WTO and IMF/World Bank. It contributes to recent work on oil-producing states’ participation in international organizations.12 Finally, the evidence that OPEC is not a cartel calls into question research in political science that is based on that premise.13 Existing Ideas About OPEC OPEC was established in 1960. Its founders, modeling it after the Texas Railroad Commission, hoped that it would act as a cartel.14 Initially this proved impossible because OPEC member countries did not gain control of their own oil production decisions until the 1970s. OPEC began to assign formal production quotas only in 1982. The organization meets regularly and makes decisions by consensus, which effectively gives each state a veto.15 OPEC currently has twelve member states: 9. See Darden 2009; Legro 2005; Blyth 2002; and McNamara 2002. 10. Koremenos, Lipson, and Snidal 2001. 11. See Martin and Simmons 1998; and Botcheva and Martin 2001. 12. See Lesage, Van de Graaf, and Westphal 2010; Ross and Voeten 2011; Rudra and Jensen 2011; Goldthau and Witte 2011; Colgan, Keohane, and Van de Graaf 2012; and Baccini, Lenzi, and Thurner 2013. 13. See Blaydes 2004; and Alt, Calvert, and Humes 1988. 14. See Parra 2004; and Yergin 2008. 15. OPEC can set or change its members’ quotas for oil production at any of its regular meetings, or it can do so in an “extraordinary session.” Each member state appoints a delegate to represent it at OPEC meetings, typically the Minister of Oil or its equivalent. The Limits of OPEC in the Global Oil Market 601

602 International Organization Algeria,Angola,Ecuador,Iran,Iraq.Kuwait,Libya,Nigeria,Qatar,Saudi Arabia, the UAE,and Venezuela.16 Collectively,OPEC produced 41 percent of the world total in 2009,though individually even its largest producer has a relatively small market share (Saudi Arabia has 12 percent).17 If OPEC were able to cooperate flawlessly,it might exert significant market influence. The significant oil price increases of the 1970s convinced many observers that OPEC had become the cartel that its founders envisioned.8 Krasner even argued in a 1974 article entitled "Oil Is the Exception"that the characteristics of oil made it especially susceptible to an international cartel compared with other commod- ities.19 Yet over time many studies have cast significant doubt on the idea that OPEC is a cartel.20 Some scholars suggested a "dominant producer"model, namely that Saudi Arabia alone exerted market power,because it seems to be the only state with sizeable surplus production capacity.21 Others simply argued that OPEC had little market impact and that oil prices were the product of other market factors.22 More recently,scholars have noted a series of limitations on OPEC's effec- tiveness.23 For instance,Bremond and others found that OPEC is a price taker,not a price setter,in the majority of subperiods that they consider.24 Still,none of the critics of the OPEC-as-cartel hypothesis offered a compelling alternative account of the organization's role.25 Even as scholars cast doubts on its effectiveness,there was sufficient ambiguity to sustain OPEC's image as a cartel.Kaufman and colleagues answer the question "Does OPEC matter?"(for oil prices and production)in the affirmative,as others do.26 Smith finds that "OPEC is much more than a noncooperative oligopoly,but less than a frictionless cartel(that is,multiplant monopoly)."27 Despite pointing to OPEC's limitations,Bremond and colleagues conclude that"OPEC influence has evolved through time"rather than rejecting it as a cartel,and they support the idea that a membership subset sustains OPEC's ability to influence markets,as earlier research argued.28 16.Indonesia and Gabon were previously members. 17.BP Statistical Review of World Energy. 18.See Osbome 1976:Seymour 1980;Doran 1980;and Adelman 1982.See also internal US government reactions during the 1970s in Qaimmaqami and Keefer 2011. 19.Krasner 1974. 20.See Griffin 1985;Dahl and Yuicel 1991;Alhajji and Huettner 2000;Barsky and Kilian 2004:Reynolds and Pippenger 2010:and Caims and Calfucura 2012. 21.Moran 1982.Adelman suggests that OPEC wobbles between acting as a dominant firm and as part of a cartel depending on market conditions.Adelman 1982 22.See Johany 1980;and MacAvoy 1982. 23.See Gulen 1996;Kohl 2002;Kaufman et al.2004 and 2008;Smith 2005;and Hyndman 2008. 24.Bremond,Hache,and Mignon 2012,125. 25.For an early suggestion about OPEC's myth making,see Doran,1977 (chap.6). 26.See Kaufman et al.2004 and 2008;Demirer and Kutan 2006;and Bentzen 2007. 27.Smith2005,74. 28.See Bremond,Hache,and Mignon 2012;Teece 1982;and Cremer and Salehi-Isfahani 1980

Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the UAE, and Venezuela.16 Collectively, OPEC produced 41 percent of the world total in 2009, though individually even its largest producer has a relatively small market share (Saudi Arabia has 12 percent).17 If OPEC were able to cooperate flawlessly, it might exert significant market influence. The significant oil price increases of the 1970s convinced many observers that OPEC had become the cartel that its founders envisioned.18 Krasner even argued in a 1974 article entitled “Oil Is the Exception” that the characteristics of oil made it especially susceptible to an international cartel compared with other commodities.19 Yet over time many studies have cast significant doubt on the idea that OPEC is a cartel.20 Some scholars suggested a “dominant producer” model, namely that Saudi Arabia alone exerted market power, because it seems to be the only state with sizeable surplus production capacity.21 Others simply argued that OPEC had little market impact and that oil prices were the product of other market factors.22 More recently, scholars have noted a series of limitations on OPEC’s effectiveness.23 For instance, Brémond and others found that OPEC is a price taker, not a price setter, in the majority of subperiods that they consider.24 Still, none of the critics of the OPEC-as-cartel hypothesis offered a compelling alternative account of the organization’s role.25 Even as scholars cast doubts on its effectiveness, there was sufficient ambiguity to sustain OPEC’s image as a cartel. Kaufman and colleagues answer the question “Does OPEC matter?” (for oil prices and production) in the affirmative, as others do.26 Smith finds that “OPEC is much more than a noncooperative oligopoly, but less than a frictionless cartel ( that is, multiplant monopoly).”27 Despite pointing to OPEC’s limitations, Brémond and colleagues conclude that “OPEC influence has evolved through time” rather than rejecting it as a cartel, and they support the idea that a membership subset sustains OPEC’s ability to influence markets, as earlier research argued.28 16. Indonesia and Gabon were previously members. 17. BP Statistical Review of World Energy. 18. See Osborne 1976; Seymour 1980; Doran 1980; and Adelman 1982. See also internal US government reactions during the 1970s in Qaimmaqami and Keefer 2011. 19. Krasner 1974. 20. See Griffin 1985; Dahl and Yücel 1991; Alhajji and Huettner 2000; Barsky and Kilian 2004; Reynolds and Pippenger 2010; and Cairns and Calfucura 2012. 21. Moran 1982. Adelman suggests that OPEC wobbles between acting as a dominant firm and as part of a cartel depending on market conditions. Adelman 1982. 22. See Johany 1980; and MacAvoy 1982. 23. See Gülen 1996; Kohl 2002; Kaufman et al. 2004 and 2008; Smith 2005; and Hyndman 2008. 24. Brémond, Hache, and Mignon 2012, 125. 25. For an early suggestion about OPEC’s myth making, see Doran, 1977 (chap. 6). 26. See Kaufman et al. 2004 and 2008; Demirer and Kutan 2006; and Bentzen 2007. 27. Smith 2005, 74. 28. See Brémond, Hache, and Mignon 2012; Teece 1982; and Crémer and Salehi-Isfahani 1980. 602 International Organization

The Limits of OPEC in the Global Oil Market 603 This ambiguity leads many scholars to continue to believe that OPEC is a cartel, albeit imperfect.Hyndman asserts "OPEC is obviously a cartel that restricts output in order to obtain super-competitive profits,"an assertion shared by other econo- mists.29 This is true also among many political scientists.30 For instance,Blaydes argues that there is an intra-OPEC bargaining game to divide the cartel's profits,in which oil-rich states allow oil-poor states to cheat on their OPEC quotas to a greater extent than the oil-rich ones do.31 Yet Blaydes provides no evidence of cartel profits.Empirically,she studies only the behavior of the OPEC members, and does not compare them with non-OPEC members,so it is not possible to assess how either the oil-rich or oil-poor OPEC states'production behavior differs from other states. Given the extent of scholarly debate,it is perhaps not surprising that many journal- ists and policy-makers continue to view OPEC as a cartel.Yet international relations theory offers important reasons to doubt that view.As Downs and colleagues argue, even states that appear to be cooperating might be acting as they would have done even without the agreement,because states design international agreements to avoid requirements for costly adjustments to their behavior.32 Thus OPEC quotas, even if strictly obeyed,might not actually require states to deviate significantly from their counterfactual behavior in which no quotas existed. Consequently,one needs to have a fresh look at the evidence.None of the existing studies provide any direct evidence that OPEC members produce less oil than they would in the counterfactual world in which OPEC did not exist.They typically focus instead on measuring the degree to which production changes in one OPEC member are correlated with production changes in the rest of OPEC,a correlation that could be explained in a variety of other ways,such as common reactions to market conditions.33 Moreover,many models do not incorporate relevant political variables,such as the regime type and investment risk of a state,creating the potential for omitted variable bias. OPEC As Market Manipulator? Many observers have noted that cheating on OPEC quotas is widespread,but there are additional problems that are probably even more important.I consider four major tests of OPEC's market impact.I focus on the period since 1982,when OPEC first began to assign quotas("market allocations")to its members.The tests focus exclusively on OPEC's impact on oil production,rather than oil prices,for two reasons.The first is practical:the relationship between OPEC quotas and 29.See Hyndman 2008,812;Smith 2005 and 2009;and Simpson 2008. 30.See Ikenberry 1988;Alt,Calvert,and Humes 1988;Lieber 1992;Shaffer 2009;and Sovacool 2011. 31.Blaydes 2004. 32.Downs,Rocke,and Barsoom 1996. 33.See Griffin 1985;Kaufman et al.2008;and Bremond,Hache,and Mignon 2012

This ambiguity leads many scholars to continue to believe that OPEC is a cartel, albeit imperfect. Hyndman asserts “OPEC is obviously a cartel that restricts output in order to obtain super-competitive profits,” an assertion shared by other economists.29 This is true also among many political scientists.30 For instance, Blaydes argues that there is an intra-OPEC bargaining game to divide the cartel’s profits, in which oil-rich states allow oil-poor states to cheat on their OPEC quotas to a greater extent than the oil-rich ones do.31 Yet Blaydes provides no evidence of cartel profits. Empirically, she studies only the behavior of the OPEC members, and does not compare them with non-OPEC members, so it is not possible to assess how either the oil-rich or oil-poor OPEC states’ production behavior differs from other states. Given the extent of scholarly debate, it is perhaps not surprising that many journalists and policy-makers continue to view OPEC as a cartel. Yet international relations theory offers important reasons to doubt that view. As Downs and colleagues argue, even states that appear to be cooperating might be acting as they would have done even without the agreement, because states design international agreements to avoid requirements for costly adjustments to their behavior.32 Thus OPEC quotas, even if strictly obeyed, might not actually require states to deviate significantly from their counterfactual behavior in which no quotas existed. Consequently, one needs to have a fresh look at the evidence. None of the existing studies provide any direct evidence that OPEC members produce less oil than they would in the counterfactual world in which OPEC did not exist. They typically focus instead on measuring the degree to which production changes in one OPEC member are correlated with production changes in the rest of OPEC, a correlation that could be explained in a variety of other ways, such as common reactions to market conditions.33 Moreover, many models do not incorporate relevant political variables, such as the regime type and investment risk of a state, creating the potential for omitted variable bias. OPEC As Market Manipulator? Many observers have noted that cheating on OPEC quotas is widespread, but there are additional problems that are probably even more important. I consider four major tests of OPEC’s market impact. I focus on the period since 1982, when OPEC first began to assign quotas (“market allocations”) to its members. The tests focus exclusively on OPEC’s impact on oil production, rather than oil prices, for two reasons. The first is practical: the relationship between OPEC quotas and 29. See Hyndman 2008, 812; Smith 2005 and 2009; and Simpson 2008. 30. See Ikenberry 1988; Alt, Calvert, and Humes 1988; Lieber 1992; Shaffer 2009; and Sovacool 2011. 31. Blaydes 2004. 32. Downs, Rocke, and Barsoom 1996. 33. See Griffin 1985; Kaufman et al. 2008; and Brémond, Hache, and Mignon 2012. The Limits of OPEC in the Global Oil Market 603

604 Interational Organization world oil prices is fraught with potential endogeneity.34 Low oil prices might cause OPEC to lower its production quotas,but if OPEC actually has market power,lower OPEC quotas would cause high oil prices.Thus on its own the (lack of)correlation between OPEC quotas and oil prices does not give one enough information to make valid inferences about its status as a cartel.35 Some sophisticated statistical techniques might be used to try to overcome this problem,but they are not satisfying.36 The second reason is perhaps even more important:production constraints are a necessary element of cartel behavior.If OPEC is not constraining its members'production,then it is not a cartel,by definition.37 Focusing on production allows one to directly inves- tigate the extent of collusion between OPEC members,rather than looking at its indir- ect effect on prices.Indeed,even if OPEC was somehow affecting market prices without constraining its members'production,it would not be doing so as a cartel. What evidence should one expect if OPEC is a cartel?Mankiw defines a cartel as a group of firms (or states,in this case)that creates agreements about quantities to produce or prices to charge,and further it"must not only agree on the total level of production but also on the amount produced by each member."38 This definition implies that a gap between market price and marginal cost of production is not by itself evidence of a cartel.39 Instead,one should see signs that the organization is cooperating to restrict production (to drive prices up).One should see the following kinds of evidence:new members of the cartel have a decreasing or decelerating pro- duction rate(first test);members should generally produce quantities at or below their assigned quota (second test);changes in quotas should lead to changes in production, creating a correlation(third test);and members of the cartel should generally produce lower quantities(that is,deplete their oil at a lower rate)on average than nonmembers of the cartel (fourth test).Failure to observe any of these phenomena would cast doubt about OPEC's status as a cartel,although none is totally determinative.The fourth test is perhaps the strongest because it is difficult to imagine how an organization that does not restrict output compared with nonmembers could be called a cartel how else could it increase average prices?40 To preview the results,OPEC fails all four of the tests. 34.Subsequent sections further discuss the link between oil prices and inferences about OPEC as a cartel. 35.A simple bivariate ordinary least squares (OLS)regression between world oil prices and OPEC's aggregate production target from 1982 through 2009 yields an R2 value of just 0.15. 36.To date,no one has identified a plausible instrumental variable or natural experiment.Other approaches exist but have not produced a widely accepted conclusion on the cartel question.See Dahl and Yuicel 1991;Gulen 1996;Alhajji and Huettner 2000:Reynolds and Pippenger 2010;and Bremond etal.2012. 37.ankiw2011,351. 38.bid.351. 39.Producers who stop producing before marginal costs equal market price (like some OPEC producers. possibly)are not behaving perfectly competitively,but that does not necessarily imply cartelization. 40.One of OPEC's stated goals is to stabilize prices.It is possible that an organization could seek to stabil- ize prices without affecting the long-run average price or production levels of its members.Yet such an organization could not be considered a classic cartel because it would not be profit maximizing.It

world oil prices is fraught with potential endogeneity.34 Low oil prices might cause OPEC to lower its production quotas, but if OPEC actually has market power, lower OPEC quotas would cause high oil prices. Thus on its own the (lack of) correlation between OPEC quotas and oil prices does not give one enough information to make valid inferences about its status as a cartel.35 Some sophisticated statistical techniques might be used to try to overcome this problem, but they are not satisfying.36 The second reason is perhaps even more important: production constraints are a necessary element of cartel behavior. If OPEC is not constraining its members’ production, then it is not a cartel, by definition.37 Focusing on production allows one to directly investigate the extent of collusion between OPEC members, rather than looking at its indirect effect on prices. Indeed, even if OPEC was somehow affecting market prices without constraining its members’ production, it would not be doing so as a cartel. What evidence should one expect if OPEC is a cartel? Mankiw defines a cartel as a group of firms (or states, in this case) that creates agreements about quantities to produce or prices to charge, and further it “must not only agree on the total level of production but also on the amount produced by each member.”38 This definition implies that a gap between market price and marginal cost of production is not by itself evidence of a cartel.39 Instead, one should see signs that the organization is cooperating to restrict production (to drive prices up). One should see the following kinds of evidence: new members of the cartel have a decreasing or decelerating production rate (first test); members should generally produce quantities at or below their assigned quota (second test); changes in quotas should lead to changes in production, creating a correlation (third test); and members of the cartel should generally produce lower quantities (that is, deplete their oil at a lower rate) on average than nonmembers of the cartel (fourth test). Failure to observe any of these phenomena would cast doubt about OPEC’s status as a cartel, although none is totally determinative. The fourth test is perhaps the strongest because it is difficult to imagine how an organization that does not restrict output compared with nonmembers could be called a cartel— how else could it increase average prices?40 To preview the results, OPEC fails all four of the tests. 34. Subsequent sections further discuss the link between oil prices and inferences about OPEC as a cartel. 35. A simple bivariate ordinary least squares (OLS) regression between world oil prices and OPEC’s aggregate production target from 1982 through 2009 yields an R2 value of just 0.15. 36. To date, no one has identified a plausible instrumental variable or natural experiment. Other approaches exist but have not produced a widely accepted conclusion on the cartel question. See Dahl and Yücel 1991; Gülen 1996; Alhajji and Huettner 2000; Reynolds and Pippenger 2010; and Brémond et al. 2012. 37. Mankiw 2011, 351. 38. Ibid., 351. 39. Producers who stop producing before marginal costs equal market price (like some OPEC producers, possibly) are not behaving perfectly competitively, but that does not necessarily imply cartelization. 40. One of OPEC’s stated goals is to stabilize prices. It is possible that an organization could seek to stabilize prices without affecting the long-run average price or production levels of its members. Yet such an organization could not be considered a classic cartel because it would not be profit maximizing. It 604 International Organization

606 Intemational Organization data,drawing on data from the US Energy Information Agency.42 Table I shows the variation among OPEC members.All but two members overproduced more than 80 percent of the time.Moreover,some OPEC countries manage to avoid having quotas for significant periods of time.43 The magnitude of overproduction varies over time and across states,but it is not trivial:on average,the nine principal members of OPEC produced 10 percent more oil than their quotas allowed.44 This is equivalent to 1.8 million barrels per day,on average,which is more than the total daily output of Libya in 2009.Even on the relatively rare occasions when member countries are not overproducing,the root cause is often involuntary production constraints such as a strike or accident,rather than a conscious decision by the government to obey its OPEC quota. TABLE 1.Relationship between OPEC quotas and production,1982-2009 Correlation between production and quota' OPEC member months production exceeds quota Beta coefficient P-value R-squared Algeria 100% 0.105 0.035 0.014 Iran 72% 0.002 0.981 0.000 Irag 82% 0.065 0.819 0.000 Kuwait 90% 0.106 0.450 0.002 Libya 83% 0.183 0.038 0.014 Nigeria 88% 0.138 0.383 0.002 Oatar 909% 0.118 0.245 0.004 Saudi Arabia 82% 0.138 0.130 0.007 UA.E. 96% -0.140 0.170 0.006 Venezuela 77毫 0.095 0.472 0.002 OPEC-9 (excludes Iraq) 96% 0.153 0.017 0.018 1.Values displayed are from bivariate OLS regression of first-differences,where DV=changes in production. 2.Up to March 1998 only.Iraq was not assigned an OPEC quota after March 1998. One might wonder how much this level of cheating actually undermines the cartel's operation.One possibility is that the OPEC anticipates a certain amount of cheating and sets the quotas accordingly.The real questions are whether OPEC pro- duction rates are affected by quotas,and whether they are lower than the counterfac- tual in which no quotas were set.The remaining tests investigate those questions. 42.EIA estimates can differ from OPEC's reported production data.OPEC's data are not fully credible because they are self-reported by member countries that have an incentive to dissimulate when they are overproducing. 43.Iraq has not had a quota since 1998.Iran,Angola,and Ecuador have also had periods without a quota. OPEC production allocations available at ,accessed 10 November 2013. 44.The nine members are Algeria,Iran,Kuwait,Libya,Nigeria,Qatar,Saudi Arabia,UAE,and Venezuela.Calculated using data from the United States,EIA for actual production,and from OPEC for market allocations,1982-2009.Note that Smith estimates that overproduction averages just 4 percent using ostensibly the same data(though for a different time period).Smith 2008

data, drawing on data from the US Energy Information Agency.42 Table 1 shows the variation among OPEC members. All but two members overproduced more than 80 percent of the time. Moreover, some OPEC countries manage to avoid having quotas for significant periods of time.43 The magnitude of overproduction varies over time and across states, but it is not trivial: on average, the nine principal members of OPEC produced 10 percent more oil than their quotas allowed.44 This is equivalent to 1.8 million barrels per day, on average, which is more than the total daily output of Libya in 2009. Even on the relatively rare occasions when member countries are not overproducing, the root cause is often involuntary production constraints such as a strike or accident, rather than a conscious decision by the government to obey its OPEC quota. One might wonder how much this level of cheating actually undermines the cartel’s operation. One possibility is that the OPEC anticipates a certain amount of cheating and sets the quotas accordingly. The real questions are whether OPEC production rates are affected by quotas, and whether they are lower than the counterfactual in which no quotas were set. The remaining tests investigate those questions. TABLE 1. Relationship between OPEC quotas and production, 1982–2009 Correlation between production and quota1 OPEC member % months production exceeds quota Beta coefficient P-value R-squared Algeria 100% 0.105 0.035 0.014 Iran 72% 0.002 0.981 0.000 Iraq2 82% 0.065 0.819 0.000 Kuwait 90% 0.106 0.450 0.002 Libya 83% 0.183 0.038 0.014 Nigeria 88% 0.138 0.383 0.002 Qatar 90% 0.118 0.245 0.004 Saudi Arabia 82% 0.138 0.130 0.007 U.A.E. 96% −0.140 0.170 0.006 Venezuela 77% 0.095 0.472 0.002 OPEC-9 (excludes Iraq) 96% 0.153 0.017 0.018 1. Values displayed are from bivariate OLS regression of first-differences, where DV = changes in production. 2. Up to March 1998 only. Iraq was not assigned an OPEC quota after March 1998. 42. EIA estimates can differ from OPEC’s reported production data. OPEC’s data are not fully credible because they are self-reported by member countries that have an incentive to dissimulate when they are overproducing. 43. Iraq has not had a quota since 1998. Iran, Angola, and Ecuador have also had periods without a quota. OPEC production allocations available at , accessed 10 November 2013. 44. The nine members are Algeria, Iran, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE, and Venezuela. Calculated using data from the United States, EIA for actual production, and from OPEC for market allocations, 1982–2009. Note that Smith estimates that overproduction averages just 4 percent using ostensibly the same data (though for a different time period). Smith 2008. 606 International Organization

The Limits of OPEC in the Global Oil Market 607 The third test reveals that OPEC quotas do a poor job of accounting for variation in production levels.Table 1 also shows the R-squared value of a linear bivariate time- series regression between changes in an OPEC member's production and changes in its quota.45 For all but two of the states (Libya and Algeria),changes in the OPEC quota are not correlated with production at standard thresholds of statistical signifi- cance.The R-squared for the nine major OPEC producers as a group was just 0.018,meaning that at most 1.8 percent of the variation in the month-to-month changes in this group's oil production can be explained by changes in their OPEC quotas.In other words,at least 98 percent of the variation is explained by factors other than changes in their OPEC quotas. Even in the face of this evidence,one could still argue that OPEC acts as a cartel in one of two ways.First,one could argue that anticipation by various actors in the oil market obscure OPEC's constraining effect.For instance,perhaps OPEC members change production levels between OPEC meetings because they anticipate forthcom- ing changes in the quotas.46 Second,one could argue that even if OPEC's quota system is entirely meaningless,OPEC still affects oil production over the long term because it encourages the adoption of a slow depletion policy and underinvest- ment in production capacity.47 Both of these propositions have a clear empirical implication:the oil production or depletion rate of OPEC member states ought to be significantly less than the production/depletion rate of comparable non-OPEC members.This leads to my fourth test. Final Test:Do OPEC Members Have Slow Depletion Rates? Depletion rates vary widely around the world.(A country's depletion rate is equal to its oil production divided by its proven oil reserves.)Broadly speaking,depletion rates will vary according to three supply-side factors (in addition to global demand for oil):the business climate of the producing country (for example,companies'tech- nical skills,investment climate,the incidence of war or sanctions,etc.);the "lift costs"of oil production (costs of getting oil to the ground,including exploration); and the government's depletion policy.OPEC membership could affect depletion policy,but so could other factors,such as the state's fiscal needs,the incentives gen- erated by its position in the global market (or example,as a"dominant firm"),and the time horizons of the political leadership. I investigate the cross-national variation in depletion rates over a thirty-year period,1980-2010.48 The analysis includes all forty-two oil-producing states 45.Formally,the dependent variable is the first difference in oil production,and the independent variable is the first difference in oil quota.The observations are monthly,although the values are measured in barrels per day. 46.Para2004,321-22. 47.Smith2009. 48.BP Statistical Review of World Energy provides data on proven reserves starting only in 1980

The third test reveals that OPEC quotas do a poor job of accounting for variation in production levels. Table 1 also shows the R-squared value of a linear bivariate timeseries regression between changes in an OPEC member’s production and changes in its quota.45 For all but two of the states (Libya and Algeria), changes in the OPEC quota are not correlated with production at standard thresholds of statistical signifi- cance. The R-squared for the nine major OPEC producers as a group was just 0.018, meaning that at most 1.8 percent of the variation in the month-to-month changes in this group’s oil production can be explained by changes in their OPEC quotas. In other words, at least 98 percent of the variation is explained by factors other than changes in their OPEC quotas. Even in the face of this evidence, one could still argue that OPEC acts as a cartel in one of two ways. First, one could argue that anticipation by various actors in the oil market obscure OPEC’s constraining effect. For instance, perhaps OPEC members change production levels between OPEC meetings because they anticipate forthcoming changes in the quotas.46 Second, one could argue that even if OPEC’s quota system is entirely meaningless, OPEC still affects oil production over the long term because it encourages the adoption of a slow depletion policy and underinvestment in production capacity.47 Both of these propositions have a clear empirical implication: the oil production or depletion rate of OPEC member states ought to be significantly less than the production/depletion rate of comparable non-OPEC members. This leads to my fourth test. Final Test: Do OPEC Members Have Slow Depletion Rates? Depletion rates vary widely around the world. (A country’s depletion rate is equal to its oil production divided by its proven oil reserves.) Broadly speaking, depletion rates will vary according to three supply-side factors (in addition to global demand for oil): the business climate of the producing country (for example, companies’ technical skills, investment climate, the incidence of war or sanctions, etc.); the “lift costs” of oil production (costs of getting oil to the ground, including exploration); and the government’s depletion policy. OPEC membership could affect depletion policy, but so could other factors, such as the state’s fiscal needs, the incentives generated by its position in the global market ( or example, as a “dominant firm”), and the time horizons of the political leadership. I investigate the cross-national variation in depletion rates over a thirty-year period, 1980–2010.48 The analysis includes all forty-two oil-producing states 45. Formally, the dependent variable is the first difference in oil production, and the independent variable is the first difference in oil quota. The observations are monthly, although the values are measured in barrels per day. 46. Parra 2004, 321–22. 47. Smith 2009. 48. BP Statistical Review of World Energy provides data on proven reserves starting only in 1980. The Limits of OPEC in the Global Oil Market 607

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