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Global Weekly: Cartels in Commodity Markets

Global Macroeconomics Team's picture
Commodity agreements were put in place right after World War II and again following the 1970s commodity price boom. Price and trade restrictions encouraged the emergence of competitor products or the entry of new producers. As a result, all of these agreements, except those covering crude oil, eventually collapsed.
Recent developments in oil markets have led to extensive debates about the viability of OPEC as a cartel. The Organization of Petroleum Exporting Countries (OPEC) began playing an important role following its decision to impose an embargo on oil exports in 1973, which resulted in the quadrupling of oil prices. It was also instrumental in the tripling of oil prices in 1978/79. Efficiency gains and new oil suppliers, along with disagreements among various OPEC members, reduced the cartel’s role for the next two decades. It began intervening actively again following the Asian financial crisis when oil prices dropped to less than $10/bbl. Higher oil prices brought unconventional oil supplies in the market which, combined with weak global demand and an appreciating US dollar, began pushing oil prices down. OPEC decided not to restrict supplies. Since June 2014, oil prices have declined by more than 50 percent (Figure 3).
Efforts to manage world commodity markets in order to achieve price objectives are not unique to crude oil. A number of commodity agreements, often negotiated among producing and consuming nations in order to stabilize prices at levels deemed fair to both, were put in place following World War II. The commodities in these agreements included wheat, sugar, tin and coffee. Following the 1970s price boom, the agreements were extended to other commodities including cocoa and natural rubber. These agreements had legal clauses on the instruments for managing the corresponding markets, principally export restrictions and inventory management. The price and trade restrictions imposed on global market conditions encouraged either the emergence of competitor products or the entry of new producers. As a result, all of these agreements eventually collapsed (Figure 4).
There is a key difference between OPEC, the only surviving commodity organization seeking to actively manage a global commodity market, and the earlier commodity agreements. OPEC has no legal clause on how to intervene when market conditions warrant some intervention, thus allowing it to respond flexibly to changing circumstances. It could be “dormant” for some time and then become active again. However, OPEC’s actions and effectiveness may be limited as it competes with nimble new technologies - notably shale oil - and producers.

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