OPEC quota system and its impact on the global oil market

OPEC Countries currently own 76.3% of World proven oil reserves, produce 40.7% of World crude oil production, and export 56.4% of World crude oil exports. Since 1983, the organization has been formulating its production policy according to a quota scheme. This paper analyzes the OPEC quota system and estimates its impact on its Members in the context of the global oil market. It begins with an overview of how OPEC allocates quotas among its Members. Then, it empirically tests whether the OPEC quota system really matters in terms of: (A) increasing the Members' real oil income, and (B) affecting Members' production levels. Quarterly data between 1976 and 1992 are used. Two global economic models are presented. They explicitly take into account the effects of the Iranian revolution, the U.S. de-regulation, and the Gulf crisis on the world oil market. Results show that OPEC real oil income did not increase as a result of formally adopting the quota system in 1983. Furthermore, OPEC production increases as OECD demand for OPEC oil rises, Non-OPEC supply decreases, or OPEC productive capacity increases. The quota does not matter. Policy implications are then discussed in light of recent developments in OPEC and the global oil market.