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I. Introduction
What has been the role of the Organization of the Petroleum Exporting Countries (OPEC) in the
oil market? Has its role evolved over time? This paper tests the ability that OPEC has had to
influence the oil market by looking at the effects of OPEC's meetings on oil price levels and
volatility between 1988 and 2019. It also studies the most relevant factors that can explain OPEC's
production decisions, and it touches on recent developments such as the alliance between OPEC
and other non-OPEC oil producers, OPEC+.
The stated objective of OPEC is to coordinate the petroleum policies of its Member Countries to
stabilize the oil markets around a “fair” price.
2
The objective is, thus, in terms of both sustaining
the oil price and reducing its volatility around an equilibrium level—a sufficiently vague statement
that seems to incentivize the use of discretionary policy (as defined in Kydland and Prescott 1977)
relative to adopting a systematic rule (i.e., a reaction function) that responds in a predictable
manner to oil market developments.
3
OPEC, in fact, has a fragile organization structure (e.g.,
Adelman 1979, Fattouh and Mahadeva 2013) as it lacks a formal enforcement mechanism that can
induce its members to comply with their quota allocations.
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This paper, however, shows that
OPEC’s decisions have a systematic component because they are predictable, at least to some
extent. Moreover, it is the surprise component of those decisions that affects the market since the
same decision can induce a different price response.
Even though OPEC sometimes has difficulty enforcing its production quotas (Almoguera et al
2011), markets pay close attention to its announcements—this is not surprising since OPEC
accounted for more than 40 percent of world oil production over the last three decades. The
empirical evidence on the effects of OPEC on oil prices is, however, rather mixed: while some
papers have found empirical evidence that its announcements can have a significant impact on oil
prices (Lin and Tamvakis, 2010; Loutia, Mellios, and Andriosopoulos, 2016), others argue that
this is only conditional on production cuts. For example, Demirer and Kutan (2010) and Guidi et
al (2006) find an asymmetry in that only OPEC production cut announcements yield a statistically
significant impact between 1983 and 2008.
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Hyndman (2008) examines the effect of OPEC quota
announcements during 1986–2002 on crude oil spot and two months futures prices. He finds
positive and significant abnormal returns following meetings when OPEC reduces the aggregate
quota. Also, Schmidbauer and Rösch (2009) found evidence that the oil market response to
OPEC’s announcements is more likely to depend on the decision. Brunetti et al (2013) look at
OPEC's pronouncements about the fair oil price as perceived by the coalition, from 2000 to 2009,
and finds no effects from OPEC’s announcements that cite the fair price even when this one differs
from current prices.
As we will show, the main problem with some event studies in the literature is that OPEC’s
decisions are not exogenous, but respond to the state of the oil market and global economy (Barsky
and Kilian, 2004). This means that, even in the absence of information leaks, OPEC's decisions
2
OPEC was established in 1960, but it became active only in the early 70s when most national oil companies (NOC) where funded. This gave the
instrument to many oil exporting countries to affect oil investment and production decisions more directly. The OPEC’s mission is “to coordinate
and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and
regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry”
(OPEC).
3
It is also worth noting that both oil production volumes and prices are not good instruments in the sense of Poole (1970).
4
Systematic rules, transparency, and accountability have been the crucial ingredients for the success of many central banks in stabilizing private
sector’s inflation expectations in the 1990s (Bernanke and Mishkin 1997, Ball and Sheridan 2004, Woodford 2003, among others).
5
“We also find that the persistence of returns following OPEC production cut announcements creates substantial excess returns to investors who
take long positions on the day following the end of OPEC conferences.” (Demirer and Kutan 2010).
