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THE IRRELEVANCE OFOPEC: PROPERTY RIGHTS AND IMPLICIT DISCOUNT RATES IN THE WORLD OIL MARKET

The recent slump and partial recovery of the world oil price has again focused attention on the structure of the world oil market, and the influence of OPEC on oil pricing. As Griffin has recently summarized, there are four theories vying for dominance: (1) the cartel model, in which OPEC, perhaps as a price leader, exercised market power by raising the price in 1973/74 and 1979/80; (2) the revenue-target model, in which shortrun considerations result in oil producers aiming to maintain net revenue targets rather than to maximize net wealth dynamically; (3) the simple Hotelling model, in which the oil price rose over time in response to increasing scarcity; and (4) the property-rights model, in which the two price increases were a result of the change in control over oil production from the oil companies to the oil-producing countries, and hence a change from high rates of time preference (the discount rate) to low rates on the part of the production decision-makers. The purpose of this paper is to use a simple model which relates the discount rate, the reserves/production ratio, and the price elasticity of demand to derive implicit discount rates from the early 1950s to the mid-1980s. This enables confirmation that the price rises of the 1970s were accompanied by a drop in discount rates, as predicted by the property-rights model. The high discount rates for the Middle East producers from 1956 to 1974 imply disequilibrium in the world oil markets, in which technical rather than economic aspects dominate. We conclude by discussing the implications of our findings for future oil prices.