Indonesia and OPEC: the economic costs of cartel membership

Technical Report · Wed Sep 01 04:00:00 EDT 1982

OSTI ID:5945396

Linquiti, P D

The primary focus of this study is on why the Indonesians have cut production in the second quarter of 1982. There appears to be only one answer. The spector of triggering a price war seems powerful enough to deter Indonesia from acting against the dictates of the cartel. Additionally, the introduction of more competition into the oil market - the result of increased Indonesian production - can only cut the long-run price of oil and reduce the present discounted value of Indonesia's oil. Futhermore, it is critical to note that the other three scenarios hinge on Indonesia having excess capacity to boost production and capture added revenues. Excess capacity is the key to undercutting the cartel. By lowering prices, a producer is doomed to earn lower revenues unless it can up production. This has never been an option for Indonesia because the current level of excess capacity is a new phenomenon. Since the rise of President Suharto in 1967, Indonesia has consistently produced its oil at full capacity. Indonesia has thus spent the last fifteen years in a situation where there was little, if anything, to be gained from undercutting the cartel. Not surprisingly, Indonesia has not acted quickly to increase production in violation of OPEC ceilings. Only if the soft market continues for a long period of time does the cost of OPEC membership impose a serious burden on Indonesia. For a host of political and economic reasons, Indonesia seems willing to wait out the current cartel disarray. If the market continues its present weakness and OPEC membership becomes truly costly, the Indonesians will find it quite difficult to adhere to coordinated pricing and production policies. If however, the world market tightens again, Indonesia may soon find itself back at full production, with no incentive to undercut the cartel.

• Research Organization: Woodrow Wilson International Center for Scholars, Washington, DC (USA). East Asia Program
• DOE Contract Number: FG01-82PE70399
• OSTI ID: 5945396
• Report Number(s): DOE/PE/70399-T2; ON: DE83012419
• Country of Publication: United States
• Language: English

Related Subjects

02 PETROLEUM
020700* -- Petroleum-- Economics
Industrial
& Business Aspects
ASIA
COST
DEVELOPING COUNTRIES
ECONOMIC ANALYSIS
ECONOMICS
ENERGY SOURCES
FOSSIL FUELS
FUELS
INDONESIA
INTERNATIONAL ORGANIZATIONS
ISLANDS
OIL-EXPORTING COUNTRIES
OPEC
PETROLEUM
PRODUCTION