OPEC as a Social Welfare Maximizer

Abstract

We maximize OPEC's social welfare from their oil production including the domestic as well as the export market. For welfare maximization OPEC countries should set domestic oil price equal to the marginal revenues from the oil export market and, therefore, domestic oil price should be lower than the world price. Our base case price leader model yields a 1995 export price of $14.21/bbl (barel) and 27,042 MBPD (thousands of barrels per day) of OPEC exports with a domestic price and quantity of$5.22/bbl and 5,175 MBPD for the base case. However, with competition world oil price should fall dramatically to $6.40 per barrel with OPEC's world market share approaching 70%.