Market Efficiency and Cartel Behaviour in Oil Prices

Abstract

The rhetoric of the Organisation of Petroleum Exporting Countries (OPEC) member spokespersons at their meetings and through the press seems directed towards some form of economic rationalisation of production behaviour of member countries. Though the body of evidence from macroeconomists, in investigating OPEC market structure, is inconclusive in differentiating between cartel and competitive behaviour, their evidence does support strong "cooperation" among OPEC members. This paper investigates OPEC market efficiency rather than market structure. The efficient markets hypothesis at the weak-form level is tested. Regression analysis of level series weekly prices is also undertaken. The study demonstrates that conditions of weak-form efficiency, specifically in rational expectations and price error orthogonality, are violated in OPEC, World (All Countries) and US oil market prices. In addition, using regression and causality analysis it is evident that the driving forces of oil prices emanate from the OPEC market. This suggests that OPEC may manipulate oil supply (and therefore prices) through pre-agreed production levels.

Keywords: Cartel competetitive behaviour, market efficiency, OPEC, Oil prices

JEL Classification: N15