OPEC reviews production quotas at least twice a year. The quotas are revised after looking at the current market conditions and the existing price and they are set after taking into consideration a specific target price band. OPEC expects its members to follow the assigned quotas. However this does not always happen. In fact during most of its history, total production levels have been greater then the total member quotas i.e. most or all OPEC members have been "cheating" on their quotas. Why do OPEC members cheat on their production quotas when the production quotas have, presumably, been set as to maximize OPEC profits? Are there some specific factors which affect a country's decision to over-produce? Is Saudi Arabia still using the tit-for-tat strategy as an enforcement mechanism to maintain cartel discipline? These are some of the questions that this thesis will address. The application of the economic theory of oligopolies to OPEC is reviewed. The analysis then proceeds to use regression analysis to examine possible influences on the percentage differences between actual output and quotas for 10 of the 11 OPEC members, using annual data from 1987 to 2001.
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