All time cheaters versus cheaters in distress: An examination of cheating and oil prices in OPEC

This paper investigates the OPEC quota share system and whether there is any pattern to “cheating”. Using threshold cointegration methods, we examine each OPEC member's cheating behavior in periods of rising and falling real oil prices. Most OPEC members behave differently in response to rising oil prices than falling oil prices. For shocks of typical historical size, most members overproduce their quotas regardless of the direction of the real oil prices in the medium to long run. However, in response to large real oil price shocks, most members conform to a “public finance argument” whereby they underproduce their quotas in response to rising oil prices and overproduce in response to falling real oil prices. In an extended model with cheating by Saudi Arabia and other OPEC members, we find no statistically significant relationship between Saudi Arabian cheating and other cheating. The impulse response functions reveal that for typical shocks, neither Saudi Arabia nor other OPEC members absorb cheating by the other party. However, when there is a large incidence of cheating by other OPEC members, Saudi Arabia responds in kind: this forceful response is in line with a tit-for-tat strategy when there is “too much” cheating.