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The theory of exhaustible resources is modified to take account of the industrial organization of the world oil market. The cartel is viewed as a unified enterprise which dominates other extractors because of its larger reserves. Equilibrium price and sales paths are derived giving neither the dominant extractor nor the competitive fringe any incentive to change its intertemporal behavior. Under standard but simplified cost assumptions, it is shown that a disproportionate share of the increased profits results from the formation of the cartel goes to non-members and that the cartel's restriction on sales eventually leaves it the sole supplier of oil.
Stephen W. Salant (Fri,) studied this question.