Export and domestic pricing decisions that maximize, OPEC social welfare

OPEC countries have around 3/4 of the world's proven oil reserves (Oil and Gas Journal, 12/30/97:41) and are heavily dependent on them for their economic well being. Therefore it is essential for them to manage these riches wisely. In this paper we provide guidance for optimizing OPEC welfare by maximizing OPEC's export profits for oil plus domestic consumer and producer surplus from domestic consumption of products. Preliminary results from this static model in the base case in 1995 suggest that to maximize social welfare OPEC should have exported about 19 million barrels a day (MBD) instead of 22.4 and world price should be around $17.15 per barrel instead of $15.83. They should have supplied 4.3 MBD to their domestic market at a price of $9.20. In sensitivity testing we find the more elastic the fringe's supply the lower price they should charge for exports whereas the domestic price varies little.