Let us first briefly review the history and nature of OPEC. The Organization of Petroleum Exporting Countries (OPEC) oil cartel was established in September 1960 by the five founding nations: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Eight other nations joined later: Qatar (1961), Indonesia (1962), Socialist Peoples Libyan Arab Jamahiriya (1962), United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), and Gabon (1973, associate member). OPEC's objectives are to coordinate and unify petroleum policies among member countries in an effort to secure fair and stable prices for petroleum producers; to offer an efficient, economic, and regular supply of petroleum to consuming nations; and to secure fair returns on capital to those investing in the industry.

In the early 1970s OPEC member countries took control of their domestic petroleum industries and finally gained the monopoly power to influence world oil prices. This required an agreement to cut back on the total amount of oil produced by the cartel members and resulted in the Arab oil embargo in 1973 (with crude oil prices increasing approximately 50%). In the early 1980s as a result of member countries cutting back on production, oil prices peaked again. However, afterwards oil production was greatly curtailed by the Iranian revolution and the Iraq - Iran war. In 1986, oil prices drastically declined and the OPEC oil cartel collapsed. During the '90s, as the demand for oil companies continued to rise due to continued political conflicts disrupting supply and the lack of discovering major oil reserves the environment was ripe for OPEC to again exercise market power.

Now members of OPEC have gone through 2005 with a perfect combination of favorable market conditions: high prices along with high production and strong demand. The increase in supply from Russia, Kazakhstan and other non-OPEC oil-exporting countries was limited and this added to disruptions in production caused by recent hurricanes in the Gulf of Mexico. Today OPEC countries are pumping their oil wells to the fullest extent. However, in the near future the picture might quite change. As non-OPEC producers, like Russia, Kazakhstan and Azerbaijan increase their supply of petroleum to the world market, OPEC will have to consider production cuts if it wants to stop prices from falling too low. Though this year OPEC supplied less than what was demanded and the result has been in the cartel's favor, yet next year this may not be the case. This means that if OPEC countries do not want the oil prices to drop below $50 a barrel, they will need to cut on production.

Though delegates from the OPEC member-countries stated that they are unlikely to cut back in actual production, some did raise concerns that the cartel, which accounts for a third of world production and more than a half of world oil exports, is producing more oil than the market needs. Today, all of the cartel members except Saudi Arabia, which is the largest member, produce oil to their maximum capacity.

Next year an increased supply is expected from interlopers - countries that are not members of OPEC but sell their petroleum at the price level determined by OPEC's supply. In fact, some experts forecasted that this increased supply will exceed the growth in global oil demand. Additional supply is being expected not only from outside OPEC but from some OPEC members as well. The global demand will grow by 1.5 million barrels a day reaching 85.5 million barrels on average. OPEC itself currently produces about 30 million barrels a day, including about 1.8 million barrels from Iraq. As a result, the world might find itself with more supply than demand next year. This would force OPEC to reopen negotiations within the cartel on when and how to allocate cuts in production to keep prices from falling.

Based on the analysis of current world oil market we can draw the conclusion that for Azerbaijan's optimal strategy related to OPEC. Staying in the market as an interloper, it will benefit from OPEC cutting back on the supply because unlike the members of cartel it can still produce oil to the maximum capacity and it should. This can be supported by the principle that every producer around the world will produce the marginal barrel to take advantage of high prices. This conclusion can also be supported based on the belief that OPEC's dominant strategy always to decrease its oil supply whenever prices are falling. Such behavior of OPEC member-countries will maintain relatively high prices and benefit interloper-countries like Azerbaijan. The latter's oil supply will only have a modest impact, if any, on the world price, even if it pumps all of its available oil wells at the full capacity level. So, at least for economic reasons - why should Azerbaijan join OPEC?

When OPEC decides to announce cuts in oil production, some of its members, if not all, will have to comply with the policies of the cartel. In such a case, my game model shows that interloper's dominant strategy should always be to refrain from joining the oil cartel and thus, take the advantage from resulting high price.

Another reason for not joining OPEC is the instability of the cartel. Should Azerbaijan join OPEC during the period of favorable market conditions and then tomorrow when oil market is impoverished the oil cartel might collapse and the members would face difficulties in repaying back loans borrowed for economic development and infrastructure investments. So the oil cartel can be unstable.
Azerbaijan is not going to gain even a penny from joining OPEC. On the contrary, it will lose its flexibility to produce and export oil at the optimal level. The same situation applies to Kazakhstan - another interloper.
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*Gubad Ibadoglu argued that Azerbaijan might need to join the OPEC in the near future. In his view, the accession of Azerbaijan to the OPEC can prevent a financial crisis on the world markets, since it has BTC pipeline and two oil refineries. Mr. Ibadoglu also proposed possible creation of "Turkic" OPEC - coalition of Azerbaijan, Kazakhstan, Russia, Norway, and Mexico. Ingilab Ahmadov disagreed with this view. He thinks that the USA and Great Britain, two strategic partners of Baku in the development of oil fields, would be unhappy about a possible accession of Kazakhstan and Azerbaijan to the OPEC. Regarding creation of a new alternative OPEC, he said it is not serious.