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The political economy of OPEC∗ † ‡ Gal Hochman and David Zilberman November 2010 Abstract In this paper we model the Organization of Petroleum Exporting Countries (OPEC) as a cartel of nations that sets production quotas while each member country sets a domestic fuel subsidy. This political economy model allows policy makers to weigh consumers differently than they weigh producers, and results in a wedge between world oil prices and domestic prices in OPEC countries. Our empirical estimates show that although when OPEC countries set the subsidies they place 32% more weight on consumer benefits from domestic fuel consumption compared with oil production, when OPEC sets the production quotas it places similar weights on consumers and producers. JEL Code: F1 Q4 Keywords: Big economy, cartel, crude oil, Energy, export, OPEC, production quotas, domestic fuel subsidies, political economy ∗The research leading to this paper was funded by the Energy Biosciences Institute and the USDA Economic Research Service under Cooperative Agreement No.58-6000-6-0051. †Energy Bioscience Institute — University of California Berkeley — Berkeley — CA — email:galh@ ‡Energy Bioscience Institute and department of Agriculture and resource economics — University of California Berkeley — Berkeley — CA — email:zilber11@ 1 1 Introduction There is growing interest in the behavior of the fuel markets as countries and global communities are establishing climate change and energy security policies. To this end, the Organizati