OPEC: THE ECONOMICS OF A CARTEL

Organization of Petroleum Exchange Countries

Set up in 1960 Principal Aim- 'coordination &

unification of petroleum policies of member countries & the determination of the best means for safeguarding their interests, individually & collectively’

40% of the world's crude oil production Exports represent 55% of the crude oil

traded internationally

COMPETITIVE DYNAMICS OF OPEC

Before 1970 No major role played by OPEC countries

During 1970 Power of price setting shifted from MNC oil

companies to OPEC By 1973 OPEC countries changed the pricing

system 1975-1985

Oil production increased from 48% to 71% Mid-1980

Survival became Uncertain Market share fell from 52% to 30% in 1985

OPEC acting like a Cartel

Quota set by OPEC Production ceiling set up was violated 1985-Oil prices dropped from $28 to $12 1990s- $30 per barrel 1993- $15 per barrel

OPEC Basket price

Pricing data collected March 2000 –Set a Price Band

mechanism in the range of $22-$28 per barrel

Production adjustments on basket price

Jan 2005 – suspended price band mechanism Market was tight in its price band Unable to defend by cutting its

production

CARTELISATION AND ITS EFFECTS

Price being affected due to speculation

Fluctuation due to changes in quota decisions

1980- OPEC made a mistake by increasing oil prices to $40 / barrel Reduction in demand – reduction in

prices Problem with cartel

Maintaining the right price Allocate sales among OPEC countries

Growth expectation in 2008-2009

SETUP COSTS

Lifting costs incurred in extraction 1999-less than $1.50 a barrel Persian countries have incurred

lowest replacement cost and U.S incurred highest costs

Cost for setup maybe around $19-$25 pb still the oil price rises up to $100

OPEC ACTING LIKE A MONOPOLY

OPEC produced 28-29mbpd in 1971 Still producing the same amount Prices rocketing due to surging

demand In 2008 oil ministers declined to

increase production. Extraction costs $1.50 pb. PB price

$100 OPEC maintained that surging prices

were due to Hedging and mere Speculation