OPEC

Organization of the Petroleum Exporting Countries

Al Gardner, Braden Spear, John Rawlings, Kyoko Kimura, Nathan Faldmo

Development

• 1949 – Venezuela approaches Iraq, Iran, Kuwait, and Saudi Arabia

• 1960 – Original Meeting

• Expansion

Baghdad – 10-14 Sep 1960

OPEC Countries

History

• 1960’s – Formative years

• 1970’s – International Prominence

• 1980’s – Price and international issues

• 1990’s – Mega-mergers

Vienna – 23 Mar 1999

The key to a very high price is the inelasticity of demand.

The cartel’s inelastic demand depends upon:

World Ed for the product

The cartel’s share of the world market

E of supply of competing non-cartel producers

Theory of CartelsTheory of Cartels

Theory of CartelsTheory of Cartels

Raising prices leads to anticartel trends:

Sagging DemandNew competing supplyDeclining market shareCheating

Reasons for Formation

• OPEC’s mission is to…

• Coordinate & unify the petroleum policies of Member Countries

• Ensure the stabilization of oil prices in order to secure an efficient, economic & regular supply of petroleum to consumers, a steady income to producers & a fair return on capital to those investing in the petroleum industry

The Current Situation

The Fight for Market Share

Oil Reserves (billions of barrels)

OPEC Dilemma – Must Raise Oil Prices

• Populations now too large to live on local resources – and growing rapidly

• If you increase the price of oil by ten times OPEC only doubles profits ie. $3,700 to $6,700

• Countries are fighting for Market share with in OPEC

• OPEC fighting for World Market Share 

http://www.wtrg.com/opec/PIE9102.gif

http://www.wtrg.com/opec/PIE9812.gif

Outcome• World prices would be closer to production costs

• Profiteering from shortages

• Consumers are encouraged to reduce waste and find alternatives

• Oil prices will curtail rampant consumption and social effects.

• Risk of global warming recedes.

OPEC: International Aspects

Political Function of OPEC• Consists of 11 Member Countries

Political Function of OPEC

• Representatives of member countries meet at the OPEC conference

• Saudi Arabia has effectively dominated the OPEC, and is considered to be the undisputed leader

• Political and economic power of OPEC was displayed most prominently in the 70s.

The Yom Kippur War• Several western countries supported Israel in the Yom

Kippur War• According to CQ Researcher:

– “In retaliation, Saudi Arabia led several other Arab countries in a five-month oil embargo that caused nationwide gasoline shortages in the US. As the leading producer in OPEC, S.A. convinced the other members to reduce their exports, causing a quadrupling of world crude oil prices to about $12 a barrel and demonstrating OPEC’s control of the world oil market.”

Economic Function of OPEC

• High prices for oil prompted countries like the US to seek other sources of oil.– For example, the US

cut its dependence on OPEC oil: from 82% in 1978 to to 41% in 1985.

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1978 1985

OPECnon-OPEC

• To gain back market share, OPEC had to reenter the market with low prices.

• This led to the low prices in the late 80s and early 90s.

• Over time, OPEC sought to regain control of the market.

Recent OPEC Economic Impact• According to the Columbia Encyclopedia:

– “With the cooperation of non-OPEC oil-exporting nations, OPEC was able to raise prices in 1999 by cutting production. As prices rose above $30 a barrel in early 2000, OPEC members agreed to increase production somewhat, cutting back production again a year later in an attempt to maintain prices. A worldwide economic slowdown caused oil prices to fall to near $20 by late 2001, but cutbacks by OPEC and non-OPEC nations, an economic rebound (including very strong economic growth in China), and the U.S. invasion and occupation of Iraq subsequently caused benchmark prices to rise and stay above $40 in mid-2004, with peaks above $50 at times.

Recent Trends• More recently, Oil prices have been driven by

speculation on the market and not on actual supply and demand.– Examples:

• The threat of war• Developing hurricanes• Political instability in oil-producing countries

• Now, when OPEC considers limiting oil production, speculators respond in the markets very quickly.

International Aspects:Summary

–Policy of increasing the price on oil• Has worked with some limits

–Increase in oil prices decreases consumption (reducing revenues)

–Long term price increase can lead to systematic behavior change (conservation)

Special Problems

• Worldwide oil sales dominated by U.S. dollars– When dollar falls, purchasing power of OPEC

member states falls– After intro of euro, Iraq tried to only be paid in

euros, but was unable to sustain it

Special Problems

• Negative results of increasing oil prices– Decreases consumption and could cause net

decrease in revenue– Extended rise could encourage change to

alternative energy or increased conservation

Special Problems

• Increasing concern about the environment– Heavy decreases in future oil demands

• Too much oil– Enough oil has been found to last about 33 years at

current rate– Non-OPEC oil-producing nations often increase

production when OPEC cuts it

Special Problems

• OPEC oil supplies will soon peak– The rest of the world already has peaked

Special Problems

• OPEC oil supplies will soon peak– Despite its claims, it is likely Saudi Arabia is

hitting its peak• Recent declines in production• Claims that it’s due to decrease in demand unlikely

since no other producers have made similar claims– OPEC countries have overestimated their oil

supplies to increase quotas since 1985

The Future of OPEC

• Problems

• Price Fixing

• Competition/No Barriers to Entry

Necessary Reforms

• Policy Reforms– Integration– Limits to integration

• Policy Strategy– Future– Consequences

Alternatives to OPEC

• Caspian oil supply

• Russian oil and gas supplies

• Alternative energy sources