OPEC

1. OPEC Organization of the Petroleum Exporting Countries Al Gardner, Braden Spear, John Rawlings, Kyoko Kimura, Nathan Faldmo

3. Development • 1949 – Venezuela approaches Iraq, Iran, Kuwait, and Saudi Arabia • 1960 – Original Meeting • Expansion

4. Baghdad – 10-14 Sep 1960

5. OPEC Countries

6. History • 1960’s – Formative years • 1970’s – International Prominence • 1980’s – Price and international issues • 1990’s – Mega-mergers

7. Vienna – 23 Mar 1999

8. Theory of Cartels 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

9. Theory of Cartels Raising prices leads to anticartel trends: • Sagging Demand • New competing supply • Declining market share • Cheating

11. 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

12. The CurrentSituation The Fight for Market Share

13. Oil Reserves (billions of barrels)

14. 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

20. 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.

21. OPEC: International Aspects

22. Political Function of OPEC • Consists of 11 Member Countries

23. 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.

24. 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.”

25. 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.

26. 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.

27. 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.

28. 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.

29. 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)

30. 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

31. 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

32. 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

33. Special Problems • OPEC oil supplies will soon peak • The rest of the world already has peaked

34. 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

36. The Future of OPEC • Problems • Price Fixing • Competition/No Barriers to Entry

37. Necessary Reforms • Policy Reforms • Integration • Limits to integration • Policy Strategy • Future • Consequences

38. Alternatives to OPEC • Caspian oil supply • Russian oil and gas supplies • Alternative energy sources