3 CartelsPeople of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.Adam Smith, The Wealth of Nations, 1776
4 Cartels regulate production and marketing fix prices limit supply limit competition.
5 The Sherman Antitrust Act 1890 prohibited cartels in the United States
6 Although prohibited in most countries, they continue to exist Labor unions
11 Countries with small oil reserves or large populations and few other resources, are often seen as "hawks" pushing for higher prices.Hawk - The sole survivor of a race of winged humanoids that inhabited the planet Earth in ages past. Seen here in Buck Rogers.
12 Producers with massive reserves and small populations fear that high prices will reduce the value of their oil
15 Organization of the Petroleum Exporting Countries What is OPEC?Organization of the Petroleum Exporting Countries“OPEC's objective is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.”
16 The 1960’s: Establishment 1960: OPEC Formation 1961-21965196719691960: OPEC Formation1st Conference, Baghdad, 16 September5 initial members: Iran, Iraq, Kuwait, Saudi Arabia, VenezuelaHeadquartered in Geneva, SwitzerlandFormed in response to lower posted prices by “Seven Sister” companies1961-2: Qatar, Indonesia and Socialist Peoples Libyan Arab Jamahiriya join1965: Headquarters move to Vienna, Austria1967: United Arab Emirates join1969: Algeria joinsOriginal membership of 5 is now 10
17 The 1970’s: Rise to Power19701971197319751979Obtained power over petroleum prices by controlling domestic production1971: Nigeria joinsOPEC enters into price and tax negotiations with oil companies1973: Ecuador joinsArab-Israeli conflict, Arab oil embargo and market imbalances → oil pricing crisis, prices rise steeply1975: Gabon joinsFirst OPEC Sovereigns and Head of State meeting in Algiers1979: Iranian Revolution sparks oil crisis and rising prices, fed by market imbalances
18 The 1980’s: Price Fluctuations 19861986-91980-5: High oil prices prevail1986: Oil pricing crisis due to decline and eventual collapse of previously high prices1986-9: Prices increase againRecognized need for collaboration among producers to assure prices and market stabilityMore international focus on environmental issues
19 The 1990’s: Crises Averted1990199219951998Technology innovations and concerns about the environmental issues put increasing tension on oil producers as future demand is put in questionEarly 1990s: Middle East tension causes oil price increases and near crisisCrisis avoided when OPEC increases output to increase supply and thus lower price1992: Ecuador leaves OPEC1995: Gabon leaves OPEC1998: South-East Asia economic problems cause oil price collapseOPEC leaders work with other leaders to recover prices
20 The 2000’s: OPEC’s State Today 11 current members, 2 former membersTextbook cartelCar-tel kɑr-tɛl/–noun 1.an international syndicate, combine, or trust formed esp. to regulate prices and output in some field of business40% of world oil productionControl 2/3 of oil reservesSignificant impact on oil price, though less power than in previous years due to new oil findings
22 Mission StatementEstablish the "coordination and unification of petroleum policies of its member countries and the determination of the best means for safeguarding their interests, individually and collectively; devising ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations; giving due regard at all times to the interests of the producing nations and to the necessity of securing a steady income to the producing countries; an efficient, economic and regular supply of petroleum to consuming nations, and a fair return on their capital to those investing in the petroleum industry."
23 Establish the "coordination and unification of petroleum policies of its member countries and the determination of the best means for safeguarding their interests, individually and collectively…
24 The Countries of OPEC Algeria Qatar (motto: “We don’t care about ‘U’”) 72.1% of exports32.1% of GDP76.4% of exports49.2% of GDPAlgeriaQatar (motto: “We don’t care about ‘U’”)10.7% of export3.3% of GDP97.4% of exports76.4% of GDPIndonesiaIraq80.5% of exports24.6% of GDP44.7% of exports37.6% of GDPIran98.7% of exports73.1% of GDPUnited Arab Emirates94.3% of exports53.2% of GDPLibya97.6% of exports47.2% of GDPSaudi ArabiaNigeria86.6% of exports34.3% of GDP94.6% of exports57.1% of GDPVenezuelaKuwait
25 …devising ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations…
26 From January to June , OPEC set its prices based on a basket of crude oils exported from each memberJune : OPEC changed the composition of the basket and the calculation to find the basketPrices depend on lightness, sweetness (sulfur content);Price band mechanism set up in March 2000
27 …giving due regard at all times to the interests of the producing nations and to the necessity of securing a steady income to the producing countries; an efficient, economic and regular supply of petroleum to consuming nations…
28 Quota decisions apply to all member countries except Iraq April 24, 2003 to March 31, 2004, production quotas fell from 27.4 to 23.5 million barrels per dayStarted increasing quotas slowly from June 3, 2004September 19, 2005, agreed to make available all spare capacity in member countries starting October 1, 2005
29 …and a fair return on their capital to those investing in the petroleum industry.
30 New International Economic Order Developing countries must be entitled to regulate and control the activities of multinational corporations operating within their territory.They must be free to nationalize or expropriate foreign property on conditions favorable to them.They must be free to set up associations of primary commodities producers similar to the OPEC; all other States must recognize this right and refrain from taking economic, military, or political measures calculated to restrict it.International trade should be based on the need to ensure stable, equitable, and remunerative prices for raw materials, generalized non-reciprocal and non-discriminatory tariff preferences, as well as transfer of technology to developing countries; and should provide economic and technical assistance without any strings attached.
32 OPEC-US RelationsRelations between the United States and OPEC far transcend simple economicsRelations have been tenuous for some time and are likely to decline as US becomes less of a presence in worldwide oil consumptionIran, Iraq, Qatar, Saudi Arabia, United Arab Emirates, Venezuela, Libya, Algeria and others have had sizeable differences of opinion with US within the last several decades
33 Arab-Israeli Conflict The persistence of the Arab-Israeli Conflict finally triggered a response that transformed OPEC from a mere cartel into a formidable political forceAfter the Six Day War of 1967, the Arab members of OPEC formed a separate, overlapping group, the Organization of Arab Petroleum Exporting Countries, for the purpose of centering policy and exerting pressure on the West over its support of Israel
34 Yom Kippur War The Yom Kippur War of 1973 galvanized Arab opinion Furious at the emergency re-supply effort that had enabled Israel to withstand Egyptian and Syrian forces, the Arab world imposed the 1973 Oil Embargo against the United States and Western EuropeThey consistently drew the oil away from non-Arab nations
35 Shah of IranSecond largest producer of oil in the world at that time and the closest ally to the US in the Middle East“Of course [the world price of oil] is going to rise," the Shah told the New York Times in "Certainly! And how...; You [Western nations] increased the price of wheat you sell us by 300%, and the same for sugar and cement...; You buy our crude oil and sell it back to us, redefined as petrochemicals, at a hundred times the price you've paid to us...; It's only fair that, from now on, you should pay more for oil. Let's say 10 times more."
36 1973 Oil CrisisOAPEC announced, as a result of the ongoing Yom Kippur War, that they would no longer ship petroleum to nations that had supported Israel in its conflict with Syria and EgyptAbout the same time, OAPEC members agreed to use their leverage over the world price-setting mechanism for oil in order to quadruple world oil prices
37 Relations?History elucidates the motives behind much of the production policy set forth by OPECThe “oil weapon” has real and lasting effects on the economies of the world, most especially the USWhat’s to come as the US shrinks in relative consumption?How much will Hugo Chavez influence prices moving forward?
40 OPEC’s Impact on the World In 2005, OPEC accounted for 41.7% of the world's oil production.Worldwide oil sales are denominated in U.S. dollars.Changes in the value of the dollar against other world currencies affect OPEC's decisions on how much oil to produce.The price of crude oil often determines how much OPEC countries will produce.
41 1973 Energy CrisisOPEC refused to ship oil to western countries that had supported Israel in the Yom Kippur War, which they fought against Egypt and Syria.This caused fourfold increase in the price of oil, which lasted five months.
42 Immediate Economic Impact of 1973 Oil Embargo Oil demand is very price inelastic (i.e. large change in price for small change in quantity)In the United States, the retail price of a gallon of gasoline rose from a national average of 38.5 cents in May 1973 to 55.1 cents in June 1974Meanwhile, NYSE shares lost $97 billion in value in six weeks
43 Effects of 1973 Oil CrisisThe Western nations' central banks sharply cut interest rates to encourage growth, deciding that inflation was a secondary concern.Although this was the orthodox macroeconimc prescription at the time, the resulting stagflation surprised economists and central bankers, and the policy is now considered by some to have deepened and lengthened the adverse effects of the embargo.
44 1979 Oil CrisisDuring the Iranian Revolution, the Shah of Iran, fled the country in early 1979, allowing Ayatollah Khomeini to gain control.Protests shattered the Iranian oil sector. While the new regime resumed oil exports, it was inconsistent and at a lower volume, forcing up prices. Saudi Arabia and other OPEC nations increased production to offset the decline, and the overall loss in production was about 4%.
45 1979 Oil CrisisA widespread panic resulted, driving the price far higher than would be expected under normal circumstances.In the US, the Carter administration instituted price controls.Over the next 12 months the price of crude oil rose to $39.50 (its all time highest real price until early 2006).
46 More Recent ImpactLeading up to the Gulf War, Iraqi President Saddam Hussein advocated that OPEC push world oil prices up, thereby helping Iraq, and other member states, service debts.But the division of OPEC countries occasioned by the Iraq-Iran War and the Iraqi invasion of Kuwait marked a low point in the cohesion of OPEC.Once supply disruption fears dissipated, oil prices began to slide dramatically.
47 More Recent ImpactAfter oil prices slumped at around $10 a barrel, concerted diplomacy, sometimes attributed to Venezuela’s president Hugo Chávez, achieved a coordinated scaling back of oil production beginning in 1998.