The World’s Largest Cartel OPEC The World’s Largest Cartel

What’s A Cartel?

Cartels People 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

Cartels regulate production and marketing fix prices limit supply limit competition.

The Sherman Antitrust Act 1890 prohibited cartels in the United States

Although prohibited in most countries, they continue to exist Labor unions

Price fixing

OPEC is organized by sovereign states. It cannot be held to antitrust enforcement

Greed

Indonesia Only net oil importer

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.

Producers with massive reserves and small populations fear that high prices will reduce the value of their oil

History

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.”

The 1960’s: Establishment 1960: OPEC Formation 1961-2 1965 1967 1969 1960: OPEC Formation 1st Conference, Baghdad, 16 September 5 initial members: Iran, Iraq, Kuwait, Saudi Arabia, Venezuela Headquartered in Geneva, Switzerland Formed in response to lower posted prices by “Seven Sister” companies 1961-2: Qatar, Indonesia and Socialist Peoples Libyan Arab Jamahiriya join 1965: Headquarters move to Vienna, Austria 1967: United Arab Emirates join 1969: Algeria joins Original membership of 5 is now 10

The 1970’s: Rise to Power 1970 1971 1973 1975 1979 Obtained power over petroleum prices by controlling domestic production 1971: Nigeria joins OPEC enters into price and tax negotiations with oil companies 1973: Ecuador joins Arab-Israeli conflict, Arab oil embargo and market imbalances → oil pricing crisis, prices rise steeply 1975: Gabon joins First OPEC Sovereigns and Head of State meeting in Algiers 1979: Iranian Revolution sparks oil crisis and rising prices, fed by market imbalances

The 1980’s: Price Fluctuations 1986 1986-9 1980-5: High oil prices prevail 1986: Oil pricing crisis due to decline and eventual collapse of previously high prices 1986-9: Prices increase again Recognized need for collaboration among producers to assure prices and market stability More international focus on environmental issues

The 1990’s: Crises Averted 1990 1992 1995 1998 Technology innovations and concerns about the environmental issues put increasing tension on oil producers as future demand is put in question Early 1990s: Middle East tension causes oil price increases and near crisis Crisis avoided when OPEC increases output to increase supply and thus lower price 1992: Ecuador leaves OPEC 1995: Gabon leaves OPEC 1998: South-East Asia economic problems cause oil price collapse OPEC leaders work with other leaders to recover prices

The 2000’s: OPEC’s State Today 11 current members, 2 former members Textbook cartel Car-tel  kɑr-tɛl/ –noun 1.an international syndicate, combine, or trust formed esp. to regulate prices and output in some field of business 40% of world oil production Control 2/3 of oil reserves Significant impact on oil price, though less power than in previous years due to new oil findings

Members and Policies

Mission Statement 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; 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." http://en.wikipedia.org/wiki/OPEC

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…

The Countries of OPEC Algeria Qatar (motto: “We don’t care about ‘U’”) 72.1% of exports 32.1% of GDP 76.4% of exports 49.2% of GDP Algeria Qatar (motto: “We don’t care about ‘U’”) 10.7% of export 3.3% of GDP 97.4% of exports 76.4% of GDP Indonesia Iraq 80.5% of exports 24.6% of GDP 44.7% of exports 37.6% of GDP Iran 98.7% of exports 73.1% of GDP United Arab Emirates 94.3% of exports 53.2% of GDP Libya 97.6% of exports 47.2% of GDP Saudi Arabia Nigeria 86.6% of exports 34.3% of GDP 94.6% of exports 57.1% of GDP Venezuela Kuwait

…devising ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations…

From January 1 1987 to June 15 2005, OPEC set its prices based on a basket of crude oils exported from each member June 15 2005: OPEC changed the composition of the basket and the calculation to find the basket Prices depend on lightness, sweetness (sulfur content); Price band mechanism set up in March 2000

…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…

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 day Started increasing quotas slowly from June 3, 2004 September 19, 2005, agreed to make available all spare capacity in member countries starting October 1, 2005

…and a fair return on their capital to those investing in the petroleum industry.

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. http://en.wikipedia.org/wiki/New_international_economic_order

US-OPEC Relations

OPEC-US Relations Relations between the United States and OPEC far transcend simple economics Relations have been tenuous for some time and are likely to decline as US becomes less of a presence in worldwide oil consumption Iran, 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

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 force After 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

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 Europe They consistently drew the oil away from non-Arab nations

Shah of Iran Second 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 1973. "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."

1973 Oil Crisis OAPEC 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 Egypt About 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

Relations? History elucidates the motives behind much of the production policy set forth by OPEC The “oil weapon” has real and lasting effects on the economies of the world, most especially the US What’s to come as the US shrinks in relative consumption? How much will Hugo Chavez influence prices moving forward?

OPEC Impact

World Oil Production

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.

1973 Energy Crisis OPEC 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.

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 1974 Meanwhile, NYSE shares lost $97 billion in value in six weeks

Effects of 1973 Oil Crisis The 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.

1979 Oil Crisis During 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%.

1979 Oil Crisis A 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).

More Recent Impact Leading up to the 1990-91 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.

More Recent Impact After 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.