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OPEC Organization of the Petroleum Exporting Countries

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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 – 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 The key to a very high price is the inelasticity of demand.
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 Fight for Market Share
The Current Situation 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 Too much oil
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 Policy Strategy Integration
Limits to integration Policy Strategy Future Consequences

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

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