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The Organization of Petroleum Exporting Countries (OPEC)

The Organization of Petroleum Exporting Countries (OPEC). Maria Lorusso March 25, 2002. Petroleum Market in America Prior to OPEC. The Standard Oil Monopoly First major illustration of how competition leads to cooperation among groups in an industry

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The Organization of Petroleum Exporting Countries (OPEC)

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  1. The Organization of Petroleum Exporting Countries(OPEC) Maria Lorusso March 25, 2002

  2. Petroleum Market in America Prior to OPEC The Standard Oil Monopoly • First major illustration of how competition leads to cooperation among groups in an industry • Standard held 10 percent of refining interests in Cleveland, but 26 other refineries held interests (competition drives down prices) • 1872 Standard (Rockefeller) organized South Improvement Co. (agreement with railroads to implement rebates) • Within 3 months of formation of S.I.C. 21/26 refiners joined

  3. Market Demand Prorationing Created by state governments in US for purpose of limiting production Limited output and maintained prices 1935-1970 International Corporate Cartel Red Line Agreement 1914 Middle Eastern reserves developed through Turkish Petroleum Company As-Is Agreement 1928 divided oil sale, eventually between the “Seven Sisters” Profit Sharing in Venezuela World Petroleum Market Prior to OPEC

  4. Formation of OPEC • 1959 majors reduce posted prices by 10 percent • First Arab Petroleum Congress, Cairo April 1959 • Aug. 1960 majors reduce posted prices again • First meeting of OPEC September 9-14, 1960 in Baghdad, Iraq

  5. OPEC Member Countries • Founding Members: Saudi Arabia, Iran, Kuwait, Iraq, and Venezuela • Full Members: Qatar, Libya, Indonesia, United Arab Emirates, Algeria, and Nigeria • Founding Members have veto power over admission of new members (otherwise all countries have equal rights) • Any country with substantial exports and same petroleum interests are eligible to join

  6. OPEC’s Principle Objectives • Coordinate and unify oil policies of Member Countries • Determine best means of safeguarding individual and collective interests • Stabilize prices in international oil markets • Provide efficient and economic supply of petroleum to consuming nations • Obtain a fair return on capital to those investing in oil industry

  7. How OPEC Functions • The OPEC Conference: supreme authority, meets generally in March and September • Heads of Delegation: official representatives of each Member Country • Board of Governors: directs management, draws up budget • Secretariat: carries out executive functions, consists of Secretary General and Research Division

  8. Brief History of OPEC • 1960’s Five Founding Members seek to assert rights in oil market dominated by Seven Sisters, Secretariat moved from Geneva to Vienna 1965 • 1970’s Rose to international prominence, 2 oil pricing crises

  9. History Cont’d • 1980’s Prices peaked in beg., 3rd oil pricing crisis 1986, environmental issues appear on agenda • 1990’s 4th pricing crisis averted, stability until 1998, then collapse in wake of downturn in South East Asia

  10. OPEC as a Cartel • Confederation of countries which have reached an accord with respect to prices, market shares and other important matters • Enhance wealth through fixing prices, limiting output • Monopoly – most extreme form (all participants in an industry merge)

  11. Incentive Both For and Against Collusion

  12. Oil • At the end of 1999, world proven crude oil reserves: 1,042,536 million barrels • OPEC Member Countries have 811,526 million barrels or 77.8 percent • Uses: refined, kerosene, gasoline, asphalt

  13. Daily Oil ConsumptionOPEC’s World Energy Model (OWEM)

  14. Country Country Crude oil reserves(million barrels) Crude oil production(million barrels per day) Saudi Arabia 262,784 Saudi Arabia Iraq 112,500 Former Soviet Union United Arab Emirates 97,800 7.565 United States Kuwait 96,500 Iran IR Iran 93,100 7.434 China Source: OPEC Annual Statistical Bulletin 1999 5.925 3.439 3.212 Oil Reserves and Oil Production

  15. High Oil Prices Shortage of oil supplies Sentiment: if traders think there will be a shortage Taxes greatly effect price of oil products Low Oil Prices Imbalance: too much supply/too little demand Non-OPEC producers supply as much as they can High and Low Oil Prices

  16. OPEC’s Current Production Ceiling

  17. OPEC and the Oil Market • OPEC does not control the oil market, but it does have a strong influence on the market • OPEC Member Countries produce 41percent of the world’s crude oil

  18. Fund for International Development • Formed in 1976 to assist Non-OPEC Countries with developing their economies • Committed to loans and grants that total more than $4 billion • Active in Asia, Africa, Latin America, Middle East, and the Caribbean • Encourages cooperation in the oil market

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