Download OPEC - Marriott School

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
• 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
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
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
1980
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
72.1% of exports
76.4% of exports
32.1% of GDP
49.2% of GDP
Qatar (motto: “We don’t care about ‘U’”)
Algeria
10.7% of export
97.4% of exports
3.3% of GDP
76.4% of GDP
Indonesia
Iraq
80.5% of exports
44.7% of exports
24.6% of GDP
37.6% of GDP
Iran
98.7% of exports
Libya
United Arab Emirates
73.1% of GDP
94.3% of exports
97.6% of exports
53.2% of GDP
47.2% of GDP
Saudi Arabia
Nigeria
Kuwait
94.6% of exports
86.6% of exports
57.1% of GDP
34.3% of GDP
Venezuela
…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 nondiscriminatory 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_economi
c_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 nonArab 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
Un
i
In
te dia
d
St
at
es
O
pe
c
Ru
ss
ia
No
rw
ay
M
ex
ico
An
g
Ka ola
za
ks
ta
n
Ca
na
da
O
m
Eq Aze an
ua r b
a
to
r ia ijan
lG
ui
ne
a
Ye
m
Ar en
ge
nt
in
a
M
al
ay
sia
Su
d
Co an
lo
m
b
De ia
nm
ar
k
Vi
et
na
m
Un
ite Egy
d
Ki p t
ng
do
m
World Oil Production
40
35
30
25
20
15
10
5
0
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.