Arab-Israeli War 1973

• Increase in price from $3 to$12 per

barrel

• No decline in demand

• Market was INELASTIC

 Post-Iranian Revolution
• Increase price from $15 to$ 40 per
barrel

• Steep drop in DEMAND

• Market became ELASTIC

WHY THIS HAPPENED…?
• Recession in world economies

• Expanded exploration and production

of oil by non-OPEC countries

• Substitutes for petroleum products

Drastic fall in market share of oil
production from 55% to 40%.

(graph)
 Why opec ws formed
Though the Middle East had huge oil reserves,
it could not reap very high profits
because oil prices were determined by the
refineries and OECD. This system
benefited only the refineries, and not the oil-
producing countries. This led to the
formation of the Organization of Petroleum
Exporting Countries (OPEC)7 in 1960,
to unify and coordinate the petroleum policies
of the 12 major oil producing and
exporting countries.
 Function of opec
• to coordinate and unify their petroleum
policies in order to promote stability and
harmony in the oil market.
• consider the current situation and forecasts
of market fundamentals, such as economic
growth rates and petroleum demand and
supply scenarios.
• Make changes in their petroleum policies,if
required.
 Formation of opec
• OPEC was formed at a meeting held
on September 14, 1960 in Baghdad,
Iraq, by five Founder Members: Iran,
Iraq, Kuwait, Saudi Arabia and
Venezuela. OPEC was registered with
the United Nations Secretariat on
November 6, 1962 (UN Resolution No
6363).
Why does OPEC set oil production
quotas
• to pursue stability and harmony in the
petroleum market for the benefit of both oil
producers and consumers.
• If demand grows, or some oil producers are
producing less oil, OPEC can increase its oil
production in order to prevent a sudden
rise in prices.
• OPEC Member Countries respond to market
fundamentals and forecast developments
by co-ordinating their petroleum policies.
 Mission statement-
“co-ordinate and unify petroleum policies
among Member Countries, in order to secure fair and
stable prices for petroleum producers;
an ecient, economic and regular supply of petroleum to
consuming nations; and a fair
return on capital to those investing in the industry.”
 OPEC Quotas and Production in thousands of barrels per day [29]

Country Quota (7/1/05) Production Capacity

(1/07)
 Algeria 894 1,360 1,430
 Angola 1,900 1,700 1,700
 Ecuador 520 500 500
 Iran 4,110 3,700 3,750
 Iraq 1,481
 Kuwait 2,247 2,500 2,600
 Libya 1,500 1,650 1,700
 Nigeria 2,306 2,250 2,250
 Qatar 726 810 850
 Saudi Arabia 10,099 8,800 10,500
  2,444 2,500 2,600
United Arab Emirates
 Venezuela 3,225 2,340 2,450
Total 31,422 30,451 32,230
 Pricing Strategies
• Low-price-preference members with small
populations and huge oil reserves, favored
moderate oil prices to discourage consumers
from seeking alternative fuels.
• High-price-preference members with large
populations, wanted high prices SINCE their
small reserves offered no incentive to support
pricing policies that would sustain the long-term
attractiveness of oil as a fuel.
GULF WAR