OPECOrganization of Petroleum Exporting Countries

What is OPEC?
Permanent Intergovernmental Organization. Started in 1960 - Oil rich nations joined together.

Original members: Iran, Iraq, Kuwait, Saudi-Arabia, Venezuela.

Joined OPEC later: Qatar, UAE, Nigeria, Libya, Ecuador, Angola, Algeria

First meeting of OPEC September 9-14, 1960 in Baghdad, Iraq. Registered in United Nations Secretariat on Nov 6,1962.
The 12 OPEC member countries produce about 40% of the worlds crude oil, and therefore have a strong influence on the oil market.

OPECs 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

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. In order to achieve these objectives, the OPEC nations meet at least bi-annually to decide whether to raise or lower their collective oil production in order to maintain stable prices

Categories of membership
Founder Membership Full Membership Associate Membership Headquarters : Vienna, Austria Official language : English President : Rostam Ghasemi Secretary general : Abdallah el-Badri Currency : USD per barrel

OIL Crises of 1973

President Nixon showed his support of Israel by giving them $ 2.5 billion worth of arms (weapons) OPEC nations retaliated against those nations(US, European and Dutch nations) supporting Israel by putting an embargo on oil shipments. EMBARGO a type of trade barrier in which a government places restrictions on imports and exports of certain goods. Result the price of gasoline shot way up as its supply went down, leading to shortages.

Economic Impacts of Crises

The oil companies in the west forced to increase payments drastically The oil price quadrupled by 1974 to nearly US$12 per barrel. US oil import from Arab countries dropped from 1.2 million barrels to 19,000 barrels. Daily consumption dropped by 7% during summer of 1974. New York Stock Exchange shares lost $97 billion in values in six weeks.

WHAT IT WAS LIKE IN 1973

Oil crisis 1980 Surplus of Crude Oil caused by falling demand following the 1970s energy crisis. Slowed economic activity in Industrial activities, reduced demand and overproduction. Oil price from $35(1980) fall to below $10 (1986).
Oil crisis 1990 (Gulf War) War against Iraq in response to Iraq's invasion and annexation of Kuwait. Iraq dumped 400 million US gallons of crude oil into the Persian Gulf. Kuwaiti oil fires were caused by Iraqi military forces setting fire to 700 oil wells.

OPEC & WORLD

Crude Reserves Country Crude oil Reserves(billion barrels)2010 Venezuela 296.58 Saudi Arabia 264.54 Iran 151.70 Iraq 143.10 Kuwait 101.50 Total 1193.72 81.3 percent(1193.72) out of Total (1467.35)Crude reserves, are in OPEC Member Countries.

Contd
Total World Output of Crude oil in 2013 was 105.54 million barrels per day OPEC s output is 41.8% of World output. OPEC crude oil reserves are sufficient to last more than 112 years.

Short run oil price elasticity

Short run -Time frame in which the quantity of atleast one of the production is fixed.
Supply- Inelastic Demand- Inelastic

Large cost associated with production. Exploring for, drilling, and bringing new sources on-line can take many years.

Because there are no readily available substitutes to using oil as a source of energy or fuel.

Short run oil price elasticity

After oil shocks of 1970,1979 reduction in supply led to huge increase in price Inelastic demand Since the quantities demanded and supplied change very little as prices rise and fall, both curves are relatively vertical

Rise of emerging markets , increase in demand led to increase in price Inelastic supply

Long run oil price elasticity

Long run-Time frame in which all quantity of the production are variable. Supply- Elastic Demand- Elastic

The increased prices of the 1970's unleashed a frenzy of successful new exploration and drilling. New oil fields came on line all over the world in places such as Mexico, Russia and the North Sea.

After oil prices rose, Firms began shifting to less energy-intensive ways of manufacturing goods and services. Consumers started to conserve as well

Change of price elasticity over the years

OPEC Fiscal issues constraint-OPEC domestic consumption continues to increase faster than supply, OPEC net exports will continue to fall. Absence of excess oil production capacity. The lack of investment in the oil sector. Geology and politics constrain oil supply constraint s elsewhere- expensive and slow progress.
Src - http://econfix.wordpress.com/tag/oil/

OPECs Share in World Oil Market

Source: British Petroleum statistical review.

Advantages for OPEC

Producers incur no storage costs consuming countries incur technical costs of building storage facilities, interest on the value of oil stocks and various risks (e.g. environmental risks) Oil production is not labour intensive Since there are no short-term substitutes for petroleum, changes in supply are also effective. Demand for crude oil is highly insensitive to price changes

Demand Supply Curve

OPEC CARTEL OR NOT

1)

MONOPOLY-CARTEL THEORY
LARGE MARKET SHARE- 42% AS ON 2012(resilience.org)

MARKET SHARE
80 70 60 50 40 30 20 10 0 58.4 62.9 63.7 67.5 67.8 65.4 67.5 67

64.5 63.2

59.5
48.6 45.7 44.3 41.7 44.9 45 47.3 49.3 50.7

59.7 60 MARKET SHARE

1970197119721973197419751976197719781979198019811982198319841985198619871988198919901991

WHAT DOESS A MONOPOLY DO- INCREASE PRICE AND REDUCE OUTPUT

PRICES- Some models of a non-renewable resource show that a monopoly sets a higher initial price than does a competitive industry
OPECs STRATERGY- CHARGE HIGH PRICE INITIALLY,THEN LOWER AND SUBSEQUENTLY RAISE AS OIL RESERVES DEPLETED WHAT ACTUALLY HAPPENED-PRICE INCREASED FROM 1970S AND OUTPUT INCREASED

This analysis suggests that OPEC's output has generally differed from the monopoly level. Even if one believes that OPEC is a unified cartel some of the time, one must concede that its cartel agreement breaks apart often.

The Cartel Core-Dominant Firm Model

Many people argue that Saudi Arabia acts as a dominant firm while many other OPEC countries are price takers.
YEAR OUTPUT CHANGE(%) MARKET SHARE CHANGE(%) Deflated Price ($1991) using U.S. GNP Deflator (% CHANGE)

1977 1978 1989 1990

8 -5.4 -0.4 26.6

4.3 -5.7 -3.7 22.3

4.7 -6.9 -4.2 18.4

SOURCE- U.S. Department of Energy

SAUDI ARABIA MAINTAINESS ITS EXCESS CAPACITY TO REMAIN PRICE MAKER.IT INCREASED ITS CAPACITY FROM 11 TO 12.5 MBD IN 2009. SAUDI ARABIA ACT AS A DISCIPLINER ACCORDING TO OTHER MODELS SAUDI ARABIA AND FEW OTHER OPEC NATIONS ACT AS DOMINANT FIRM AND RESTRICT OUTPUT- NON-OPEC HAVE LITTLE EXCESS CAPACITY

COMPETITIVE MODEL
Opec is unsuccessful cartel as every countrys output has increased Opec follows target revenue moddel (crmer and salehi-isfahani ) and supply curve is backward bending

Oil industry was at eq. At (p1,q1) in 1973 and Eq. At (p3,q3) on 1973-74 when members agreed to increase prices Verleger's (1982) empirical study indicates that opec countries set their official prices in response to shifts in demand, spot market and not based on persuasion They act as a Price Takers Price change is due to shifts in demand

The Non-Profit-Maximizing Model

Economist like teece(1982) argue that opec member make production decision based on their absorptive capacity.
Opec countries set different prices. And saudis sell at lower prices Economist like adelman reject this model 1. Opec want to generate as much revenue as possible 2. Opec not able to achieve political objective

CONCLUSION
Monopoly or dominant-firm model -opec has a large share of the market and entry by competitors is slow. In some periods, price has increased substantially. Perfect competitive-the cartel agreement appears to break down regularly, resulting in prices below the profit-maximizing level. Non profit-some countries probably vary their production for political rather than economic reasons.

Future Challenges for OPEC

Production Mismatch Between OPEC and Non-OPEC

Global Oil Demand Uncertainity

Russia Overtook Saudi Arabia in Crude Oil Production

Factions within OPEC OPEC share of Production Decreasing Member Cohesion Maintaining Quota Discipline

Technological Developments in Renewable Energy Sources

REFERENCES
http://www.bp.com/statisticalreview http://www.eia.gov/finance/markets/supply-opec.cfm http://www.opec.org/opec_web/en/publications