...OPEC and the economics of cartel Presented by Sanjay Gupta Lakshmi Varma Lakshmi Nair Shibin T Renjith Outlines What is OPEC? 1. 2. 3. Oil – A basic necessity OPEC (Information on OPEC) OPEC Side Line Objectives Our main premise of this Presentation is to derive economics concepts from OPEC and the economics of cartel. We will also cover briefly micro economics concepts – Demand and Supply, market structure & pricing decisions and related concepts. 2. OPEC is an epitome of Oligopoly 1. Oil – Life Blood of Indian Economy OIL - One of the life bloods of our Indian economy is oil. The impact of oil in today’s Indian economy has been witness by consumers many times. We have seen how human spending and travel got affected as the price of oil fluctuates. In contrast almost all energies are generated using oil, to mention few; Cars, Trucks, Indian railways, Plane, use oil in order to run their engine. Therefore if oil supply disturbed for one day we can imagine how the Indian economy can be affected greatly. OPEC - Introduction About OPEC (pronounced oh-peck)- Organization of the Petroleum Exporting Countries - Organization of the Petroleum Exporting Countries, established in Bagdad, Iraq in 1960. OPEC as a cartel, manipulate supply of oil in the market, in hopes of keeping prices, and profits, high. It is comprised of 12 members –Algeria, Angola, Ecuador, Islamic Republic of Iran, Iraq, Kuwait, Socialist People’s Liberian Arab...
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...Exporting Countries (OPEC) have received considerable attention both in the academic literature and in the media. Many conflicting theoretical and empirical interpretations about the nature of OPEC and its influence on world oil markets have been proposed. The debate is not centred on whether OPEC restricts output, but the reasons behind these restrictions. Others explain production cuts in the 1970s in terms of the transfer of property rights from international oil companies to governments (Johany, 1980; Mead, 1979). Others explain output restrictions in terms of coordinated actions of OPEC members. Within the literature, OPEC behaviour ranges from classic textbook cartel to two block cartel (Hnyilicza and Pindyck, 1976), to clumsy cartel (Adelman, 1980), to dominant firm (Salant, 1976; Mabro, 1991), to loosely co-operating oligopoly, to residual firm monopolist (Adelman, 1982) and most recently to bureaucratic cartel (Smith, 2005). Others have suggested that OPEC oscillates between various positions but always acts as a vacillating federation of producers (see for instance Adelman, 1982; Smith, 2005). The existing empirical evidence has not helped narrow these different views. Griffin’s (1985) observation in the mid-1980s that the empirical studies tend to “reach onto the shelf of economic models to select one, to validate its choice by pointing to selected events not inconsistent with model’s prediction” still dominates the empirical approach to studying OPEC behaviour and its...
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...OPEC OIL IN 2010: ECONOMIC EVENTS, TRENDS IN DEMAND AND SUPPLY AND IMPACT ON PRICES Etuwat James J.O., American University of Leadership, 2012 1.0 INTRODUCTION This submission is on an organization known by its acronym OPEC but its full name is Organization of the Petroleum Exporting Countries. The write up seeks to identify economic events related to 2010 that have influenced the trends of the supply and demand of OPEC oil and the impact of these events on oil prices. My focus will be on the period of 2010 and to an extent prior to that year. According to their website (OPEC 2012) , the Organization of the Petroleum Exporting Countries (OPEC) is a permanent, intergovernmental Organization and was created in the Iraq capital of Baghdad after endorsement of accord in 1960 by the founding members, Kuwait, Iraq, Saudi Arabia, Islamic Republic of Iran and Venezuela. Others came in later in alphabetical order: Algeria (1969), Angola (2007), Ecuador (1973), Gabon (1975), Indonesia (1962), Libya (1962), Nigeria (1971), Qatar (1961), United Arab Emirates (1967). However, Ecuador deferred its membership in the period December 1992 to October 2007, Gabon ceased its attachment in 1995. Indonesia shelved its commitment from January 2009. At the moment, OPEC has Member Nations. OPEC had its head office in Geneva, Switzerland, for five years since its creation but transferred Vienna, Austria in 1965. The governing charter of OPEC differentiates between the Founder Members and Full Members...
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...Organization and Objectives The Organization of the Petroleum Exporting Countries (OPEC), hereinafter referred to as “the Organization”, created as a permanent intergovernmental organization in conformity with the Resolutions of the Conference of the Representatives of the Governments of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, held in Baghdad from September 10 to 14, 1960, shall carry out its functions in accordance with the provisions set forth hereunder. A. The principal aim of the Organization shall be the coordination and unification of the petroleum policies of Member Countries and the determination of the best means for safeguarding their interests, individually and collectively. B. The Organization shall devise ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations. C. Due regard shall be given 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. English shall be the official language of the Organization. Membership A. Founder Members of the Organization are those countries which were represented at the First Conference, held in Baghdad, and which signed the original agreement of the establishment...
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...multiplier times negative impact on GDP and other macro economic variables such as inflation. Oil and other petroleum products are scarce commodities in the world. Like prices of other commodities the price of crude oil experiences wide price swings in times of shortage or oversupply. The crude oil price cycle may extend over several years responding to changes in demand as well as OPEC and non-OPEC supply. Throughout much of the twentieth century, the price of U.S. petroleum was heavily regulated through production or price controls. In the post World War II era, U.S. oil prices at the wellhead averaged $28.52 per barrel adjusted for inflation to 2010 dollars. In the absence of price controls, the U.S. price would have tracked the world price averaging near $30.54. Over the same post war period, the median for the domestic and the adjusted world price of crude oil was $20.53 in 2010 prices. Adjusted for inflation, from 1947 to 2010 oil prices only exceeded $20.53 per barrel 50 percent of the time. (See note in the box on right.) Until March 28, 2000 when OPEC adopted the $22-$28 price band for the OPEC basket of crude, real oil prices...
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...life style. Fuel cost is increasing day by day. Not knowing the real reason of this leads to misconception that the main beneficiaries are oil producing countries especially OPEC Member Countries. This essay will compare the revenues of oil-consuming countries (OECD nations) and OPEC Member Countries in order to find out the reason of oil price raise and who gets profit from produced oil. OECD countries bought oil at nearly same price but sold totally at different from each other due to inner taxes. Consumers in the UK paid 57.8% and in Italy 55.5% of total fuel cost to their governments as taxes which increased dramatically from 2009 to 2012. Nearly half of a liter of fuel cost was charged as taxes in Germany and France. The lowest tax rate was in the US 14.2% steady for 2011-13. The highest price per barrel in Japan was about $250 in 2011. Canadians bought a barrel of oil at approximately $200 in 2011-13. The estimated average annual OECD tax revenues per barrel in 2009-13 was $116 while OPEC export revenue per barrel was $95 for the same period. During 4 years OECD economies received an average of $1,082 billion pure income per year from oil taxes when OPEC earned an average of $966 billion per year without subtraction of expenses – nearly $115 billion less than OECD governments. As it is seen OPEC Member Countries producing oil have much less income than OECD countries imposing heavily taxed price on fuel. In conclusion the real burden on consumers is due to taxes, not...
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...An Anatomy of the Crude Oil Pricing System Bassam Fattouh1 WPM 40 January 2011 1 Bassam Fattouh is the Director of the Oil and Middle East Programme at the Oxford Institute for Energy Studies; Research Fellow at St Antony‟s College, Oxford University; and Professor of Finance and Management at the School of Oriental and African Studies, University of London. I would like to express my gratitude to Argus for supplying me with much of the data that underlie this research. I would also like to thank Platts for providing me with the data for Figure 21 and CME Group for providing me with the data for Figure 13. The paper has benefited greatly from the helpful comments of Robert Mabro and Christopher Allsopp and many commentators who preferred to remain anonymous but whose comments provided a major source of information for this study. The paper also benefited from the comments received in seminars at the Department of Energy and Climate Change, UK, ENI, Milan and Oxford Institute for Energy Studies, Oxford. Finally, I would like to thank those individuals who have given their time for face-to-face and/or phone interviews and have been willing to share their views and expertise. Any remaining errors are my own. 1 The contents of this paper are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its members. Copyright © 2011 Oxford Institute for Energy Studies (Registered Charity, No. 286084) ...
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...Prices The main stream media and the government would lead you to believe that the rising gas prices are a result of poor planning, greed, and too little government regulation. While those factors may play a small role in the inflated prices, what it really boils down to is the basic principles of supply and demand. The lack of alternate energy sources, the growing need for gas in other countries like China and the limited number of oil refineries in the United States keep the demand high. Since Economics teaches us that there is a positive relationship between demand and prices, we know that if the demand is high the prices will remain high. Couple this is the monopoly OPEC, Organization of Petroleum Exporting Countries, has established, allowing them to in reality, set whatever prices per barrel they choose. OPEC is responsible for over a third of the world's oil production, giving it the power to strong arm countries like the United States and Canada into paying outrageous amounts per each barrel (Carollo, 2012). When the prices do not move as they anticipate them to, they manipulate the market by creating imaginary gas shortages. Having their refineries cut back production until foreign pumps are running dry and prices soar. Other factors like the war in Iraq, environmental restrictions in the United States that hinder off shore drilling and exploration and instability in other oil producing countries, also play a small role in the fluctuating prices. However, the bottom line...
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...500,000 barrels per day (bpd) to global supply while demand growth remains tepid," Moody's said in a statement. Stating that it has adjusted its view downward for the likely range of prices, the rating agency said it saw "a substantial risk that prices may recover much more slowly over the medium term than many companies expect, as well as a risk that prices might fall further." "Even under a scenario with a modest recovery from current prices, producing companies and the drillers and service companies that support them will experience rising financial stress with much lower cash flows," it said. Oil cartel OPEC and many non-OPEC oil producers continue to produce without restraint as they battle for market share, and the addition of Iranian oil to the market in 2016 will offset or exceed a roughly 500,000 bpd decline in the US production, it added. "OPEC countries continue high levels of production in the battle for market share, contributing to the current oil glut despite moderate consumption growth by key consumers such as China, India and the US, Moody's Senior VP Terry Marshall said. Production now exceeds demand by about 2 million bpd, adding to already high global oil stocks, it said. "Moody's reduced its price estimates for...
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...ricing Analysis of the Impact of High Oil Prices on the Global Economy International Energy Agency May 2004 IEA/(2004) SUMMARY Oil prices still matter to the health of the world economy. Higher oil prices since 1999 – partly the result of OPEC supply-management policies – contributed to the global economic downturn in 2000-2001 and are dampening the current cyclical upturn: world GDP growth may have been at least half a percentage point higher in the last two or three years had prices remained at mid-2001 levels. Fears of OPEC supply cuts, political tensions in Venezuela and tight stocks have driven up international crude oil and product prices even further in recent weeks. By March 2004, crude prices were well over $10 per barrel higher than three years before. Current market conditions are more unstable than normal, in part because of geopolitical uncertainties and because tight product markets – notably for gasoline in the United States – are reinforcing upward pressures on crude prices. Higher prices are contributing to stubbornly high levels of unemployment and exacerbating budget-deficit problems in many OECD and other oil-importing countries. The vulnerability of oil-importing countries to higher oil prices varies markedly depending on the degree to which they are net importers and the oil intensity of their economies. According to the results of a quantitative exercise carried out by the IEA in collaboration with the OECD Economics Department...
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...Daniel Sebagh Dr. Armiger Response paper #2 4/26/12 Oil Crisis in the 1970’s The Oil Crisis of the 1970’s was a major period in American history, when a number of political, global and social events came together to create a ‘perfect storm’. The Seventies was an era filled with people seeking self-fulfillment (The ‘Me’ Decade), where the nation was growing at a fast pace. People, during this time, concentrated on their own leisure and happiness. Behind the narcissism and selfishness of many people’s attitudes, an oil crisis struck America which largely impacted the automobile industry and led to a rise in gas prices. The combination of stagnant growth and price inflation during this era raises many issues, while many attempts to end the crisis, such as Jimmy Carter’s Energy plan, substantially made it worse. These problems caused Americans to focus more on economic issues versus social issues. The “Me Decade,” a term coined by novelist Tom Wolfe, was a concept of the Seventies- “an era of narcissism, selfishness, personal rather than political awareness… The ‘70’s was the decade in which people put emphasis on the skin, on the surface, rather than on the roof of things… It was the decade in which image became preeminent because nothing deeper was going on (Schulman, 145).” It described the new American self-awareness and the collective retreat from history, community and human reciprocity. Compared to the 1960’s, Americans in the 1970’s were self-absorbed and passive;...
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...Filling up at the gas station has been a much more pleasant experience for Americans since last fall. Regular gas is now less than $2 a gallon in many states, down from around $3.30 just a year ago. But how long will that last? It's just one of many questions stemming from the extraordinary drop in crude oil prices — a development that has boosted consumer confidence, hurt once-booming energy states and presented new opportunities — and challenges — for the U.S. and global economy. Q: Why did oil prices fall so much, so fast? A: A confluence of factors has contributed to the more than 50 percent slide in oil prices since September. The biggest is the steady rise in world petroleum supplies, mainly because of the shale-oil revolution in the U.S. Thanks to hydraulic fracturing, or fracking, and other drilling techniques, the U.S. has accounted for more than 80 percent of global crude production growth in the last five years. More recently, an increase in oil output in Iraq and Libya has further boosted capacity. At the same time, there are signs of softening demand. Economies in Europe and Japan have been stagnant, and the Chinese economy, the biggest driver of global oil demand, is slowing down. The strong dollar also has helped pushed down oil prices. Q: How long will it last? A: Low prices at the pump may be short-lived because the cost of crude is likely to start rebounding in the second half of this year. That's based on predictions of future supply and demand...
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...has plenty of shale oil. 2013 - Oil rose swiftly to $118.90/barrel on February 8, sending gas prices to $3.85 by February 25. Prices had started rising earlier than normal thanks to Iran's threatening war games near the Straits of Hormuz. What Causes High Oil Prices?: Like most of the things you buy, oil prices are affected by supply and demand. More demand, like the summer driving season, drives higher prices. There is usually less demand in the winter, since only the Northeast U.S. uses heating oil. However, oil prices are also affected by oil price futures, which are traded on the commodities exchange. These prices fluctuate daily, depending on what investors think the price of oil will be going forward. What Affects Oil Supply?: OPEC is an organization of 12 oil-producing countries that produce 46% of the world's oil. In 1960, they formed an alliance to regulate the supply, and to some extent, the price of oil. These countries realized they had a non-renewable resource. If...
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...1. How dependent is your country on its oil? Include in this discussion which countries your country currently is trading their oil with, their largest importing countries, how much oil they are producing and how dependent they are on their oil trade? (8 points). The Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental organization created at the Baghdad Conference on September 10, 1969. The objective of the OPEC is to co-ordinate and unify petroleum polices among Member Countries, in order to secure fair and stable prices for petroleum producers; and efficient, economic, and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry. (OPEC.) In 1969, Algeria joined the OPEC. Algeria is OPEC’s largest member county and the largest country in Africa. It is in the northern part Africa with Western Sahara, Mauritania, Mali, Niger, Libya, and Tunisia as its neighbors. Algeria gained its political independence in 1952 from France. Algeria’s population is more 39 million people. The gas and oil sector is the backbone of the economy, which accounts for more than 35 percent of the GDP and two-thirds of its export. Its largest gas and petroleum deposits are found mainly in the Eastern Sahara and these are transported to various sea port by pipelines. Algeria has the 10th largest reserves of natural gas in the world and is the sixth largest gas exporter. It ranks 16th in oil reserves. Algeria's oil and...
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...Economics for the Global Manager BUS610 AIU Abstract An economic company has contracted out to establish the financial structure and potential actions of the Organization of Petroleum Exporting Countries, or OPEC. The purpose of this paper is to discuss the difference between a monopoly, an oligopoly, and a cartel along with examples of each. It will discuss the welfare effects of monopolies and oligopolies. It will discuss how game theory explains the relations of firms within oligopolies and cartels and the financial purpose of OPEC and the past five years of the oil prices. Economics for the Global Manager The Organization of Petroleum Exporting Countries, or OPEC, economic structure and future actions are predicated on a contract from an economic firm. The difference between a monopoly, an oligopoly, and a cartel are simple and examples of each will be given. The welfare effects of monopolies and oligopolies will be discussed. Game theory explains the relations of firms within oligopolies and cartels. The economic purpose of OPEC and what has happened to oil prices over the past five year will be discussed. Differences /Examples One seller of a good or service which has no close substitute and has substantial control over the price and protection from rivalry through a barrier to entry is a monopoly. An industry that has moderately diminutive number of firms, barriers to access, price searching behavior and mutual interdependence is an oligopoly. A cartel...
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