Type: Definition Essays
Sample donated: Kent Barker
Last updated: April 15, 2019
Submitted to Prof.Sharmila DeviPrepared by LisaFernandes: 3152 (SY C)Date of submission: 24thJanuary, 2018 Insteadof begging OPEC to drop its oil prices, let’s use American leadership andingenuity to solve our own energy problems. – Pete DomeniciTable of contents: Sr. No. Topic Pg.
No. a. Acknowledgement 1 b.
Issues Motivated for choosing the study 2 c. Origin & nature 3 d. Existing scholarly work – Literature Review 6 e. Current situation (time period 2010 to now) 10 f. Lessons learned 13 g. Recommendations for Future 14 h. Reference 15 Acknowledgement:I would like to thankProf.
Sharmila Devi for designing this project and enabling us to gatherinformation, analyze and break it down to understand the topic “Oil Cartels”and its current situation in the global environment to further increase ourknowledge on International Relations and Strategies. This assignment made uslook beyond what meets the eye in the International market. The members of oilcartels, substitutes of oil and the resulting transformation of theinternational market have been engrained in our minds due to the structure ofthis project. We thank the InternationalBusiness Specialization course organizers for giving us this opportunity tounderstand the depth of oil cartels in the global market and its impact on internationalrelations and strategies that can form the base of strategizing on entering theinternational corporate world. Issues Motivated forchoosing the study:The Organisation of Petroleum Exporting Countries, OPEC, hasmanaged to come to agreement on cuts in production quotas among the variousmembers. Those who are not formal members of OPEC, such as Russia, are alsojoining in the cuts. The aim, of course as with any cartel, is to agree torestrain production so that prices rise. If they can manage to get that priceproduction level equation right they can thereby gain higher income for lessproduction.
And that is, again of course, what we expect of monopolists. Acartel is an attempt to create a monopoly among a number of differentproducers–or at least gain something close to monopoly power so that thatmonopolists’ trick of lower production and yet higher revenue can be pulledoff.Consumers should and do hate such behavior – it makes them poorer,they have less oil to use and yet must give up more of their incomes to haveit. This is why most countries have anti-monopoly and anti-trust laws andenforcement. For the artificial creation of such monopolies is known to besomething that harms consumers. In fact, if one tries that sort of actioninside the European Union you can be fined up to 10% of your global turnoverfor trying it on.
Sadly, OPEC, being a governmental organization, doesn’t getdinged with those same laws. But this still leaves them with the basic economicproblem faced by all cartels. A true monopoly has it easier – everyone, allproduction, is under the same control.
A cartel is by definition a number ofindividual actors who have joined together to achieve their goal.And the problem with such a cartel is that every single member hasan incentive to cheat all the other members. The production restraints push upthe price – so, why not produce a little bit more, you know, just a leetle bit, to take advantage of those higherprices? And if only one person does it just a little, a leetle, bit, then usually noproblem. But if everyone starts to cheat just a bit then the productionrestrictions are breached and all lose. It’s a nice example of the standardcollective action problem.
If everyone does what they’re supposed to then itworks nicely. And the more cheaters there are the more it falls apart.OPEC’s problem is that the organization itself doesn’t controlenough of the world’s supply to really control the oil price. And while it’sgot some help from some other producers that’s still not quite enough. For inthe background there is America’s fracking industry. And that is so split intomyriad parts that it’s simply never going to happen that it will constrainproduction for any other reason than price. And that’s really OPEC’s problemwrit large, the more successful they are at raising the price then the morethey’re going to call into that competition which will undermine that price.
Origin & nature: OPEC:It isthe Organization of Petroleum Exporting Countries. It was founded in Bagdad in1960 and currently has 11 members. OPEC’s aim is to regulate the amountof oilthat member nations produce and to keep prices at a steady rate. The countriesget together twice a year and agree on how much oil each country is allowed toproduce. OPEC’s headquarters are in Vienna, the capital of Austria.
Before OPECwas created, there were large oil companies that controlled the world’s oilproduction. They wanted to sell as much oil as possible and did not letgovernments influence their decisions. Oil-rich countries, especially inthe Middle East, wanted more control over the oil that they produce.
As aresult, Iran, Iraq,Saudi Arabia, Kuwait and Venezuela founded OPEC. In the following years Qatar,Indonesia, Libya, Algeria, Nigeria, Ecuador, Angola and the United ArabEmirates also become members. Inthe 1960s,OPEC did not have much power. This changed in 1973 when the third Arab-Israeliwar started. The United States and a few European countriessupported Israel. As a form of punishment, OPEC nations, influenced bythe Arab countries, stopped selling oil to the West. Within the next six yearsoil prices rose to ten times the price of the early 1970s. OPEC countriesbecame rich with so-called petrodollars; the West sank into deep recessionbecause they needed OPEC’s oil.
Inthe aftermath of the energy crisis of the 1970s, western countries startedlooking for alternativeforms of energy in order to become more independent from OPEC andthe oil-producing nations. In 1986, oil prices dropped to the lowest rate inhistory. Oil-producing nations lost much of their income.
In the 80s and90s OPEC’s power diminished, often because of conflicts and internal argumentsand because member states could not agree on production quotas. Some OPECcountries did not keep agreements and produced more oil, thus lowering prices.After 2000, oil prices began to rise again and reached an all-time high in2007. The financialcrisis of 2007 and 2008 hit world economy hard and oil prices fellonce again. Since the Arab Springof 2011, prices have gone up and down several times. Today OPECstill controls about 60% of the world’s oil reserves and produces 40% of theworld’s oil. Saudi Arabia is the most powerful member of the group, because ithas the largest reserves.
Even though there have been quarrels in the cartel inthe last 5 decades it remains a powerful organization. OPECwas created based on principles which are as valid today as they were then in1960 — despite the vast number of changes they have since experienced intechnology, economics, politics and many other aspects of their lives. Theseprinciples revolve around the coordination of their Member Countries’ oilpolicies, so as: to ensure price stability in the world oil market; to obtain astable revenue for oil-producing nations; and to provide a regular, reliable,efficient and economic supply to consuming countries and a fair return toinvestors in the oil industry. Their commitment to these principles wasreaffirmed as recently as the year 2000, in the Solemn Declaration thatconcluded the Second Summit of Heads of State and Government of OPEC MemberCountries, which was held in Caracas, Venezuela.OPEC’s activities are focused on oil, a commodity thathas contributed more than any other form of energy to economic developmentaround the world, over the past century and a half. Analysts agree thathydrocarbons will remain the most important source of energy for decades tocome.Moreover, they are dedicated to the ideals of 2002’s World Summit inJohannesburg, to ensure that energy reaches all people and all nations, richand poor alike, as an essential element in the sustainable development ofmankind.
OPEC’s mission is not restricted by time or circumstance, however. It is,instead, a permanent one, which is centered around petroleum, but broadens outinto the energy industry generally. It involves close cooperation and exchangeswith other leading, influential parties in the sector at national andinternational levels.
Themembers meet twice a year (usually March and September) at the OPEC Conferenceto co-ordinate and unify their petroleum policies and consider the currentsituation and forecasts of economic growth rates and petroleum demand andsupply scenarios. Delegates are normally the Ministers of Oil, Mines and Energyof Member Countries. The Conference is the supreme authority of theOrganization. However, there are three main organizational units which overseethe operations of the organization:· OPECSecretariat – This group functions as the Headquarters of OPEC.
It isresponsible for carrying out the executive functions of the Organization. Itconsists of the Secretary General and the Research Division, headed by theDirector of Research, who oversees the Petroleum Market Analysis, EnergyStudies, and Data Services Departments.· Boardof Governors – The Board is composed of Governors nominated by MemberCountries and confirmed by the Conference for two years. The Board directs themanagement of the Organization, implements Resolutions of the Conference; drawsup the Organization’s annual budget, and submits it to the Conference forapproval. · ResearchDivision – is a specialized research oriented body operating within theframework of the Secretariat. It consists of three Departments, namely, DataServices, Energy Studies and Petroleum Studies. Muchabout the actual operations and decision making process of OPEC is unknown. Theorganization is quite secretive about itself so there is not much written aboutits internal workings.
This secrecy has often lead to misunderstandings orconspiracy theories, which are prevalent in some books and articles written onOPEC. The obvious conclusion is that OPEC isnot a cartel, as some people still insist on calling them. Instead, it is aninternational organization of sovereign states, with a legitimate, permanentand essential mission for both its Member Countries and mankind generally. InternationalEnergy Agency (IEA):TheInternational Energy Agency (IEA) is one of the larger organizations involvedin the oil and gas industry. The IEA is the energy forum for 26 industrializedcountries.
Formed by the Organization for Economic Cooperation and Development(OECD) as an autonomous intergovernmental entity within the OECD in 1974 indirect response to the oil crisis, its members include: Australia, Austria,Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece,Hungary Ireland, Italy, Japan, Republic of Korea, Luxembourg, The NetherlandsNew Zealand, Norway, (participates under a special Agreement), Portugal, Spain,Sweden, Switzerland, Turkey, United Kingdom, and the United States. Oneof the overall objectives ofthe IEA, which reflects the original reason for the group’sestablishment, is to seek ways to reduce the members’ vulnerability to a supplydisruption. Organization ofArab Petroleum Exporting Countries (OAPEC):TheOrganization of Arab Petroleum Exporting Countries (OAPEC) was established in1968 and is based in Kuwait. Membership is limited to petroleum producing Arabcountries. The three founding members were Kuwait, Libya, and Saudi Arabia. TheOAPEC is not a cartel in the same sense as OPEC.
OAPEC is devoted todevelopmental activities and increasing the cooperation among its members.