OIL effort to regulate or manipulate prices. It is

OIL CARTEL – ORGANIZATION
OF PETROLEUM EXPORTING COUNTRIES

A cartel is an
organization created from a formal agreement between a group of producers of a
good or service to regulate supply in an effort to regulate or manipulate
prices. It is basically a collection of various firms or countries that come
together to form an organization, and thus are able to set prices for the goods
they produce without any competition.

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Cartels have a negative effect
of consumers because their existence results in higher prices and restricted
supply. The Organization of Petroleum Exporting Countries (OPEC) is the world’s
largest cartel.

 

OPEC

 

 

The
Organization of the Petroleum Exporting
Countries (OPEC) is a permanent, intergovernmental Organization, created at
the Baghdad Conference on September 1960, by Iran, Iraq, Kuwait, Saudi Arabia
and Venezuela. The five Founding Members were later joined by ten other
Members: Qatar (1961), Indonesia (1962), Libya (1962), United Arab Emirates
(1967), Algeria (1969), Nigeria (1971), Ecuador (1973), Angola (2007); Gabon
(1975), and Equatorial Guinea (2017).

 

OPEC
had its headquarters in Geneva, Switzerland, in the first five years of its
existence. This was moved to Vienna, Austria, on September 1, 1965. OPEC’s
objective is to co-ordinate and unifies petroleum policies among Member
Countries, in order to secure fair and stable prices for petroleum producers.
It is thought as an efficient, economic and regular source of supply of
petroleum to consuming nations and a fair return on capital to those investing
in the industry.

HISTORY OF OPEC

 

1960s

OPEC’s
formation by five oil-producing developing countries in Baghdad in September
1960 occurred at a time of transition in the international economic and
political landscape, with extensive decolonization and the birth of many new
independent states in the developing world. The international oil market was
dominated by the “Seven Sisters” multinational companies and was largely
separate from that of the former Soviet Union (FSU) and other centrally planned
economies (CPEs).

 

1st OPEC Conference, 10-14 September
1960, Baghdad, Iraq

 

OPEC
developed its collective vision, set up its objectives and established its
Secretariat, first in Geneva and then, in 1965, in Vienna. It adopted a
‘Declaratory Statement of Petroleum Policy in Member Countries’ in 1968, which emphasized
the inalienable right of all countries to exercise permanent sovereignty over
their natural resources in the interest of their national development.

 

1970s

OPEC
rose to international prominence during this decade, as its Member Countries took
control of their domestic petroleum industries and acquired a major say in the
pricing of crude oil on world markets. On two occasions, oil prices rose
steeply in a volatile market, triggered by the Arab oil embargo in 1973 and the
outbreak of the Iranian Revolution in 1979.

 

OPEC
broadened its mandate with the first Summit of Heads of State and Government in
Algiers in 1975, which addressed the plight of the poorer nations and called
for a new era of cooperation in international relations, in the interests of
world economic development and stability. This led to the establishment of the
OPEC Fund for International Development in 1976. Member Countries embarked on
ambitious socio-economic development schemes.

 

32nd (Extraordinary) OPEC Conference,
16–17 March 1973, Vienna, Austria

 

1980s

During
the 1980s prices began to weaken, before crashing in 1986, responding to a big
oil glut and consumer shift away from this hydrocarbon. OPEC’s share of the
smaller oil market fell heavily and its total petroleum revenue dropped below a
third of earlier peaks, causing severe economic hardship for many Member
Countries. Prices rallied in the final part of the decade, but to around half
the levels of the early part, and OPEC’s share of newly growing world output began
to recover. This was supported by OPEC introducing a group production ceiling
divided among Member Countries and a Reference Basket for pricing, as well as
significant progress with OPEC/non-OPEC dialogue and cooperation, seen as
essential for market stability and reasonable prices.

 

73rd (Extraordinary) OPEC Conference,
28–30 January 1985, Geneva, Switzerland

 

1990s

Prices
moved less dramatically than in the 1970s and 1980s, and timely OPEC action
reduced the market impact of Middle East hostilities in 1990–91. But excessive
volatility and general price weakness dominated the decade, and the South-East
Asian economic downturn and mild Northern Hemisphere winter of 1998–99 saw
prices back at 1986 levels. However, a solid recovery followed in a more
integrated oil market, which was adjusting to the post-Soviet world, greater
regionalism, globalization, the communications revolution and other high-tech
trends.

Breakthroughs
in producer-consumer dialogue matched continued advances in OPEC/non-OPEC
relations. As the United Nations-sponsored climate change negotiations gathered
momentum, after the Earth Summit of 1992, OPEC sought fairness, balance and
realism in the treatment of oil supply. One country left OPEC, while another
suspended its Membership.

 

2000s

An
innovative OPEC oil price band mechanism helped strengthen and stabilize crude
prices in the early years of the decade. But a combination of market forces,
speculation and other factors transformed the situation in 2004, pushing up
prices and increasing volatility in a well-supplied crude market. Oil was used
increasingly as an asset class. Prices soared to record levels in mid-2008,
before collapsing in the emerging global financial turmoil and economic
recession. OPEC became prominent in supporting the oil sector, as part of
global efforts to address the economic crisis. OPEC’s second and third summits
in Caracas and Riyadh in 2000 and 2007 established stable energy markets,
sustainable development and the environment as three guiding themes, and it
adopted a comprehensive long-term strategy in 2005. One country joined OPEC,
another reactivated its Membership and a third suspended it.

 

Third OPEC Summit, 17-18 November
2007, Riyadh, Saudi Arabia

CURRENT SCENARIO (2010 –
2018)

 

The
global economy represented the main risk to the oil market early in the decade,
as global macroeconomic uncertainties and heightened risks surrounding the
international financial system weighed on economies. Escalating social unrest
in many parts of the world affected both supply and demand throughout the first
half of the decade, although the market remained relatively balanced.

 

Delegates and guests at OPEC’s new
Headquarters, 17 March 2010, Vienna, Austria

 

Prices
were stable between 2011 and mid-2014, before a combination of speculation and
oversupply caused them to fall in 2014. Trade patterns continued to shift, with
demand growing further in Asian countries and generally shrinking in the OECD.
The world’s focus on multilateral environmental matters began to sharpen, with
expectations for a new UN-led climate change agreement. OPEC continued to seek
stability in the market, and looked to further enhance its dialogue and
cooperation with consumers, and non-OPEC producers.

 

167th OPEC Conference, 5 June 2015,
Vienna, Austria

 

MEMBERS

 

The
OPEC was created in September 1960, by Iran, Iraq, Kuwait, Saudi Arabia and
Venezuela. These countries were later joined by Qatar (1961), Indonesia
(1962), Libya (1962), the United Arab Emirates (1967), Algeria (1969),
Nigeria (1971), Ecuador (1973), Gabon (1975), Angola (2007) and Equatorial
Guinea (2017).

 

Ecuador
suspended its membership in December 1992, but rejoined OPEC in October 2007.
Indonesia suspended its membership in January 2009, reactivated it again
in January 2016, but decided to suspend its membership once more at the 171st
Meeting of the OPEC Conference on 30 November 2016. Gabon terminated its
membership in January 1995. However, it rejoined the Organization in July 2016.

 

This
means that, currently, the Organization has a total of 14 Member Countries.

 

 

The
OPEC Statute
distinguishes between the Founder Members and Full Members – those countries
whose applications for membership have been accepted by the Conference.

 

 

 

 

 

OPEC MISSION

In
accordance with its Statute,
the mission of the Organization of the Petroleum Exporting Countries (OPEC) is
to coordinate and unify the petroleum policies of its Member Countries and
ensure the stabilization of oil markets in order to secure an efficient,
economic and regular supply of petroleum to consumers, a steady income to
producers and a fair return on capital for those investing in the petroleum
industry.

 

 

OPEC’S
INFLUENCE ON OIL PRICES WANING

At the bi-annual meeting in Vienna in the last week of
December, OPEC announced its decision to extend the production cut of 1.8
million barrels of oil per day until the first quarter of 2018 to support the
recovery in oil prices. While the market had anticipated the move, the
extension did not have a strong impact on crude oil prices, unlike the surge in
commodity prices witnessed in November 2016 when the OPEC deal was first
announced. To put things in perspective, WTI (West Texas Intermediate) crude
oil prices had gone up by more than 9% in November following the initial
agreement to reduce output, as opposed to just a 2% jump in oil prices when
OPEC announced the extension of the cuts. This trend not only indicates that the
proposed output restrictions are not enough to have a meaningful impact on oil
prices, but also hints at the fact that OPEC’s power to influence crude oil
prices is waning.

 

Data
Source: US Energy Information Administration

 

LITERATURE REVIEW

OPEC
and World Crude Oil Markets from 1973 to 1994: Cartel, Oligopoly, or
Competitive?

Authors
– A.F. Alhajji and David Huettner

 

This study investigates the existence of a
dominant producer in the world crude oil market for the period 1973 to 1994.
Contrary to the literature, the results show that neither OPEC nor the OPEC
core can be characterized as a dominant producer. Statistical tests have been
used to investigate whether OPEC, the OPEC Core of Saudi Arabia fit the
competitive model. The statistical results reject all models except the
dominant firm model for Saudi Arabia. New user cost that has been estimated are
introduced and included in the models. An alternative explanation of high OPEC
profits in the 1973-82 period have also been developed as part of a statistical
test of the effect of the US oil price regulation on world oil demand and
supply.

 

Do
We Really Know That Oil Caused the Great Stagflation? A Monetary Alternative

Authors – Robert B. Barsky,
and Lutz Kilian

This paper argues that major oil price
increases were not nearly as essential a part of the causal mechanism that
generated the stag-flation of the 1970s as is often thought. There is neither a
theoretical presumption that oil supply shocks are stag-flationary nor robust
empirical evidence for this view. In contrast, it is shown that monetary
expansions and contractions can generate stagflation of realistic magnitude
even in the absence of supply shocks. Furthermore, monetary fluctuations help
to explain the historical movements of the prices of oil and other commodities,
including the surge in the prices of industrial commodities that preceded the
1973-1974 oil price increase. Thus, they can account for the striking
coincidence of major oil price increases and worsening stagflation.

 

Not
All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the
Crude Oil Market

Author
– Lutz Kilian

 

Shocks
to the real price of oil may reflect oil supply shocks, shocks to the global
demand for all industrial commodities, or demand shocks that are specific to
the crude oil market. Each shock has different effects on the real price of oil
and on US macroeconomic aggregates. Changes in the composition of shocks help
explain why regressions of macroeconomic aggregates on oil prices tend to be
unstable. Evidence that the recent surge in oil prices was driven primarily by
global demand shocks helps explain why this shock so far has failed to cause a
major recession in the United States.

 

Does
OPEC Matter? An Econometric Analysis of Oil Prices

Authors
– Robert K. Kaufmann, Stephane Dees, Pavlos Karadeloglou and Marcelo Sánchez

 

This
study assesses the claims that OPEC’s ability to influence real oil prices has
diminished and that the relationship between real oil prices and OPEC
production can be used to test competing hypotheses about OPEC behavior. An
econometric analysis indicates that there is a statistically significant
relationship among real oil prices, OPEC capacity utilization, OPEC quotas, the
degree to which OPEC exceeds these production quotas, and OECD stocks of crude
oil. These results imply that OPEC influences oil prices and that previous
models cannot be used to test competing models for OPEC production behavior.
The effect of OECD oil stocks on real oil prices indicates that there may be an
important externality in private decisions regarding optimal crude oil stocks.

 

Pricing policies for a two-part exhaustible resource
cartel: The case of OPEC

Authors
– Esteban Hnyilicza and Robert S. Pindyck

 

This
paper examines pricing policies for OPEC under the assumption that the cartel
is composed of a block of spender
countries with large cash needs and a block of saver countries with little immediate need for cash and a lower
rate of discount. The decision problem for the two-part cartel is embodied in a
game-theoretic framework and the optimal bargaining solution is computed using
results from the theory of cooperative games developed by Nash. The set of
feasible bargaining points is computed under two assumptions on the behavior of
output shares that they are subject to choice and that they are fixed at
historical values. The results suggest that for fixed output shares, there is
little room for bargaining, and the price path approximates the optimal
monopoly price path. If the shares are subject to control, optimal paths depend
significantly on the relative bargaining power of each block.

 

 

OPEC and the monopoly price of world oil

Authors
– Jacques Cremer and Martin L. Weitzman

 

The
paper presents a dynamic model of the behavior of OPEC viewed as a monopolist
sharing the oil market with a competitive sector. The main conclusion is that
the recent increase in the price of oil was a once and for all phenomenons due
to the formation of the cartel and that prices should remain approximately
constant during the next twenty years.

 

Crude oil prices as
determined by OPEC and market fundamentals

Author
– P. W. MacAvoy

 

A
detailed analysis of the causes of oil price increases during the last decade
and of the consequences for price levels in the 1980s, this study includes both
market fundamentals and the OPEC cartel in identifying major and minor
determinants of price changes in the world crude-oil market. The author poses a
scenario without OPEC, and argues that world-market supply-and-demand
conditions would have resulted in the same yearly average price increases. He
argues that pressuring OPEC to prevent or mitigate future price increases will
not work. Instead, policymakers must view crude oil prices from a wider
political and economic perspective. Only then can they successfully anticipate
abrupt price changes that are inherent to the market itself.

 

 

 

 

 

 

 

 

 

 

 

 

REFERENCE

·       http://www.english-online.at/economy/opec/opec-oil-cartel.htm

·       www.jstor.org

·       www.sciencedirect.com

·       www.osti.gov

·       http://www.opec.org/opec_web/en/17.htm

·       https://www.investopedia.com/terms/o/opec.asp

·       https://www.forbes.com/sites/greatspeculations/2017/06/02/opecs-influence-on-oil-prices-waning/#272a1ccc4eb0

·       www.aeaweb.org

·       http://www.journals.uchicago.edu