How OPEC Controls the Price of Oil A Lesson in SUPPLY, DEMAND, and PRICE.

How OPEC Controls the Price of Oil

A Lesson in SUPPLY, DEMAND, and PRICE

What is OPEC?•OPEC stands for the Organization of

Petroleum Exporting Countries

•Members include: Saudi Arabia, Iran, Iraq, Kuwait, United Arab Emirates, Libya, Algeria, Qatar, Indonesia, Nigeria, and Venezuela

•Founded in 1960

•Their Mission: Control the PRICE of World Oil by limiting the SUPPLY

Before we talk about OPEC’s Mission... Lets learn about SUPPLY, DEMAND,

and PRICE work

What is SUPPLY?

•SUPPLY is simply how much ‘stuff’ is available...

•... For OPEC that ‘stuff’ is petroleum or oil.

What is DEMAND?

•DEMAND is simply how much ‘stuff’ is wanted or needed.

•Oil is very much in demand - because it is so important for economies to grow...

SUPPLY and DEMAND

•SUPPLY and DEMAND are exact opposites of one another:

•The more DEMAND the less the SUPPLY XBox 360 was very popular gift for Christmas (HIGH DEMAND), because it was so popular sometimes it was hard to find in stores (LOW SUPPLY)

•The less DEMAND the greater the SUPPLY Sega was not as popular (LOW DEMAND), so it

might have been much easier to find that in stores (HIGH SUPPLY)

How PRICE is Determined:

•If you graphed a SUPPLY Table and a DEMAND Table where the two lines meet is called the PRICE

•The more rare or scarce something is - the less SUPPLY the greater the DEMAND... the higher the PRICE!

The SUPPLY of Petroleum

•While petroleum is a non-renewable resource, meaning one day we will ‘run out of oil’ - at least for now, it is not especially scarce or rare.

•For example, by some estimates almost 1.007 Trillion Barrels of Worldwide Petroleum Reserves - that is, oil still in the ground waiting to be pumped!

Map of Proven Petroleum Reserves

What is a Monopoly?•When one person, company or

country produces or controls a substantial amount of a particular something.

•For example, Microsoft makes the operating system of more than 90 percent of the world’s computers!

•Can you list any other monopolies - how do they control PRICE?

OPEC is a Monopoly!

• OPEC countries dominate the Top-10 of world’s petroleum SUPPLY (only Russia and Kazakhstan are not members).

• Together OPEC controls almost 75 percent of the World Petroleum Reserves!

Percentage of World Petroleum Reserves

1 Saudi Arabia 22.10

2 Iran 11.14

3 Iraq 9.68

4 Kuwait 8.33

5 United Arab Emirates 8.23

6 Venezuela 6.50

7 Russia 6.08

8 Kazakhstan 3.33

9 Libya 3.29

10 Nigeria 2.97

OPEC Controls SUPPLY

•Several times a year the OPEC countries have a secret meeting where they try to predict future DEMAND and set limits on their SUPPLY to pump ‘just enough’ to meet world need.

•However, often they decide not to pump as much as they could - so they can limit the SUPPLY of petroleum which causes PRICES to rise! This means huge profits for them.

The Role of Saudi Arabia•Although the leader of OPEC, Saudi

Arabia often surpassed the organization’s pre-set limits in order to increase world SUPPLY from their own huge reserves.

•Saudi Arabia’s willingness to pump ‘just more than enough’ petroleum to meet world DEMAND has kept PRICES lower than what OPEC could have charged.

•What motives could Saudi Arabia have for keeping oil prices artificially lower than what they could charge?

What about DEMAND?

•Petroleum DEMAND is strongly linked to GDP.

•The world’s biggest economies need huge amounts of oil to function!

Percentage of World Petroleum Consumers Oil GDP

1 United States24.8

91st

2 China 8.19 2nd

3 Japan 6.41 3rd

4 Germany 3.41 6th

5 Russia 3.28 11th

6 India 3.17 4th

7 South Korea 2.78 15th

8 Canada 2.64 12th

9 France 2.49 8th

10 Italy 2.38 9th

Map of Petroleum Consumption

Oil = Economic Growth•As the world becomes more

developed, poor countries will need their share of petroleum too; this increased DEMAND means decreasing SUPPLY (even OPEC’s); less oil means higher PRICES!

•Fast growing economies like India and China are expected to increase DEMAND for petroleum by almost 60 percent over the next 15 years!

Saudi Arabia and USA

•In 1991, the USA protected Saudi Arabia when Saddam Hussein invaded neighboring Kuwait and threatened to invade SA.

•The presence of Christian and Jewish American soldiers on the holy soil of Saudi Arabia was one of Osama bin Laden’s biggest complaints against the USA.

•Should the USA use its military to ensure a steady and regular flow of oil in the Middle East (Saudi Arab or Iraq, etc)?