Opec

OPEC

Organization of Petroleum Exporting Countries

Submitted by:-Gunjan Jadon(116)Neha Mishra(131)Satyadev(146)

About OPEC• It is a permanent intergovernmental organization, currently

consisting of 12 oil producing and exporting countries, spread across three continents America, Asia and Africa

• Oil is the main marketable commodity and foreign exchange earner. Thus, for these countries, oil is the vital key to development – economic, social and political. Their oil revenues are used not only to expand their economic and industrial base, but also to provide their people with jobs, education, health care and a decent standard of living

• OPEC was formed at a meeting held on September 14, 1960 in Baghdad, Iraq, by five Founder Members: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. OPEC was registered with the United Nations Secretariat on November 6, 1962

Member CountriesCountry Joined OPEC Location

Algeria 1969 Africa

Angola 2007 Africa

Ecuador ** rejoined 2007 South America

IR Iran * 1960 Middle East

Iraq * 1960 Middle East

Kuwait * 1960 Middle East

Libya 1962 Africa

Nigeria 1971 Africa

Qatar 1961 Middle East

Saudi Arabia * 1960 Middle East

United Arab Emirates 1967 Middle East

Venezuela* 1960 South America

• Countries in blue are the members countries• Ecuador and Gabon were early members of OPEC, but Ecuador

withdrew on December 31, 1992 because it was unwilling or unable to pay a $2 million membership fee and felt that it needed to produce more oil than it was allowed to under the OPEC quota, although it rejoined in October 2007

OPEC’S ObjectivesThe organization’s principal objectives are:

• To co-ordinate and unify the petroleum policies of the Member Countries and to determine the best means for safeguarding their individual and collective interests

• To seek ways and means of ensuring the stabilization of prices in international oil markets, with a view to eliminating harmful and unnecessary fluctuations

•To provide an efficient economic and regular supply of petroleum to consuming nations and a fair return on capital to those investing in the petroleum industry.

OPEC Statute & Membership

“Any country with a substantial net export of crude petroleum, which has fundamentally similar interests to those of Member Countries, may become a Full Member of the Organization, if accepted by a majority of three-fourths of Full Members, including the concurring votes of all Founder Members”

The Statute further distinguishes between three categories of membership:

• Founder Members of the Organization are those countries which were represented at OPEC's first Conference, held in Baghdad, Iraq, in September 1960, and which signed the original agreement establishing OPEC.

• Full Members are the Founder Members, plus those countries whose applications for Membership have been accepted by the Conference.

• Associate Members are the countries which do not qualify for full membership, but which are nevertheless admitted under such special conditions as may be prescribed by the Conference.

• The OPEC Conference: The Conference generally meets twice a year, in March and September, and in extraordinary sessions whenever required. It operates on the principle of unanimity and one Member, one vote. It is responsible for the formulation of the general policy of the Organization, setting oil price and quotas for each country and the determination of the appropriate ways and means of its implementation.

• The Heads of Delegation : The Heads of Delegation to OPEC are the official representatives of each Member Country to the OPEC Conference. They are normally the Ministers of Oil, Mines and Energy of Member Countries.

• Headquarters : Vienna, Austria• Official language : English• President : Rostam Ghasemi• Secretary general : Abdallah el-Badri• Currency : USD per barrel

Why OPEC?• Stable oil market, with reasonable prices and steady supplies to consumers :

OPEC was made to make sure that the price of the oil in the world market will be properly controlled. There main goal is to prevent harmful increase in price of oil in global market and make sure that nations that produce oil have a fair profit.

• Seven Sisters : 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). 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 emphasised the inalienable right of all countries to exercise permanent sovereignty over their natural resources in the interest of their national development. Membership grew to ten by 1969.

• Mandatory Oil Import Quota Program (MOIP) : In 1959, the U.S. government established the Mandatory Oil Import Quota program (MOIP), which restricted the amount of imported crude oil and refined products allowed into the United States and gave preferential treatment to oil imports from Canada, Mexico, and, somewhat later, Venezuela. This partial exclusion of Persian Gulf oil from the U.S. market depressed prices for Middle Eastern oil; therefore the Persian Gulf nations formed OPEC in order to obtain higher prices for crude oil

• OPEC-• Cartel Group /Producer’s Alliance- Member

countries of the group decide on the quotas of production and then setting up of prices depending on the market situation. Countries like Saudi Arabia are swing producers as theie production capability are huge and can effect the market maximum.

Cartel Oligopoly

Sources of power Explicit agreement between the dominant players in the industry.

Each firm can significantly influence the market by setting price or production quantity.

Prices Unusually high. Prices are fixed by cartel members.

Moderate/fair pricing due to competition in market

Examples OPEC, lysine cartel, Federal Reser

Health insurers, wireless carriers, beer (Anheuser-Busch and MillerCoors), media (TV broadcasting, book publishing, movies)

Characteristics Prices and production quantities are fixed. Product is undifferentiated.

firms compete with each other based on product differentiation, price, customer service etc.

Meaning agreement between firms in an industry to fix price and production quantity

An economic market condition where numerous sellers have their presence in one single market.

Barriers to entry difficult to enter the industry because of economies of scale.

difficult to enter the industry because of economies of scale.

OPEC Quotas and Production in thousands of barrels per day [36]

Country Quota (7/1/05) Production (1/07) Capacity

Saudi Arabia 10,099 9,800 12,500 Algeria

894 1,360 1,430

Angola 1,900 1,700 1,700

Ecuador 520 500 500

Iran 4,110 3,700 3,750 Iraq

1,481

Kuwait 2,247 2,500 2,600

Libya 1,500 1,650 1,700

Nigeria 2,306 2,250 2,250 Qatar

726 810 850

United Arab Emirates 2,444 2,500 2,600

Venezuela 3,225 2,340 2,450

Total 29,971 29,591 30,330

Quotas circa 2005

OPEC Function• Cartel enforcement problem: overproduction and price

cheating by members.• The methods available to engage in such cheating i. Extending credit longer then the standard 30 day periodii. Selling high grade oil at the price of low grade oil. Crediting for the transportation

cost.• Rivalry between two groups within OPECI. Hawks-Countries having lower production ask for higher prices to get

maximum revenue.(Iran and Iraq)II. Doves- Countries having Higher output can set lower prices to achieve

economies of scale and make sure that the demand of oil is maintained in the market and people do not switch to substitutes(Saudi Arabia, Kuwait, United Arab Emirates)

Does OPEC control the Oil Prices? Yes-, OPEC's crude oil exports represent about 60 per cent of the

crude oil traded internationally

No-OPEC Member Countries produce about 42 per cent of the world's crude oil and 18 per cent of its natural gas

The price of crude oil is set by movements on the three major international petroleum exchanges

i. The New York Mercantile Exchange ii. The International Petroleum Exchange in Londoniii. The Singapore International Monetary Exchange .

OPEC is trying to price the OIL in Euros rather then in Dollars- As the imports from Europe for OPEC countries is increasing and the US dollar is becoming unstable in the market .

Non- OPEC countries• Seven of the world's fifteen largest oil producers are outside of

OPEC and one of the major producer is Russia. OECD is also part of the Non- OPEC Countries

• Russia• The former Soviet Union, i.e., the CIS countries form one of the

largest groups of oil and gas producing countries outside OPEC. The countries produce about 10 per cent of the world's oil and about 30 per cent of the gas. Some of the world's biggest oil and gas fields are situated in Russia, especially in Siberia.

• While OPEC countries shut their wells and idled their pipelines, new tax incentives encouraged companies in Russia to, in effect, drill, baby, drill. A devaluation of the ruble helped exporters.

Russia Joins WTO impact• Ends the anomaly of, a leading oil and natural

gas exporter as well as a permanent member of the United Nations Security Council, outside the world trade system.

• Lower its tariffs like(7.1 per cent for oils (current applied tariff 9.0 per cent))

• Controlled production of OIL because of some restrictions of WTO.

• Price stability of Oil prices is expected.

Why Low prices?• Imbalance of supply and demand.• Non OPEC countries

Why High Prices?• Shortage of Oil supplies• Taxation.• Sentiments• Other Factors

• PERHAPS 60% OF OIL PRICES ARE SPECULATION!

• In June 2006, the senate investigation estimated that of oil traded in futures markets at some$60 a barrel, about $25 of that was due to pure financial speculation.

• Analysts estimated in August2005 that US oil inventory levels suggested WTI crude prices should be around $25 a barrel, and not $60.

• That would mean today that at least $50 to $60 or more of today's$115 a barrel price is due to pure hedge fund and financial institution speculation.

Oil Crisis 1973 Oil Embargo• Members of OAPEC(Arab members of OPEC plus Egypt, Syria, Tunisia)

proclaimed an OIL embargo.

• Prices Quadrupled from $3.50 to $12 in 1974.

• In response to US decision to resupply Israeli military during YOM KIPPUR war.

• YOM KIPPUR war-Syria and Egypt launched a surprise attack on Israel in 1973.

• Promise of negotiated settlement between Israel and Syria resulted in removal of embargo.

Oil crisis (Contd.)

1980 Oil Gluts• Surplus of Crude Oil caused by falling demand

following the 1970s energy crisis.

• Oil price from $35(1980) fall to below $10 (1986).

• Slowed economic activity in Industrial activities, reduced demand and overproduction.

Oil crisis (Contd.)

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. • Apparent strategic goal was to foil a potential

landing by US Marines.• Kuwaiti oil fires were caused by Iraqi military forces

setting fire to 700 oil wells.

OPEC & INDIA

• In 2008 OPEC rejected India’s call for a price band.• OPEC doesn’t have uniform pricing policy.• India having high current account deficit as it imports

70% of oil.• India-Iran payment issue.

OPEC & WORLD• Crude Reserve’s 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 reserve’s, are in OPEC Member Countries.

Source: OPEC Annual Statistical Bulletin 2010/2011 Edition

Current scenario• Total World Output of Crude oil in 2010 was 69.7

million barrels per day

• OPEC ‘s output was 29.2 million barrels per day which is 41.8% of World output.

• OPEC crude oil reserves are sufficient to last more than 112 years.

Impact of OPEC

• On Industries: Shortage of Oil supplies-->Price of Oil will rise. Higher transportation Cost. Slow economic growth.• Economics• Sustainability• “World lives on OIL”

Importance of Countries(Member & Non Member)

• Historically they took advantage of the voluntary constraint of OPEC.

• Russia, Mexico, Oman, Norway are the major non member countries

• Combined effort required for controlling the prices

OPEC Challenges

• Uncertainty in Global Demand Structural shift in demand from developed world to

developing world.• Non-OPEC oil-producing nations (Russia , Norway,

Canada, Mexico etc.)often increase production when OPEC cuts it.

• Russia overtook Saudi Arabia as the world’s biggest crude supplier in 2009.

• OPEC’s share of production has gone down from around 51% in the mid-1970s to just over 40% now.

Challenge’s Contd.• Problem of Member Cohesion within OPEC nations:- Maintaining quota discipline within the cartel.• Existence of factions within OPEC, which are

generally classified into three groups:1. The group led by Saudi Arabia, the UAE and Kuwait, �

who are in favour of increased supplies and moderate pricing,

2. The group led by Libya, Iran and Algeria, who are insistent on decreasing output for higher prices,

3. The in-between group including Nigeria, Venezuela, Indonesia who have been known to take sides depending on their own economic/political agenda.

Challenge’s Contd.• Middle-Eastern Strife & Political instability in OPEC

oil-producing countries - Mostly authoritarian states that use oil money as a

means of sustaining political power.• Future technological developments in areas of

renewable energy sources - According to IEA (International Energy Agency), the

increase in renewable usage will far outstrip annual growth in energy liquids(crude oil and natural gas) as a source of the world's power Crude oil, OPEC will �become less important in the energy equation.

Upcoming Events

• OPEC Events:- 161st OPEC meeting will be held on 14 June 2012.

5th OPEC International Seminar will be held on 13-14 June 2012.

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