OPEC – A CASE OF CARTEL
Group – 10
Section A
Submitted to:
Dr.Venkatraja B
Submitted by:
Devaki Skanda Bhatta R S – 18010
Rakshith V- 18020
Vipul Halathi – 18030
Juhi Singh – 18040
Yashank Uthappa K R - 18050
Contents
History and Background of OPEC. ........................................................................................................... 1
Role of OPEC ........................................................................................................................................... 3
World oil production. .............................................................................................................................. 4
OPEC Share of world crude oil reserves.................................................................................................. 5
Members of OPEC ................................................................................................................................... 5
Non – OPEC Members............................................................................................................................. 6
Influence of OPEC on oil Supply and price .............................................................................................. 7
OPEC as a cartel ...................................................................................................................................... 9
Current Scenario ................................................................................................................................... 10
Conclusion ............................................................................................................................................. 10
Bibliography .......................................................................................................................................... 11
The OPEC logo was created by Gertrude Svoboda in 1969. She combined the different letters
of the Organization’s name in a rounded design.
History and Background of OPEC.
The Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental
Organization, made at the Baghdad Conference on September 10 to 14 in 1960, by Iran, Iraq,
Kuwait, Saudi Arabia and Venezuela. The five Founding Members were later joined by ten
different Members: Qatar (1961); Indonesia (1962) – suspended its enrolment in January 2009,
reactivated it in January 2016, however chose to suspend it again in November 2016; Libya
(1962); United Arab Emirates (1967); Algeria (1969); Nigeria (1971); Ecuador (1973) –
suspended its participation in December 1992, yet reactivated it in October 2007; Angola
(2007); Gabon (1975) - ended its participation in January 1995 yet re-joined in July 2016;
Equatorial Guinea (2017); and Congo (2018). OPEC had its central station in Geneva,
Switzerland, in the initial five long periods of its reality. This was moved to Vienna, Austria,
on September 1, 1965.
The 1960s :OPEC's arrangement by five oil-delivering creating nations in Baghdad in
September 1960 happened during a period of change in the universal financial and political
scene, with broad decolonisation and the introduction of numerous new free states in the
creating scene. The worldwide oil advertise was ruled by the "Seven Sisters" multinational
organizations and was to a great extent isolate from that of the previous Soviet Union (FSU)
and other midway arranged economies (CPEs). OPEC built up its aggregate vision, set up its
destinations and set up its Secretariat, first in Geneva and afterward, in 1965, in Vienna. It
embraced a 'Decisive Statement of Petroleum Policy in Member Countries' in 1968, which
underlined the basic right of all nations to practice lasting power over their regular assets in
light of a legitimate concern for their national improvement. Participation developed to ten by
1969.
The 1970s :OPEC rose to universal noticeable quality amid this decade, as its Member
Countries took control of their residential oil businesses and gained a noteworthy say in the
evaluating of raw petroleum on world markets. On two events, oil costs climbed steeply in an
unstable market, activated by the Arab oil ban in 1973 and the episode of the Iranian Revolution
in 1979. OPEC widened its command with the principal Summit of Heads of State and
Government in Algiers in 1975, which tended to the situation of the poorer countries and
required another period of participation in universal relations, in light of a legitimate concern
for world monetary advancement and dependability. This prompted the foundation of the
OPEC Fund for International Development in 1976. Part Countries set out on aggressive
financial advancement plans. Enrolment developed to 13 by 1975.
The 1980s :In the wake of achieving record levels right off the bat in the decade, costs started
to debilitate, before slamming in 1986, reacting to a major oil excess and purchaser move far
from this hydrocarbon. A lot of the littler oil showcase fell vigorously and its aggregate oil
income dipped under 33% of before tops, causing extreme financial hardship for some Member
Countries. Costs mobilized in the last piece of the decade, however to around a large portion
of the levels of the early part, and a lot of recently developing world yield started to recuperate.
This was upheld by OPEC presenting a gathering creation roof separated among Member
Countries and a Reference Basket for evaluating, and in addition noteworthy advancement with
OPEC/non-OPEC discourse and collaboration, seen as basic for advertise dependability and
sensible costs. Natural issues developed on the worldwide vitality plan.
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The 1990s :Costs moved less significantly than in the 1980s, and auspicious OPEC activity
decreased the market effect of Middle East threats in 1990– 91. However, over the top
unpredictability and general value shortcoming overwhelmed the decade, and the South-East
Asian monetary downturn and gentle Northern Hemisphere winter of 1998– 99 saw costs back
at 1986 levels. Notwithstanding, a strong recuperation followed in a more incorporated oil
advertise, which was changing in accordance with the post-Soviet world, more noteworthy
regionalism, globalization, the interchanges transformation and other cutting edge patterns.
Leaps forward in maker buyer exchange coordinated proceeded with progresses in OPEC/non-
OPEC relations. As the United Nations-supported environmental change transactions
accumulated energy, after the Earth Summit of 1992, OPEC looked for decency, adjust and
authenticity in the treatment of oil supply. One nation left OPEC, while another suspended its
Membership.
The 2000s :A creative OPEC oil value band instrument fortified and balance out unrefined
costs in the early long stretches of the decade. Be that as it may, a blend of market powers,
hypothesis and different components changed the circumstance in 2004, pushing up costs and
expanding instability in an all-around provided rough market. Oil was utilized progressively as
an advantage class. Costs took off to record levels in mid-2008, preceding falling in the rising
worldwide money related unrest and monetary subsidence. OPEC wound up noticeable in
supporting the oil segment, as a component of worldwide endeavours to address the financial
emergency. OPEC's second and third summits in Caracas and Riyadh in 2000 and 2007 built
up stable vitality markets, manageable advancement and the earth as three directing topics, and
it embraced a thorough long haul methodology in 2005. One nation joined OPEC, another
reactivated its Membership and a third suspended it.
2010 up to this point :The worldwide economy spoke to the fundamental hazard to the oil
showcase from the get-go in the decade, as worldwide macroeconomic vulnerabilities and
increased dangers encompassing the universal budgetary framework weighed on economies.
Raising social agitation in numerous parts of the world influenced both free market activity all
through the main portion of the decade, despite the fact that the market remained moderately
adjusted. Costs were steady among 2011 and mid-2014, preceding a blend of hypothesis and
oversupply made them fall in 2014. Exchange designs kept on moving, with request becoming
further in Asian nations and for the most part contracting in the OECD. The world's attention
on multilateral ecological issues started to hone, with desires for another UN-drove
environmental change. OPEC kept on looking for steadiness in the market, and hoped to
additionally improve its discourse and collaboration with purchasers, and non-OPEC makers.
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Role of OPEC
The mission of the organization 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."
Production agreements: OPEC has allotted production quotas among members to control oil
prices effectively. There is no implicit formula for computation of these quotas. However, the
principle element to determine the quotas of each member depends on their oil production
capacity and their import per capita individually. OPEC focuses to provide an efficient,
economic and regular supply of petroleum to oil consuming nations.
Steady income to members: OPEC being a permanent intergovernmental organization works
to protect the interest of the members ensuring the supply of oil markets. OPEC’s mission is to
guarantee the oil producing countries a “fair and stable” oil prices to ensure fair return on
capital invested by the oil producing nations.
Unification of oil policies: OPEC being a cartel of oil producing nations requires a common
ground upon which the oil policies of the different member nations can be implemented
efficiently and effectively.
Need for cooperation: OPEC contributes for about 60% of world’s crude oil export, thus there
emerges a requirement of cooperation and commitment among major producers of crude oil to
ensure the success of market stability.
Keeping the market supplied: OPEC has seen periods of both extremely high and low oil
prices. If demand suddenly grows and supplies fall short, OPEC can increase its oil production
in order to keep the market well supplied. On the other hand, if demand suddenly falls and
supplies grow, OPEC can slow down production in order to help maintain a balance in the
market. OPEC also keeps the oil market well-supplied during different kinds of unexpected
events
Stabilizing oil markets: OPEC’s mission is making sure that the oil markets remain
stable, it does this by working to avoid price extremes. This is important for both producers
and consumers. When oil prices are too high problems are generated for the global economy.
If the price of crude oil is too low, then the return on investment on projects to find oil may fall
and producing oil will not be feasible.
Average Price in U.S
Dollars per barrel
120
100
80
60
40
20
0
1991
1998
2005
2012
1990
1992
1993
1994
1995
1996
1997
1999
2000
2001
2002
2003
2004
2006
2007
2008
2009
2010
2011
2013
2014
2015
2016
2017
2018
Years
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World oil production.
Total world oil production in 2016 averaged 80,622,000 barrels per day. Approximately 68%
came from the top ten countries, and an overlapping 44% came from the fifteen current OPEC
members. The top three producers in recent history have been Russia, Saudi Arabia, and the
United States.
12,000,000
Bbl / day (million)
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
0
World oil consumption.
Total Oil consumption in 2018 averaged 99,58,000 barrels per day. Oil consumption increased
due to fast-growing demand for road and air transport, particularly in developing countries
especially in China and India. Asia accounts for more than 40% of the overall increase in
consumption..
Despite this growth, the US remains by far the largest user of oil, consuming more than China
but China may overtake the US by 2030.
25,000,000
20,000,000
Bbl / day (million)
15,000,000
10,000,000
5,000,000
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OPEC Share of world crude oil reserves
Venezuela 24.9% Kuwait 8.4% Qatar 2.1% Gabon 0.2%
Saudi
Arabia 21.9% UAE 8.1% Algeria 1.0% Guinea 0.1%
Iran 12.8% Libya 4.0% Angola 0.7%
Iraq 12.1% Nigeria 3.1% Ecuador 0.7%
OPEC's proven oil reserves currently stand at 1,214.21 billion barrels. According to estimates,
81.89% of the world's proven oil reserves are located in OPEC Member Countries, with the
bulk of OPEC oil reserves in the Middle East, amounting to 65.36% of the OPEC’s total .OPEC
Member Countries have made significant additions to their oil reserves by intensive
explorations and enhanced recoveries. OPEC's proven oil reserves currently stand at 1,214.21
billion barrels.
Members of OPEC
As of June 2018, OPEC has 15 member countries: Six in the Middle East, seven in Africa, and
two in South America. According to the U.S. Energy Information Administration (EIA),
OPEC's combined rate of oil production represented 44 percent of the world's total in 2016.
The OPEC Statute distinguishes the Founder Members and Full Members. The Statute
stipulates that “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 oil producing capacity of each Member Country is different. But when it comes to making
decisions as an Organization, every country is equal. Decisions must be made unanimously
with the agreement of all Members.
The five founding members were Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Founder
members of the Organization are those countries which attended the Baghdad Conference in
1960, and which signed the original agreement establishing OPEC.
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Founding Members
12,000,000
10,000,000
Bbl / day (million)
8,000,000
6,000,000
4,000,000
2,000,000
0
Iran Iraq Kuwait Saudi Arabia Venezuela
The countries(Full members) that joined later were Qatar (1961), Indonesia (1962), Libya
(1962), the United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973),
Gabon (1975), Angola (2007), Equatorial Guinea (2017) and Congo (2018).
Full members
3,500,000
Bbl / day (million)
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
Non – OPEC Members
Out of the non-OPEC producers, only 30 have significant production i.e. over hundred
thousand barrels per day. Non-OPEC producers usually have cost disadvantage compared to
the OPEC producers. Non-OPEC producers make independent decisions about oil production.
Non-OPEC oil-producing nations can strike deals with the OPEC producers to cut crude output
and make a pact to reduce global oversupply of crude, lift prices and lend support to economies
hurt by market slumps. OPEC and non-OPEC can join together with the idea of stabilizing the
oil market and defending a fair price for crude oil. The major Non – OPEC producers are
Russia, USA, China, Canada and Brazil.
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Non - OPEC Countries
12,000,000
Bbl / day (million)
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
0
Russia Unites States of China Canada Brazil
America
Influence of OPEC on oil Supply and price
Volatility (2003-2011):
During the early 2008, America’s occupation of Iraq, rapidly increasing oil demand of
China, recurring violence against the Nigerian oil industry, led to sudden increase in
price, far higher than those targeted by OPEC.
Price volatility reached an extreme in 2008, as WTI crude oil surged to a record
US$147/bbl. in July and then plunged back to US$35/bbl. in December, during the
worst global recession since World War II. OPEC's annual oil export revenue also set
a new record in 2008.
2008 production dispute: Different economic needs of OPEC member states often affect
the internal debates behind OPEC production quotas. Poorer member pushed other
OPEC members for production cut, so that increased price will earn them more
revenues. But Saudi Arabia opposed it as it thought that the over expensive oil or
unreliable supply will drive industrial nations to conserve energy and develop
alternative fuels and also its long-term strategy was to become partner with world’s
economic powers and ensure steady flow of oil. Saudi Arabia walked out of a
negotiating session where rival members voted to reduce OPEC output. They keep on
supplying and the oil price fall up to $30/bbl. It bounced back at $100/bbl. during
Libyan Civil War in 2011.
7|Page
Oil Glut (2014-2017):
During 2014-15, OPEC members consistently exceeded their production ceiling,
China’s economic growth slowed down and U.S oil production got doubled due to the
substantial long-term improvement and spread of shale "fracking" technology, this led
to substantial decrease in oil price as U.S and China decreases their oil import.
Seeing the price fall, Poorer OPEC members wanted production cut of oil, but Saudi
Arabia wanted to leave the market to rebalance itself at lower price as it will rebuild
OPEC's long-term market share by ending the profitability of high-cost US shale oil
production.
By the end of 2015, OPEC increases the production ceiling for 18 consecutive months,
world markets appeared to be oversupplied by at least 2 million barrels per day.
In mid-2016, Excess oil production was partially cut, OPEC regained modest market
share and agreed to level the price that will suitable for both the producers and
consumers.
In November 2016, OPEC decided decision to trim approximately 1 million barrels per
day.
Production Cut (2017-18):
Following the Nov 2016 decision of production cut by OPEC supported by other non-
members like Russia and others led to the increase in oil price in 2017.
Further Russia and OPEC agreed to extend the production cut of 1.8million barrels/day
until the end of 2018.
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OPEC as a cartel
A cartel is a group of small firms which come together to decide upon the level of production
and price as well. Cartel tends to arise when there are few sellers in the market where each
seller can individually influence the market outcome, since each firm has a significant share in
the market.
Organizations of Petroleum Exporting Countries (OPEC) is one of the best examples of cartel.
The oligopolistic firms that is the major oil producing nations have formed a cartel to increase
their market power. They jointly determine the level of output of each member and they abide
by the OPEC Reference Basket (ORB), which is used as a benchmark for crude oil prices,
which is computed as a weighted average of petroleum blends produced by OPEC members.
Because of such synchronized working, OPEC behaves like a monopolist. Theoretically, each
firm in an oligopoly sells undifferentiated product, the demand curve each firm faces will be
horizontal at the market price. On the other hand, if the oil producing firms form a cartel like
OPEC, they jointly face a downward sloping demand curve, just like a monopolist.
The cartel members together choose combined output at that level where their combined
marginal revenue is equal to their combined marginal cost. Accordingly, the cartel price is
determined by the market forces. The cartel’s profits are equal to the area of the rectangular
box labelled as in the Figure. Thus, like a monopolist cartel chooses to produce less output and
charge higher price. However, cartels are difficult to maintain. The problem encountered is that
each member tries to maximize its profit.
9|Page
Current Scenario
Oil prices have weakened over the past month following a call from President Trump for OPEC
to increase production in response to rising oil prices. Even the ongoing global trade disputes
and strengthening of the dollar would reduce oil demand. After rising above $75 per barrel in
May, the price of West Texas Intermediate (WTI) had dropped back to $65/barrel.
OPEC, in agreement with Russia, announced that it would increase production for the first time
since implementing production cuts in November 2016. By the end of this year, OPEC is
expected to produce nearly 1.5 million BPD more than they were forecasted to produce. Thus,
even if OPEC managed to follow through on the full output increase, it would be insufficient
to prevent further declines in global crude oil inventories. Saudi Aramco is still planning its
IPO. Saudi Arabia would like oil prices to remain elevated, while appeasing President Trump.
OPEC’s action potentially satisfies President Trump’s request while ensuring that oil prices
remain strong.
Oil prices surged again on news that the U.S. was pressuring its allies not to import oil from
Iran and they risk sanctions. Iran currently exports 2.9 million barrels per day of crude oil and
condensate to Asian and European markets. Even if there is modest compliance with this
Trump Administration request, it could accelerate the depletion of global crude oil inventories.
That would likely drive oil prices even higher. Refiners, on the other hand, would likely suffer.
Higher oil prices erode the margins of refiners, resulting in lower profits. So, the spike in oil
prices will probably have a bigger negative impact on earnings in the short term.
Conclusion
Although OPEC has the ability to influence the oil price in the current oil pricing system, but
the OPEC pricing power is not constant and varies according to oil market conditions and they
have a greater influence on the oil market as they develop their reserves and gain a greater
market share. Although there are various economic factors, it is important to note that OPEC
operates in a political environment. It has been argued elsewhere that pricing systems in the
past reflected the balance of power at those times and this present system is no exception.
For many, the balance of political power can have an impact on OPEC behaviour. As limits on
how much Saudi Arabia can increase its oil price because very high oil prices can be damaging
to their own interest because of the danger to the world economy and to their larger commercial
involvements. However, it is important to stress that the impacts of such political factors are
not independent of the oil market. Similarly, imposing oil embargoes is more feasible when oil
prices are low and markets are well supplied. Although oil is a political commodity, it is still a
commodity and like any other, in the long run its price responds largely to economic forces.
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Bibliography
https://www.opec.org/opec_web/en/index.htm
https://en.wikipedia.org/wiki/OPEC
https://www.opec.org/opec_web/en/publications/2333.htm
Principles of economics – N. Gregory Mankiw.
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