OPEC
BUSINESS ENVIRONMENT PRESENTATION
By: Tejas Singh
OPEC Fact-File
• It is a cartel of twelve countries made up of Algeria, Angola, Ecuador, Iran, Iraq,
Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela
• Headquarters: Vienna, Austria
• Secretary General: Abdallah Salem el-Badri (Since Jan 2007)
• OPEC nations still account for two-thirds of the world's oil reserves, and, as of April
2009, 33.3% of the world's oil production
• It had been formed at a Baghdad conference on September 14, 1960. OPEC was
organized to resist pressure by the "Seven Sisters"(mostly owned by U.S., British, and
Dutch nationals) to reduce oil prices and payments to producing countries
•End of Bretton Woods-How it impacted Oil
Prices?
Challenges •The Oil Shock of 70’s-
Faced By •Oil Crisis of 1973
•1979 (Or Second) Oil Crisis
OPEC •1980’s Oil Glut
End of Bretton Woods-How
it impacted Oil Prices?
• On August 15, 1971,U.S. pulled out of the Gold Exchange Standard (whereby
only the value of the US dollar had been pegged to the price of gold and all
other currencies were pegged to the US dollar), allowing the dollar to
"float".
• In anticipation of the fluctuation of currencies, the industrialized nations
also increased their reserves (printing money) in amounts far greater than
ever before.
• The result was a depreciation of the value of the USD, as well as the other
currencies of the world.
• Because oil was priced in dollars, this meant that oil producers were
receiving less real income for the same price.
End of Bretton Woods-How it
impacted Oil Prices?
• This led to the "Oil Shock" of the 70’s
• OPEC ministers had not developed the institutional mechanisms to update
prices rapidly enough to keep up with changing market conditions, so their
real incomes lagged for several years.
• OIL CRISIS-1973
• On October 6, 1973, Syria and Egypt launched a surprise attack on Israel.
• OPEC oil ministers agreed to use oil as a weapon to influence the West's
support of Israel in the Yom Kippur war. They recommend an embargo
against non-complying states and mandated a cut in exports.
Oil Crisis 1973 & The Oil Shock
of 70’s-Arab Oil Embargo
• This new round in the Arab-Israeli conflict triggered a crisis already in the
making; the price of oil was going to rise.
• Price increases were also imposed.
• Since oil demand falls little when the price is raised, the prices had to be risen
dramatically to reduce demand to the new lower level of supply.
• Anticipating this, the market price for oil immediately rose substantially, from
$3 a barrel to $12.
• The world financial system, which was already under pressure from the
breakdown of the Bretton Woods agreement, was set on a path of recessions and
high inflation that persisted until the early 1980s, with oil prices continuing to
rise until 1986.
1979 (Or Second) Oil Crisis
• The 1979 (or second) oil crisis in the United States occurred in
the wake of the Iranian Revolution.
• Amid massive protests, the Shah of Iran, fled his country in early
1979 and the Ayatollah Khomeini soon became the new leader of
Iran.
• Protests severely disrupted the Iranian oil sector, with production
being greatly curtailed and exports suspended.
• When oil exports were later resumed under the new regime, they
were inconsistent and at a lower volume, which pushed prices up
1980’s Oil Glut- When the world
temporarily floated in a glut of oil
• The inflation adjusted real 2004 dollar value of oil fell from
an average of $78.2 in 1981 to an average of $26.8 per barrel in 1986
• The 1980s oil glut was a serious surplus of crude oil caused by
falling demand following the 1970s Energy Crisis
• The then U.S. President, Ronald Regan signed an executive order
allowing the free market to adjust oil prices in the U.S.
1980’s Oil Glut- When the world
temporarily floated in a glut of oil
• During the 1980s, non-OPEC production increased worldwide [discentives
to U.S. oil producers were lowered in 1980]
• This ended the artificial scarcity of oil, encouraging increased oil production
• From 1980 to 1986, OPEC decreased oil production several times and
nearly in half to maintain oil's high prices.
• However, it failed to hold on to its preeminent position, and by 1981, its
production was surpassed by Non-OPEC countries
• In Feb 1982, it was reported that OPEC's production, which had
previously peaked in 1977, was at its lowest level since 1969.
1980’s Oil Glut- When the world
temporarily floated in a glut of oil
• Non-OPEC nations were at that time supplying most of the West's
imports.
• OPEC had relied on the price elasticity of demand of oil to maintain
high consumption, but underestimated the extent to which other
sources of supply would become profitable as prices increased. [The
other factor]
• Electricity generation from nuclear power and natural gas; home
heating from natural gas; and ethanol blended gasoline all reduced
the demand for oil.
• New passenger car fuel economy rose from 17 mpg in 1978 to more
than 22 mpg in 1982, an increase of more than 30 percent.
When Oil Crisis Peaked
Around 2008
• Oil had reached the inflation
adjusted levels of April 1980
• It widened the trade deficit
and raised concerns about
inflation at a time when a
growing number of
economists feared a recession
may be coming.
Oil Crisis 2008
• Demand rose but supply did not rise to meet the demand
▫ Demand is forecast to increase this year by 1.2 million barrels a day, to
87.2 million barrels a day [2008 figures]
• In the United States, the world’s most oil-thirsty nation,
consumption actually fell a bit because of the economic slowdown.
• But that drop was being offset by growth in other countries.
▫ World consumption is projected to rise 35 percent, to around 115 million
barrels a day, in the next two decades.
▫ Most of the growth will come from China, India and oil-producing
countries in the Middle East, where retail fuel prices are subsidized,
encouraging wasteful consumption.
Oil Crisis 2008
• Unlike the Organization of the Petroleum Exporting Countries, whose
explicit goal is to regulate supply [Rather restrict supply!!] to keep prices
up, the other countries are the free traders of the international market, with
every incentive to produce flat-out at a time of high prices.
• A key reason that supply is not rising to meet demand is that producers
outside of the OPEC cartel — countries like Russia, Mexico and Norway —
have been showing troubling signs of sluggishness.
▫ Norway’s production slumped by 25 percent since its peak in 2001.
▫ In Britain, oil production plummeted 43 percent in eight years.
▫ Alaska’s giant field at Prudhoe Bay has declined 65 percent since its peak 20 years
ago.
Oil-A hedging option?
• Oil, like other commodities, has become a
perceived safe haven for traders who are
edgy about the weakening dollar and
fallout from the tight credit market in the
United States.
THANK YOU..!
