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The Organization of Petroleum Exporting Countries (OPEC)


The Organization of Petroleum Exporting Countries (OPEC) Maria Lorusso March 25, 2002 Petroleum Market in America Prior to OPEC The Standard Oil Monopoly First major ... – PowerPoint PPT presentation

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Title: The Organization of Petroleum Exporting Countries (OPEC)

The Organization of Petroleum Exporting
  • Maria Lorusso
  • March 25, 2002

Petroleum Market in America Prior to OPEC
  • The Standard Oil Monopoly
  • First major illustration of how competition leads
    to cooperation among groups in an industry
  • Standard held 10 percent of refining interests in
    Cleveland, but 26 other refineries held interests
    (competition drives down prices)
  • 1872 Standard (Rockefeller) organized South
    Improvement Co. (agreement with railroads to
    implement rebates)
  • Within 3 months of formation of S.I.C. 21/26
    refiners joined

World Petroleum Market Prior to OPEC
  • Market Demand Prorationing
  • Created by state governments in US for purpose of
    limiting production
  • Limited output and maintained prices 1935-1970
  • International Corporate Cartel
  • Red Line Agreement 1914
  • Middle Eastern reserves developed through
    Turkish Petroleum Company
  • As-Is Agreement 1928
  • divided oil sale, eventually between the Seven
  • Profit Sharing in Venezuela

Formation of OPEC
  • 1959 majors reduce posted prices by 10 percent
  • First Arab Petroleum Congress, Cairo April 1959
  • Aug. 1960 majors reduce posted prices again
  • First meeting of OPEC September 9-14, 1960 in
    Baghdad, Iraq

OPEC Member Countries
  • Founding Members Saudi Arabia, Iran, Kuwait,
    Iraq, and Venezuela
  • Full Members Qatar, Libya, Indonesia, United
    Arab Emirates, Algeria, and Nigeria
  • Founding Members have veto power over admission
    of new members (otherwise all countries have
    equal rights)
  • Any country with substantial exports and same
    petroleum interests are eligible to join

OPECs Principle Objectives
  • Coordinate and unify oil policies of Member
  • Determine best means of safeguarding individual
    and collective interests
  • Stabilize prices in international oil markets
  • Provide efficient and economic supply of
    petroleum to consuming nations
  • Obtain a fair return on capital to those
    investing in oil industry

How OPEC Functions
  • The OPEC Conference supreme authority, meets
    generally in March and September
  • Heads of Delegation official representatives of
    each Member Country
  • Board of Governors directs management, draws up
  • Secretariat carries out executive functions,
    consists of Secretary General and Research

Brief History of OPEC
  • 1960s Five Founding Members seek to assert
    rights in oil market dominated by Seven Sisters,
    Secretariat moved from Geneva to Vienna 1965
  • 1970s Rose to international prominence, 2 oil
    pricing crises

History Contd
  • 1980s Prices peaked in beg., 3rd oil pricing
    crisis 1986, environmental issues appear on
  • 1990s 4th pricing crisis averted, stability
    until 1998, then collapse in wake of downturn in
    South East Asia

OPEC as a Cartel
  • Confederation of countries which have reached an
    accord with respect to prices, market shares and
    other important matters
  • Enhance wealth through fixing prices, limiting
  • Monopoly most extreme form (all participants in
    an industry merge)

Incentive Both For and Against Collusion
  • At the end of 1999, world proven crude oil
    reserves 1,042,536 million barrels
  • OPEC Member Countries have 811,526 million
    barrels or 77.8 percent
  • Uses refined, kerosene, gasoline, asphalt

Daily Oil ConsumptionOPECs World Energy Model
Oil Reserves and Oil Production
High and Low Oil Prices
  • High Oil Prices
  • Shortage of oil supplies
  • Sentiment if traders think there will be a
  • Taxes greatly effect price of oil products
  • Low Oil Prices
  • Imbalance too much supply/too little demand
  • Non-OPEC producers supply as much as they can

OPECs Current Production Ceiling
OPEC and the Oil Market
  • OPEC does not control the oil market, but it does
    have a strong influence on the market
  • OPEC Member Countries produce 41percent of the
    worlds crude oil

Fund for International Development
  • Formed in 1976 to assist Non-OPEC Countries with
    developing their economies
  • Committed to loans and grants that total more
    than 4 billion
  • Active in Asia, Africa, Latin America, Middle
    East, and the Caribbean
  • Encourages cooperation in the oil market