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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 illustration of how competition leads to cooperation among groups in an industry

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petroleum market in america prior to opec
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 Sisters”

Profit Sharing in Venezuela

World Petroleum Market Prior to OPEC
formation of opec
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
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
opec s principle objectives
OPEC’s Principle Objectives
  • Coordinate and unify oil policies of Member Countries
  • 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
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 budget
  • Secretariat: carries out executive functions, consists of Secretary General and Research Division
brief history of opec
Brief History of OPEC
  • 1960’s Five Founding Members seek to assert rights in oil market dominated by Seven Sisters, Secretariat moved from Geneva to Vienna 1965
  • 1970’s Rose to international prominence, 2 oil pricing crises
history cont d
History Cont’d
  • 1980’s Prices peaked in beg., 3rd oil pricing crisis 1986, environmental issues appear on agenda
  • 1990’s 4th pricing crisis averted, stability until 1998, then collapse in wake of downturn in South East Asia
opec as a cartel
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 output
  • Monopoly – most extreme form (all participants in an industry merge)
slide12
Oil
  • 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
oil reserves and oil production

Country

Country

Crude oil reserves(million barrels)

Crude oil production(million barrels per day)

Saudi Arabia

262,784

Saudi Arabia

Iraq

112,500

Former Soviet Union

United Arab Emirates

97,800

7.565

United States

Kuwait

96,500

Iran

IR Iran

93,100

7.434

China

Source: OPEC Annual Statistical Bulletin 1999

5.925

3.439

3.212

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 shortage

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

High and Low Oil Prices
opec and the oil market
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 world’s crude oil
fund for international development
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