Commodity Product ProjectOPEC

Organization of Petroleum Exporting Countries

Elissa Kam & Laura Du

History of OPEC

• Formed at the Baghdad Conference on September 10 , 1960

• 5 Founding members: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela

• Now consists of 13 countries

Why was OPEC formed?

• 1960: triggered by American quotas on Venezuelan and Persian Gulf oil imports in favor of Canadian and Mexican imports

• Intended to protect the profitability of OPEC’s natural resources

“ The OPEC Member Countries coordinate their oil production policies in order to help stabilise the oil market and to help oil producers achieve a reasonable rate of return on their investments. This policy is also designed to ensure that oil consumers continue to receive stable supplies of oil.”

~ OPEC

Setting Oil Prices

• OPEC is not the only organization responsible for setting prices.

• 3 major international petroleum markets– New York Mercantile Exchange– The International Petroleum Exchange London– Singapore International Monetary Exchange

Does OPEC control oil prices?

• No, it seeks stability rather than controlling prices.

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What causes high oil prices?

• Shortage of supply• Investments not made in advance• Expectations of future supply/ demand• Unfortunate incidents

What causes Low Oil prices

• Too little supply/ too much demand• When oil production rises faster than demand

Why Does OPEC Regulate Production?

• Preserve stability and sustainability in the petroleum market for both oil producers AND consumers

• Prevent sudden shortage or surplus

How Can OPEC Influence Price?

• OPEC currently produces 45% of the world’s crude oil and owns 78% of the world’s oil reserves

• OPEC Member Countries meet to review their oil production policies and analyze market trends (supply vs demand)

• OPEC sets production quotas for each of its members to regulate the amount of oil contributed to the market

Scenario 1: Demand > Supply

• If demand grows or other oil producers supply less oil, demand > supply

• Consumers will still want to buy more but producers will not be supplying enough

• Shortage will occur in the market, price will rise and demand falls/supply rises

• Price increases until supply > demand; surplus causes price to fall again

• Cycle repeats

OPEC’s Role

• BUT: when OPEC sees that demand > supply– quickly increases oil

production because of its large reserves

• Shortage will be prevented, price will remain stable

Scenario 2: Low Demand

• Likewise, when supply > demand:– OPEC can cut production quotas to prevent

surplus & price crash and protect the oil production industry

Pre-2007

• Demand ↑– Economy is HEN HAO

D2

D1

0 Q

P

Meeting High Demand

• Demand > Supply = OPEC Supply ↑• Prevents prices from rising

S1S2

0 Q

P

OPEC Supply

2007- September 2008:Climbing Prices to Financial Crisis

• Price ↑ = Demand ↓• Income ↓ = Demand ↓

D2

D1

0 Q

P

OPEC Supply Cuts

• Nov 1: OPEC cut crude production of 28.8 mil b/d by 1.5 million b/d (5.21%)– Global economic slowdown, oversupplied markets

and the likelihood of a deepening fall in demand for oil.

• Largest individual cuts include:– 466,000 bpd: Saudi Arabia – 199,000 bpd: Iran

Economic Recession

• Demand ↓ = OPEC Supply ↓

S1S2

0 Q

P

OPEC Supply

OPEC Future Plans

• Big drop in oil demand could prompt OPEC to take further action to prevent the collapse of the oil market

• Iraq − exempt from OPEC quotas to rebuild oil sector post-war

• Indonesia − net importer of oil, will leave OPEC at the end of this year

Bibliography

• Carlisle, Tamsin. “Opec cuts output by 1.5m barrels - The National Newspaper.” 24 Oct 2008. <http://thenational.ae/article/20081024/BUSINESS/414788116/1005/LIFE>.

• The McGraw-Hill Companies. “OPEC members start to detail how they will cut output.” <http://www.platts.com/Oil/Resources/News%20Features/opec/index.xml>.

• OPEC. “Frequently asked questions about OPEC.” 2008. 1 Nov 2008 <http://www.opec.org/library/faqs/OPEC.htm>.

• “Organization of the Petroleum Exporting Countries Functions.” 1 Nov 2008 <http://www.opec.org/aboutus/functions/functions.htm>.

• Wikipedia. “OPEC - Wikipedia, the free encyclopedia.” 31 Oct 2008. 1 Nov 2008 <http://en.wikipedia.org/wiki/OPEC>.

• Wikipedia. “Price of petroleum - Wikipedia, the free encyclopedia.” 1 Nov 2008 <http://en.wikipedia.org/wiki/Price_of_petroleum>.

• Zycher, Benjamin. “OPEC | Library of Economics and Liberty.” The Concise Encyclopedia of Economics . 1 Nov 2008 <http://www.econlib.org/library/Enc/OPEC.html>.