The Impact of OPEC on the World Economy
The Organization of Petroleum exporting countries, better known as OPEC, is one of the most recognized cartels in the world. Yet, how many of those who can recognize the name really understand the cartel. I would venture to guess not many and even fewer know about the economic impact it has upon the world. To really get a feel for OPEC one has to delve deep into the heart of the cartel. This can be accomplished by looking at the economic definition of a cartel, the history of OPEC, OPEC today, OPEC and international trade, and the political questions that surround the cartel.
The Economics of a Cartel
Cartels in essence are simple devices. Basically, a group of suppliers band together
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• The product must be homogenous across all members. OPEC meets this with the two and only two types of oil that they sell (low and high-sulfur crude oil). This is important, LeClair says, because inhomogeneous products translate into complex pricing structures that lead to internal conflict.
• No direct supplement products exist. This is so that there will still be a demand for your product even if you raise prices. Oil is still the foremost energy supply and is used throughout the world. There is no direct supplement for oil, yet.
• There has to be a limited number of producers to make the quota system run easier. Quotas are needed to control the price and the bigger the cartel becomes the harder it is to figure out, employ, and regulate such a system. OPEC has limited itself to 11 countries.
• Barriers to entry must exist in the market. This is important because cartels can’t regulate prices if newer cheaper competitors enter the market constantly. Oil is a natural resource and thus there are natural barriers to entry.
• The cartel must be able to control prices by cutting back in overproduction and producing in underproduction. This is mostly accomplished by stockpiling and thus excludes perishable producers from the world of cartels. OPEC can choose to store their oil in barrels or leave it in the ground.
Cartels are notoriously hard to
The Organisation of the Petroleum Exporting Countries (OPEC) aims to coordinate and unify the petroleum policies of its Member Countries and ensure the
Chevron Texaco, or Texaco Shell, is the leading competitor to ExxonMobil. Texaco is in the same areas of business as Exxon. Their petroleum products and lubricants are sold in the same markets, stores, and in many cases opposite street corners from each other. The two companies are very similar, but Exxon’s recent petroleum deals in the Middle East and Africa have allowed its stock price to jump ahead for the time being (1). In the industry, the two companies mainly compete for the ability to negotiate for new production. The competition is not made at the pump or at the local auto store. It seems that it’s more important to control oil than it is to sell it quickly. Because oil has so much value and power in the world, the industry is made of semi-friendly companies. Surviving and making as much profit as possible, is more important than trying to put people out of business.
The economics of supply and demand suggest that output restriction will increase demand which in turn will increase prices. Consequently, output restriction can affect prices in much the same way as price fixing. Those four forms of cartel conduct exist when the individuals or businesses agree to act together for competition fairly and maintain profits. Moreover, there are other anti-competitive practices such as boycotts and misuse of market power. A boycott is an agreement between two or more parties not to deal with a third party, or to do so only upon certain terms. On the other hand, misuse of market power is the individuals or businesses who use their market power for the purpose of eliminating or substantially damaging a competitor or make barriers to enter into the market. The ACCC educates consumers and businesses as to their right and responsibilities under the CCA.
Currently, the United States is the largest importer of crude oil in the world, while it is only the 3rd largest producer. In 2013, while we imported 7.7 million barrels of oil a day, we only produced 7.5 million (Dakota Access). It is critical that we produce more and import less so we can be more self-sufficient in energy production and focus on our country’s economy, to benefit the American people.
Since the oil embargo of 1977, there has been an increased awareness of our nation's energy security. As global population and energy consumption rise, the need for a stable energy supply has become a hot topic and a politically volatile issue. As our negative trade balance grows larger by the day, the United States finds itself in a rather precarious position. We are becoming more and more dependent on Middle East oil.
on this years by providing the oil gap cause for the OPEC embargo to those
Our world economy depends upon petroleum; petroleum, in fact, has shaped the modern world. It has dictated production technologies and methods. It has facilitated the emergence of a worldwide transportation network. It has allowed cites to grow and expand, and determined the spatial landscape of regions. Due to our great need for petroleum, the scope of OPEC¡¦s power surpasses our prowess as an economic superpower, considering OPEC regulates the output and the price of oil from their reserves.
Being at the centre of global economic activities, the U.S. has had its own fair share of oil price shocks. However, it did not just accept or try to change or distort the market forces behind oil prices. Rather, it sought to influence them by making supreme the goal of energy independence. It also intensified diplomatic efforts and negotiations to this end.
However, there is an incentive for them to work together, as they would be able to maximize their profits across the industry rather than competing amongst one another. This way, a cartel can be established to fix selling prices, purchase prices, and reduce production using a variety of tactics.
Member nations of OPEC wanted high oil prices to support the fortunes of the ruling wealthy classes and to provide huge public benefits for a the member nation's poverty stricken and unemployed population (Steltzer, 2000).
According to current estimates, more than 80% 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 around 66% of the OPEC total (OPEC Share of World Crude Oil Reserves, 2014). Competition amongst the U.S. and the Middle East has never reached this level before. There is a constant tension between the two countries and refuse to collaborate in dividing the market share equally. Furthermore, as both nations refuse any bipartisan agreement, there is no limiting the production of oil. Each nation is looking to drive out competition by any means. What they don’t realize is if they cooperated and reached an agreement amongst the international community, oil will remain profitable just as it was a few years ago. Though, this is unlikely to happen any time soon, but will eventually cause Saudi Arabia and other Middle Eastern countries to take a drastic decision when their main source of capital plummets due to the current price of oil. Profits are no longer seen in the oil industry. The Price of oil has been selling at around $50-$60 per barrel, not enough to cover production cost. The United States is able to withstand any contraction within the oil sector, as their financial portfolio is diversified, not solely reliant on the price of
The Organization of the Petroleum Exporting Countries (OPEC) was formed in 1960 to unify the policies of oil exporting countries in the Middle East (About Us). During the 1973 Arab-Israeli War, the United States and Netherlands helped Israel in this war with supplies. This angered OPEC countries and acted as a catalyst for the 1973 oil embargo (Reid). Many countries in OPEC and most notably Saudi Arabia, wanted Israel to retreat from territories they gained during the war (Reid). The embargo that resulted caught many Western countries flat footed and sparked a global recession.
Oil-The article”OPEC #1”explains the oil prices.The Oil of the Middle East is the price of oil has fallen by nearly half in just six months.Anyone who buys oil or gas is happy because the prices are low.Car and truck drivers, airlines, and shipping companies are all happy because they don't have to spend as much money on gas. Oil companies are not very happy. They are losing money.A barrel of oil now costs $58 and last summer it was $107.Oil prices have gone down and people are happy,at least some of
World oil demand is increasing as emerging economies need more energy to increase their living standards. Estimates, shown below, are that by 2030, China and India as emerging markets will import over 70% to 90% of their fossil fuel needs (1) . Coupled to a continued high and growing demand for oil, makes this a robust market for the next 30 years.
Within the last two years, the oil industry has increased the price of oil causing gas prices to rise to $3.00 a gallon today. It was only a few years ago that the price of gas was $1.00 a gallon. There have been many complaints against the oil industry on price gauging and monopolizing the industry. Oil companies are reaching sales up to $100 billion and they are seeing profits in the $10 million range. These are the facts that we receive from the media and the government to portray a negative image on the oil industry. The oil industry does not seem to be getting their fair shake and peoples perception from the media and government reaction have clouded the statements