OPEC Nations Arpan Shrivastava Asst Professor IBMR IPS

OPEC Nations Arpan Shrivastava Asst. Professor IBMR, IPS Academy, Indore

What is OPEC • “Organization of Petroleum Exporting Courtiers” • Regulates exporting of oil, oil products, and oil pricing • HQ in Vienna, Austria • Produces 40% of whole world’s oil supply • Wants high oil prices • Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE, Venezuela

What is OPEC? • OPEC stands for the Organization of Petroleum Exporting Countries • Members include: Saudi Arabia, Iran, Iraq, Kuwait, United Arab Emirates, Libya, Algeria, Qatar, Indonesia, Nigeria, and Venezuela • Founded in 1960 • Their Mission: Control the PRICE of World Oil by limiting the SUPPLY

What is SUPPLY? • SUPPLY is simply how much ‘stuff’ is available. . . • . . . For OPEC that ‘stuff’ is petroleum or oil.

What is DEMAND? • DEMAND is simply how much ‘stuff’ is wanted or needed. • Oil is very much in demand - because it is so important for economies to grow. . .

SUPPLY and DEMAND • SUPPLY and DEMAND are exact opposites of one another: • The more DEMAND the less the SUPPLY XBox 360 was very popular gift for Christmas (HIGH DEMAND), because it was so popular sometimes it was hard to find in stores (LOW SUPPLY) • The less DEMAND the greater the SUPPLY Sega was not as popular (LOW DEMAND), so it might have been much easier to find that in stores (HIGH SUPPLY)

How PRICE is Determined: • If you graphed a SUPPLY Table and a DEMAND Table where the two lines meet is called the PRICE • The more rare or scarce something is - the less SUPPLY the greater the DEMAND. . . the higher the PRICE!

What is a Monopoly? • When one person, company or country produces or controls a substantial amount of a particular something. • For example, Microsoft makes the operating system of more than 90 percent of the world’s computers! • Can you list any other monopolies - how do they control PRICE?

OPEC is a Monopoly! Percentage of World Petroleum Reserves 1 • OPEC countries dominate the Top-10 of world’s petroleum SUPPLY (only Russia and Kazakhstan are not members). • Together OPEC controls almost 75 percent of the World Petroleum Reserves! Saudi Arabia 22. 10 2 Iran 11. 14 3 Iraq 9. 68 4 Kuwait 8. 33 5 United Arab Emirates 8. 23 6 Venezuela 6. 50 7 Russia 6. 08 8 Kazakhstan 3. 33 9 Libya 3. 29 10 Nigeria 2. 97

What about DEMAND? Percentage of World Petroleum Consumers • Petroleum DEMAND is strongly linked to GDP. • The world’s biggest economies need huge amounts of oil to function! Oil GDP 1 United States 24. 89 1 st 2 China 8. 19 2 nd 3 Japan 6. 41 3 rd 4 Germany 3. 41 6 th 5 Russia 3. 28 11 th 6 India 3. 17 4 th 7 South Korea 2. 78 15 th 8 Canada 2. 64 12 th 9 France 2. 49 8 th 10 Italy 2. 38 9 th

Member Countries • 1960: Founding Members: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. • Qatar (1961); • Indonesia (1962) – suspended its membership from January 2009 • Socialist Peoples Libyan Arab Jamahiriya (1962) • United Arab Emirates (1967) • Algeria (1969) • Nigeria (1971) • Ecuador (1973) – suspended its membership from December 1992 -October 2007 • Angola (2007) • Gabon (1975– 1994).

Map of Proven Petroleum Reserves

Map of Petroleum Consumption

Basic Facts • OPEC was formed in Baghdad in 1960 to coordinate and unify the policies of petroleum exporting nations • The main objective of OPEC is to ensure the “stabilization of oil prices in international markets” and securing a steady income to oil producing nations • In order to achieve these objectives, the OPEC nations meet at least bi-annually to decide whether to raise or lower their collective oil production in order to maintain “stable” prices • The main factors in their formulating of petroleum policy are the forecasts for economic growth rates and petroleum demand supply • The 11 OPEC member countries produce about 40% of the world’s crude oil, and therefore have a strong influence on the oil market • At the end of 2001, OPEC had reserves of nearly 850 billion barrels of crude oil, representing nearly 80% of the world total of over 1 trillion barrels

Middle East • Although OPEC is not an organization of Middle Eastern oil producers, the politics of the Middle East and in particular the Persian Gulf have played and continue to play a dominant role in the policies OPEC decides upon • There have been three main price spikes in world oil prices, all of which were due to unrest in the Middle East with OPEC not increasing quotas enough to compensate: • In the early 1970’s oil prices spiked as Arab oil producers embargoed oil deliveries to countries friendly to Israel • In 1979, prices soared again as Iranian oil workers went on strike in support of the Islamic Revolution, and high prices continued in the early 80’s during the Iran/Iraq War • In 1990 when Iraq invaded Kuwait, oil exports from Kuwait were severely diminished from the burning of their oil fields and the imposing of sanctions on oil exports from Iraq ( In this instance Saudi Arabia did pick up the slack substantially )

• Opened Sept. 10 -14, 1960 in Baghdad, Iraq • Started in economic and political changes • “Seven Sisters” controlled Oil Marked before • Countries joining OPEC control their own resources (OPEC Policy) • After starting company ten countries joined OPEC History 1960 s

OPEC History 1970 s • OPEC became well known • Countries took control of oil company and oil pricing • Oil prices went up drastically (1973) • OPEC Fund for International Development • Organization gained three members

• • Oil prices dropped badly Small oil market shares fell Oil revenue lowers badly Reference Basket to help price oil • New environmental issues become relevant OPEC History 1980 s

• • Prices became more stable Recovery while post-Soviet Union settled Economy and weather effected prices Producers, consumers, OPEC, and Non-OPEC coordinating affiliations OPEC History 1990 s

• OPEC’s pricing system made pricing better (early 2000 s) • Markets increased prices to record levels • Prices crashed after • Made a “comprehensive long-term strategy” • Help achieve stable markets, environment, development. OPEC History 2000 s

USA vs. OPEC Problems accusing OPEC countries, limit oil • OPEC make oil supply go up continuously • Oil pricing issues • OPEC wanting high prices using to advantage, USA depends on oil

OPEC and The U. S. • • As I touched upon in my first presentation, the United States consumes nearly 7 billion barrels of oil annually The U. S. imports over half of these 7 billion barrels, with half of these imports coming from OPEC nations The amount of these imports is only going to increase in the future as the nearly depleted U. S. reserves begin to run out Some numbers for you math lovers of course: ~ 1998 U. S. oil imports- $50 Billion nations ~ 1999 U. S. oil imports- $67 Billion nations ~ 2000 U. S. oil imports- $119 Billion nations ~ Approx. $25 Billion to OPEC ~ Approx. $34 Billion to OPEC ~ Approx. $60 Billion to OPEC

Major Sources of U. S. Petroleum Imports Country Total Oil Imports Canada 1. 79 Saudi Arabia 1. 66 Venezuela 1. 54 Mexico 1. 42 Nigeria . 86 Iraq . 78 Norway . 33 Angola . 32 U. K. . 31 Total Imports 11. 62

US Dependency • Country’s demand for oil increasing • Persian Gulf biggest oil production (65%) • Happenings in OPEC countries effect oil prices • Most US oil from OPEC countries • US economy relates to OPEC oil prices • Strategic Oil Revenue-oil supply for emergencies

Oil Alternatives • Tar Sands-sticky substance underground in sand & rock • Tar Sands-bad for environment • Ethanol-oil made by corn • Ethanol-would hurt our food supply • Ethanol-97% of land would be corn if fuel was only ethanol • Both-industries lose more energy than make

Pollution • Petroleum/oil products poisonous • Petroleum has sulfur & nitrogen tracings • Hydrocarbon • Petroleum/oil is one of the biggest polluters

Problems with the US • Oil dependency creating a disaster • Not exactly looking for different fuel resources • Oil companies/companies invested in oil not looking for alternatives-USA stuck in a rut • Synthetic oil payments go in taxes-foreign oil no taxes • Foreign fuel in favor-not giving other sources a chance

Religion vs. Oil • Some OPEC countries are Muslim • USA worried because of Muslim faith-just seeing beliefs as a threat • Some Muslims want to convert all countries-all faiths need to work together-oil countries • Oil products also in concern

Summary • While OPEC still has considerable influence in determining the price per barrel of petroleum by restricting output, their success has greatly diminished since the 1970’s • Despite the overall increase in worldwide demand for petroleum, OPEC nations have not received the brunt of this increased demand. Rather, it has gone to Non-OPEC nations • As a result, over the past few years both production and revenues in the OPEC nations have declined significantly • Successful oil production in the OPEC nations is tied to the political and economic status of the volatile Middle East, which serves as a deterrent to potential importers

Conclusion • OPEC still has considerable influence in determining the price per barrel of petroleum by setting quotas, but their best days are behind them • Non-OPEC nations such as Canada and Mexico have stripped the cartel of its power to single-handedly manipulate the petroleum market • The U. S. has benefited from the increased production of petroleum by Non-OPEC nations and thus reduced their annual imports from the OPEC countries in recent years • The United States needs to address its unacceptable energy policy by stressing efficiency and reduced demand for fossil fuels

Thank You