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
• 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
International Corporate
Cartel
• Created by state
governments in US for
purpose of limiting
production
• Limited output and
maintained prices 19351970
• 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
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
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
• 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
• 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
• 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
• 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)
Incentive Both For and Against
Collusion
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
Daily Oil Consumption
OPEC’s World Energy Model (OWEM)
120
100
80
million
barrels/day 60
40
20
0
2000
2010
Year
2020
Oil Reserves and Oil Production
Country
Saudi Arabia
Iraq
United Arab
Emirates
Kuwait
Crude oil
reserves
(million
barrels)
262,784
112,500
IR Iran
Source: OPEC Annual Statistical Bulletin 1999
97,800
96,500
93,100
Country
Saudi Arabia
Former Soviet
Union
United States
Iran
China
Crude oil
production
(million
barrels per
day)
7.565
7.434
5.925
3.439
3.212
High and Low Oil Prices
High Oil Prices
Low Oil Prices
• Shortage of oil
supplies
• Sentiment: if traders
think there will be a
shortage
• Taxes greatly effect
price of oil products
• Imbalance: too much
supply/too little
demand
• Non-OPEC producers
supply as much as
they can
OPEC’s Current Production
Ceiling
Countries
Old Prod.
Level
(b/d)
Decrease
(b/d)
New Prod.
Level
(b/d)
Saudi
Arabia
7,541,000
488,000
7,053,000
I.R.Iran
3,406,000
220,000
3,186,000
Kuwait
1,861,000
120,000
1,741,000
Venezuela 2,670,000
173,000
2,497,000
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
• 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