How OPEC Controls
the Price of Oil
A Lesson in SUPPLY, DEMAND, and PRICE
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
Before we talk about OPEC’s Mission... Lets
learn about SUPPLY, DEMAND, and PRICE
work
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!
The SUPPLY of
Petroleum
• While petroleum is a non-renewable
resource, meaning one day we will ‘run
out of oil’ - at least for now, it is not
especially scarce or rare.
• For example, by some estimates almost
1.007 Trillion Barrels of Worldwide
Petroleum Reserves - that is, oil still in
the ground waiting to be pumped!
Map of Proven Petroleum
Reserves
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
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!
1
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
OPEC Controls
SUPPLY
• Several times a year the OPEC
countries have a secret meeting where
they try to predict future DEMAND and
set limits on their SUPPLY to pump ‘just
enough’ to meet world need.
• However, often they decide not to pump
as much as they could - so they can limit
the SUPPLY of petroleum which causes
PRICES to rise! This means huge
profits for them.
The Role of Saudi Arabia
• Although the leader of OPEC, Saudi
Arabia often surpassed the
organization’s pre-set limits in order to
increase world SUPPLY from their own
huge reserves.
• Saudi Arabia’s willingness to pump ‘just
more than enough’ petroleum to meet
world DEMAND has kept PRICES lower
than what OPEC could have charged.
• What motives could Saudi Arabia have
for keeping oil prices artificially lower
than what they could charge?
What about
DEMAND?
• Petroleum
DEMAND is
strongly linked
to GDP.
• The world’s
biggest
economies
need huge
amounts of oil
to function!
Percentage of World Petroleum Consumers
Oil
GDP
1
United States
24.89
1st
2
China
8.19
2nd
3
Japan
6.41
3rd
4
Germany
3.41
6th
5
Russia
3.28
11th
6
India
3.17
4th
7
South Korea
2.78
15th
8
Canada
2.64
12th
9
France
2.49
8th
10
Italy
2.38
9th
Map of Petroleum
Consumption
Oil = Economic Growth
• As the world becomes more developed,
poor countries will need their share of
petroleum too; this increased DEMAND
means decreasing SUPPLY (even
OPEC’s); less oil means higher
PRICES!
• Fast growing economies like India and
China are expected to increase
DEMAND for petroleum by almost 60
percent over the next 15 years!
Saudi Arabia and
• In 1991, the USA protected Saudi Arabia
when SaddamUSA
Hussein invaded
neighboring Kuwait and threatened to
invade SA.
• The presence of Christian and Jewish
American soldiers on the holy soil of
Saudi Arabia was one of Osama bin
Laden’s biggest complaints against the
USA.
• Should the USA use its military to
ensure a steady and regular flow of oil in
the Middle East (Saudi Arab or Iraq,
etc)?