TERM PAPER OF MANAGERIAL ECONOMICS OPEC: Organization of the Petroleum Exporting Countries

SUBMITTED TO: MR.MANDEEP SINGH

SUBMITTED BY

MANOJ MBA 1 SEM ROLL NO :B62

INDEX

ACKNOWLEDGEMENT INTRODUCTION OPEC IN ECONOMIC ARTICLES ROLE OF OPEC IN WORLD ANALYSIS CONCLUSION

ACKNOWLEDGEMENT

This Term Paper is the culmination of many forces that had been working together in unison. I am therefore deeply indebted to all those without whose support, it would have been impossible to achieve this stage of work. It is my distinct honour and indeed a great privilege to have worked under the dynamic teaching and able guidance of Mr. Mandeep Singh(Lecturer of Economic) for her whole hearted help, kind inspiration, keen interest, constructive criticism and most valuable suggestions in this subject of Business Environment. I would also like to convey my gratitude to the Lovely Professional University by the help of whom I could do my research work over the internet without any problems. Finally, words fail me to express my thanks to my parents and friends without whose constant motivation, I would never have been able to complete this term paper.

(MANOJ SHARMA)

OPEC

The Organization of the Petroleum Exporting Countries is a cartel of twelve countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC has maintained its headquarters in Vienna since 1965 and hosts regular meetings among the oil ministers of its Member Countries. Indonesia withdrew in 2008 after it became a net importer of oil, but stated it would likely return if it became a net exporter in the world again. According to its statutes, one of the principal goals is the determination of the best means for safeguarding the cartel's interests, individually and collectively. It also pursues ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations. OPEC's influence on the market has been widely criticized, since it became effective in determining production and prices. Arab members of OPEC alarmed the developed world when they used the oil weapon during the Yom Kippur War by implementing oil embargoes and initiating the 1973 oil crisis. Although largely political explanations for the timing and extent of the OPEC price increases are also valid. This explanation encompasses OPEC actions both before and after the outbreak of hostilities in October 1973, and concludes that OPEC countries were only staying even by dramatically raising the dollar price of oil. OPEC's ability to control the price of oil has diminished somewhat since then, due to the subsequent discovery and development of large oil reserves in Alaska, the North Sea, Canada, the Gulf of Mexico, the opening up of Russia, and market modernization. OPEC nations still account for two-thirds of the world's oil reserves, and, as of April 2009, 33.3% of the world's oil production, affording them considerable control over the global market. The next largest group of producers, members of the OECD and the Post-Soviet states produced only 23.8% and 14.8%, respectively, of the world's total oil production. As early as 2003, concerns that OPEC members had little excess pumping capacity sparked speculation that their influence on crude oil prices would begin to slip.

The new OPEC headquarters in Vienna

Venezuela and Iran were the first countries to move towards the establishment of OPEC in the 1960s by approaching Iraq, Kuwait and Saudi Arabia in 1949, suggesting that they exchange views and explore avenues for regular and closer communication among petroleum-producing nations. The founder members are Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Later members include Algeria, Ecuador, Gabon, Indonesia, Libya, Qatar, Nigeria, and the United Arab Emirates. In 1014 September 1960, at the initiative of the Venezuelan Energy and Mines minister Juan Pablo Prez Alfonzo and the Saudi Arabian Energy and Mines minister Abdullah al-Tariki, the governments of Iraq, Iran, Kuwait, Saudi Arabia and Venezuela met in Baghdad to discuss ways to increase the price of the crude oil produced by their respective countries. OPEC was founded in Baghdad, triggered by a 1960 law instituted by American President Dwight Eisenhower.

Oil exports imports difference

As a result, OPEC was founded to unify and coordinate members' petroleum policies. Original OPEC members include Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Between 1960 and 1975, the organization expanded to include Qatar (1961), Indonesia (1962), Libya (1962), the United Arab Emirates (1967), Algeria (1969), and Nigeria (1971). Ecuador and Gabon were early members of OPEC, but Ecuador withdrew on December 31, 1992 because it was unwilling or unable to pay a $2 million membership fee and felt that it needed to produce more oil than it as allowed to under the OPEC quota, although it rejoined in October 2007. Similar concerns prompted Gabon to suspend membership in January 1995. Angola joined on the first day of 2007. Norway and Russia have attended OPEC meetings as observers. Indicating that OPEC is not averse to further expansion, Mohammed Barkindo, OPEC's Secretary General, recently asked Sudan to join. Iraq remains a member of OPEC, but Iraqi production has not been a part of any OPEC quota agreements since March 1998. In May 2008, Indonesia announced that it would leave OPEC when its membership expired at the end of that year, having become a net importer of oil and being unable to meet its production quota. A statement released by OPEC on 10 September 2008 confirmed Indonesia's withdrawal, noting that it "regretfully accepted the wish of Indonesia to suspend its full Membership in the Organization and recorded its hope that the Country would be in a position to rejoin the Organization in the not too distant future."

ARTICLES

1973 oil embargo

Main article: 1973 oil crisis The persistence of the Arab-Israeli conflict finally triggered a response that transformed OPEC into a formidable political force. After the Six Day War of 1967, the Arab members of OPEC formed a separate, overlapping group, the Organization of Arab Petroleum Exporting Countries, for the purpose of centering policy and exerting pressure on the West over its support of Israel. Egypt and Syria, though not major oil-exporting countries, joined the latter grouping to help articulate its objectives. Later, the Yom Kippur War of 1973 galvanized Arab opinion. Furious at the emergency re-supply effort that had enabled Israel to withstand Egyptian and Syrian forces, the Arab world imposed the 1973 oil embargo against the United States and Western Europe, while non-Arab OPEC members did not.

The 1980s oil gluts

OPEC net oil export revenues for 1971 2007,After 1980, oil prices began a sixyear decline that culminated with a 46 percent price drop in 1986. This was due to reduced demand and over-production that produced a glut on the world market. Around this period, Iraq also increased its oil production to help pay for the IranIraq War. Overall OPEC lost its unity and thus its net oil export revenues fell in the 1980s.

Responding to war and low prices

Main articles: Oil price increase of 1990 and Oil price increases since 2003 In 1990-91 Gulf War, Iraqi President Saddam Hussein advocated that OPEC push world oil prices up, thereby helping Iraq, and other member states, service debts. But the division of OPEC countries occasioned by the Iraq-Iran War and the Iraqi invasion of Kuwait marked a low point in the cohesion of OPEC. Once supply disruption fears that accompanied these conflicts dissipated, oil prices began to slide dramatically.

After oil prices slumped at around $15 a barrel in the late 1990. In 2000, Chvez hosted the first summit of heads of state of OPEC in 25 years. The next year, however, the September 11, 2001 attacks against the United States, the following invasion of Afghanistan, and 2003 invasion of Iraq and subsequent occupation prompted a surge in oil prices to levels far higher than those targeted by OPEC during the preceding period. Indonesia withdrew from OPEC to protect its oil supply interests. On November 19, 2007, global oil prices reacted strongly as OPEC members spoke openly about potentially converting their cash reserves to the euro and away from the US dollar.

ACCORDING TO KHOL :Kohl (2002) argues that OPEC faces difficulties to stabilize oil prices with Imperfect data and very limited instruments. He suggested the OPECs use of production quotas as the only instrument to stabilize prices has not been as effectible due to number f factors including geo-political unrest, changes in demand, changes in Iraqi exports, and production o Non-opec countries

ACCORDING TO PIJUSH PAUL : -

Pijush Paul (2005) analyzed that OPEC supply 40% of worlds oil supply and hold 78% of resources and his analysis showed that OPEC fix oil price in relations with non-opec courtiers and OPECs oil availability is enough for next few decades and fast production decline in non-opec courtiers may make OPEC as the key player to decide oil prices but OPEC as a group has a limited success because of internal cheating it looks like OPEC is losing its control to decide. The oil prices and market is deciding the price because of growing demand

OPEC in Economics

OPEC is a swing producer and its decisions have had considerable influence on international oil prices. For example, in the 1973 energy crisis OPEC refused to ship oil to western countries that had supported Israel in the Yom Kippur War or 6 Day War, which Israel had fought against Egypt and Syria. This refusal caused a fourfold increase in the price of oil, which lasted five months, starting on October 17, 1973, and ending on March 18, 1974. OPEC nations then agreed, on January 7, 1975, to raise crude oil prices by 10%. At that time, OPEC nations including many who had recently nationalized their oil industries joined the call for a new international economic order to be initiated by coalitions of primary producers. Concluding the First OPEC Summit in Algiers they called for stable and just commodity prices, an international food and agriculture program, technology transfer from North to South, and the democratization of the economic system. Overall, the evidence suggests that OPEC did act as a cartel, when it adopted output rationing in order to maintain price. Since currently worldwide oil sales are denominated in U.S. dollars, changes in the value of the dollar against other world currencies affect OPEC's decisions on how much oil to produce. For example, when the dollar falls relative to the other currencies, OPEC-member states receive smaller revenues in other currencies for their oil, causing substantial cuts in their purchasing power. After the introduction of the euro, pre-invasion Iraq decided it wanted to be paid for its oil in euros instead of US dollars causing OPEC to consider changing its oil exchange currency to euros, although after Iraq's invasion, the interim government reversed this policy, and the subsequent Iraq governments stuck to the US dollar. Member states Iran and Venezuela have undergone similar shifts from the dollar to the Euro.

Impact of OPEC on Oil Prices

This table shows us how much the OPEC countries are depending on oil exporting compared to total exports of country.

OPEC Member Country Venezuela Nigeria Algeria Libia Saudi Arabia Iraq Iran Indonesia Kuwait Qatar United Arab Emirates

Total Value of Exports (Million US Dollars) 18543 12087 11046 7960 50183 567 18346 45417 13036 3610 24028

Value of Petroleum Exports (Million US Dollars) 13737 11724 7008 7763 42502 461 14944 6441 12217 2987 12349

Percent of Total Exports Made Up of Petroleum Exports 74% 97% 63% 98% 85% 81% 81% 14% 94% 83% 51%

It table shows that how much oil is being exported by OPEC countries which are compared to the total exports of the particular OPEC country. This total export is almost 41% of total production oil worldwide and 15% of total production of natural gas. In the above table, Libia, Saudi Arabia, Iraq, Nigeria, Iran, Kuwait, Qatar are the countries which are exporting 80% of oil in their total exports. These are the countries named as oil ores of world. These 7 countries are exporting above 50% of share of OPEC exports and 30% in total exports of oil worldwide. Recently, the decline in oil prices is not only due to economical crisis around the world but due to impact of U.S.A. on Kuwait, which is one of OPEC country. Due to sub-prime crisis, U.S.A. faced lack of liquidity cash, then it forced Kuwait to increase the crude oil production, which is against the rules of OPEC, then the price of one barrel reduced almost to $ 100 from $ 147.This will show us how OPEC countries has influence over the oil prices.

ROLE OF OPEC IN REAL WORLD

The Roles of OPEC are simple and are all stated in the OPEC statutes (OPEC, 2008) from which they would all be quoted. The roles of OPEC are as follows: 1.) Co-Ordination & Unification of Policies: The principal aim of the Organization shall be the co-ordination and unification of the Petroleum policies of member countries. From this, the organization aims to synchronize petroleum laws and energy policies of all member countries so they all are the same. 2.) Safeguarding member interests: OPEC statutes state that the organization shall determine the best means for protecting member interests both individually & collectively. 3.) Eliminating Oil Price Fluctuations: OPEC has an objective of stabilizing oil prices, quoting again from the statutes; The Organization shall devise ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations. 4.) Securing a steady income for producing nations: This shall be given at all times to the interests of the producing nations and to the necessity of securing a steady income to the producing countries. This tries to ensure that all oil producing member nations of OPEC must have a constant and sustainable income from oil producing activities. 5.) Ensuring regular supply to Importers: As on one of its objectives, OPEC intends to secure an efficient, economic and regular supply of petroleum to consuming countries. 6.) Ensuring Return on Capital: OPEC aims to ensure a fair return on capital for all multinationals & other investors in the Petroleum industry From what is seen above, it can be seen that OPEC has to employ a delicate balancing act in order to meet with all the above mentioned objectives. This is because there are very thin lines w en an organization is meant to satisfy all members of the supply chain, the producer, the consumer & the investors.

ANALYSIS:
In these articles,The Organization of Petroleum Exporting Countries (OPEC), an organization set up to cater to the interests of net exporters of Petroleum worldwide as faced a lot of crisis of confidence in its over 50 years of existence. OPEC which was formed in 1960 as a reaction to unilateral cuts in oil prices by the seven big oil companies had a mission to coordinate &unify the petroleum policies of its member countries and ensure stabilization of oil markets to secure an efficient, economic & regular supply of petroleum to end users, a steady income to producers and a fair return on capital for those investing in the petroleum Industry Over the years, activities of the Organization has led a vast majority to call it a cartel (an alliance of business companies formed to control production, competition, and price) since OPEC manipulates production rates from member countries in order to influence the supply of oil & hence control prices of crude, it is also blamed for the quadrupling of crude prices in The Organization of Petroleum Exporting Countries has a membership of 11 countries ranging from United Arab Emirates to the Socialist People's Libyan Arab. The members of OPEC currently supply more than 40 per cent of the world's oil and they possess about 78 per cent of the world's total proven crude oil reserves. 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. Twice a year, the OPEC MCs meet in Vienna, Austria to coordinate their oil production policies in order to help stabilize the oil market and to help oil producers (the involved countries) achieve a reasonable rate of return on their investments

CONCLUSION
From the study we come to know that the 1973, 1979 and 1990 oil crises were driven by political or military events. In these year the oil prices shows different fluctuation with the OPEC decision. In 1973 OPEC was successful in raising oil prices. the 1979 oil prices also rises because of the Iranian revaluation and the 1990 oil crises was The cause of the Iraqi invasion of Kuwait Unlike previous oil crises (1973, 1979, 1990) which were driven by political or military events, the oil prices collapse of 1998 and the price shock of 2000 were caused by fundamental economic forces an imbalance of supply and demand. After its initial misjudgments of the oil market in late 1997 and in 1998, and further weakened by its lack of discipline, OPEC did demonstrate in 1999 and 2000 that it has market power and the ability to turn the market around, first by cutting production in 1999, then by expanding production in 2000. However, it miscalculated again in 2000 as to the amount of additional supply that would be needed to hold prices at or under $30/barrel, and as a result prices soared above $30 for much of the year. This had Political factors that were important in enhancing OPEC discipline during this period include the election of the Chavez government in Venezuela (in late 1998), which adopted a much more pro-OPEC oil policy, and the establishment of a Saudi-Iranian rapprochement at the highest levels to maintain more stable oil prices and manage Iraq. Changes of government in Nigeria and Algeria have also apparently contributed to cooperation. OPEC itself has increased the frequency of its meetings to four or more each year, 58 which puts it in a better position to finetune the market and react to changes in supply and demand. Saudi Arabia has become more proactive in leading OPEC decisions. The oil ministers in several countries are now technocrats, not political figures, which makes cooperatioeasier; for example, Ali al- Naimi in Saudi Arabia and Chakib Khelil in Algeria, who recently served as OPECs president. Cooperation by several non OPEC countries, especially Mexico and Norway, was very important in assisting the market turnaround in 1999.

References

www.opec.org Outlook Profit Supplementary September 2008 Edition, which is published on OIL & GAS Reckoner OPEC Annual Reports Organization of the Petroleum Exporting Countries Monthly Oil Market Report, July 2008 www.google.co.in www.wikipedia.com http://www.uni-due.de/makrooekonomik/