Submitted Fernandes: 3152 (SY C) Date of submission:

Submitted to Prof.
Sharmila Devi

Prepared by Lisa
Fernandes: 3152 (SY C)

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Date of submission: 24th
January, 2018

 

Instead
of begging OPEC to drop its oil prices, let’s use American leadership and
ingenuity to solve our own energy problems. – Pete Domenici

Table of contents:

 

Sr.
No.

Topic

Pg.
No.

a.      

Acknowledgement

1

b.      

Issues
Motivated for choosing the study

2

c.      

Origin
& nature

3

d.      

Existing
scholarly work – Literature Review

6

e.      

Current
situation (time period 2010 to now)

10

f.       

Lessons
learned

13

g.      

Recommendations
for Future

14

h.      

Reference

15

 

Acknowledgement:

I would like to thank
Prof. Sharmila Devi for designing this project and enabling us to gather
information, analyze and break it down to understand the topic “Oil Cartels”
and its current situation in the global environment to further increase our
knowledge on International Relations and Strategies. This assignment made us
look beyond what meets the eye in the International market. The members of oil
cartels, substitutes of oil and the resulting transformation of the
international market have been engrained in our minds due to the structure of
this project.

 

We thank the International
Business Specialization course organizers for giving us this opportunity to
understand the depth of oil cartels in the global market and its impact on international
relations and strategies that can form the base of strategizing on entering the
international corporate world.

 

Issues Motivated for
choosing the study:

The Organisation of Petroleum Exporting Countries, OPEC, has
managed to come to agreement on cuts in production quotas among the various
members. Those who are not formal members of OPEC, such as Russia, are also
joining in the cuts. The aim, of course as with any cartel, is to agree to
restrain production so that prices rise. If they can manage to get that price
production level equation right they can thereby gain higher income for less
production. And that is, again of course, what we expect of monopolists. A
cartel is an attempt to create a monopoly among a number of different
producers–or at least gain something close to monopoly power so that that
monopolists’ trick of lower production and yet higher revenue can be pulled
off.

Consumers should and do hate such behavior – it makes them poorer,
they have less oil to use and yet must give up more of their incomes to have
it. This is why most countries have anti-monopoly and anti-trust laws and
enforcement. For the artificial creation of such monopolies is known to be
something that harms consumers. In fact, if one tries that sort of action
inside the European Union you can be fined up to 10% of your global turnover
for trying it on. Sadly, OPEC, being a governmental organization, doesn’t get
dinged with those same laws. But this still leaves them with the basic economic
problem faced by all cartels. A true monopoly has it easier – everyone, all
production, is under the same control. A cartel is by definition a number of
individual actors who have joined together to achieve their goal.

And the problem with such a cartel is that every single member has
an incentive to cheat all the other members. The production restraints push up
the price – so, why not produce a little bit more, you know, just a leetle bit, to take advantage of those higher
prices? And if only one person does it just a little, a leetle, bit, then usually no
problem. But if everyone starts to cheat just a bit then the production
restrictions are breached and all lose. It’s a nice example of the standard
collective action problem. If everyone does what they’re supposed to then it
works nicely. And the more cheaters there are the more it falls apart.

OPEC’s problem is that the organization itself doesn’t control
enough of the world’s supply to really control the oil price. And while it’s
got some help from some other producers that’s still not quite enough. For in
the background there is America’s fracking industry. And that is so split into
myriad parts that it’s simply never going to happen that it will constrain
production for any other reason than price. And that’s really OPEC’s problem
writ large, the more successful they are at raising the price then the more
they’re going to call into that competition which will undermine that price.

 

Origin & nature:

 

OPEC:

It is
the Organization of Petroleum Exporting Countries. It was founded in Bagdad in
1960 and currently has 11 members.  OPEC’s aim is to regulate the amount
of oil
that member nations produce and to keep prices at a steady rate. The countries
get together twice a year and agree on how much oil each country is allowed to
produce. OPEC’s headquarters are in Vienna, the capital of Austria. Before OPEC
was created, there were large oil companies that controlled the world’s oil
production. They wanted to sell as much oil as possible and did not let
governments influence their decisions.  Oil-rich countries, especially in
the Middle East, wanted more control over the oil that they produce. As a
result, Iran, Iraq,
Saudi Arabia, Kuwait and Venezuela founded OPEC. In the following years Qatar,
Indonesia, Libya, Algeria, Nigeria, Ecuador, Angola and the United Arab
Emirates also become members.

 

In
the 1960s,
OPEC did not have much power. This changed in 1973 when the third Arab-Israeli
war started. The United States and a few European countries
supported Israel.  As a form of punishment, OPEC nations, influenced by
the Arab countries, stopped selling oil to the West. Within the next six years
oil prices rose to ten times the price of the early 1970s. OPEC countries
became rich with so-called petrodollars; the West sank into deep recession
because they needed OPEC’s oil.

 

 

In
the aftermath of the energy crisis of the 1970s, western countries started
looking for alternative
forms of energy in order to become more independent from OPEC and
the oil-producing nations. In 1986, oil prices dropped to the lowest rate in
history. Oil-producing nations lost much of their income.  In the 80s and
90s OPEC’s power diminished, often because of conflicts and internal arguments
and because member states could not agree on production quotas. Some OPEC
countries did not keep agreements and produced more oil, thus lowering prices.
After 2000, oil prices began to rise again and reached an all-time high in
2007. The financial
crisis of 2007 and 2008 hit world economy hard and oil prices fell
once again. Since the Arab Spring
of 2011, prices have gone up and down several times. Today OPEC
still controls about 60% of the world’s oil reserves and produces 40% of the
world’s oil. Saudi Arabia is the most powerful member of the group, because it
has the largest reserves. Even though there have been quarrels in the cartel in
the last 5 decades it remains a powerful organization.

 

OPEC
was created based on principles which are as valid today as they were then in
1960 — despite the vast number of changes they have since experienced in
technology, economics, politics and many other aspects of their lives. These
principles revolve around the coordination of their Member Countries’ oil
policies, so as: to ensure price stability in the world oil market; to obtain a
stable revenue for oil-producing nations; and to provide a regular, reliable,
efficient and economic supply to consuming countries and a fair return to
investors in the oil industry. Their commitment to these principles was
reaffirmed as recently as the year 2000, in the Solemn Declaration that
concluded the Second Summit of Heads of State and Government of OPEC Member
Countries, which was held in Caracas, Venezuela.

OPEC’s activities are focused on oil, a commodity that
has contributed more than any other form of energy to economic development
around the world, over the past century and a half. Analysts agree that
hydrocarbons will remain the most important source of energy for decades to
come.

Moreover, they are dedicated to the ideals of 2002’s World Summit in
Johannesburg, to ensure that energy reaches all people and all nations, rich
and poor alike, as an essential element in the sustainable development of
mankind.

OPEC’s mission is not restricted by time or circumstance, however. It is,
instead, a permanent one, which is centered around petroleum, but broadens out
into the energy industry generally. It involves close cooperation and exchanges
with other leading, influential parties in the sector at national and
international levels.

 

The
members meet twice a year (usually March and September) at the OPEC Conference
to co-ordinate and unify their petroleum policies and consider the current
situation and forecasts of economic growth rates and petroleum demand and
supply scenarios. Delegates are normally the Ministers of Oil, Mines and Energy
of Member Countries.  The Conference is the supreme authority of the
Organization. However, there are three main organizational units which oversee
the operations of the organization:

·      
OPEC
Secretariat – This group functions as the Headquarters of OPEC. It is
responsible for carrying out the executive functions of the Organization. It
consists of the Secretary General and the Research Division, headed by the
Director of Research, who oversees the Petroleum Market Analysis, Energy
Studies, and Data Services Departments.

·      
Board
of Governors – The Board is composed of Governors nominated by Member
Countries and confirmed by the Conference for two years. The Board directs the
management of the Organization, implements Resolutions of the Conference; draws
up the Organization’s annual budget, and submits it to the Conference for
approval. 

·      
Research
Division – is a specialized research oriented body operating within the
framework of the Secretariat. It consists of three Departments, namely, Data
Services, Energy Studies and Petroleum Studies.

 

 

Much
about the actual operations and decision making process of OPEC is unknown. The
organization is quite secretive about itself so there is not much written about
its internal workings. This secrecy has often lead to misunderstandings or
conspiracy theories, which are prevalent in some books and articles written on
OPEC.

 

The obvious conclusion is that OPEC is
not a cartel, as some people still insist on calling them. Instead, it is an
international organization of sovereign states, with a legitimate, permanent
and essential mission for both its Member Countries and mankind generally.

 

International
Energy Agency (IEA):

The
International Energy Agency (IEA) is one of the larger organizations involved
in the oil and gas industry. The IEA is the energy forum for 26 industrialized
countries. Formed by the Organization for Economic Cooperation and Development
(OECD) as an autonomous intergovernmental entity within the OECD in 1974 in
direct response to the oil crisis, its members include: Australia, Austria,
Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece,
Hungary Ireland, Italy, Japan, Republic of Korea, Luxembourg, The Netherlands
New Zealand, Norway, (participates under a special Agreement), Portugal, Spain,
Sweden, Switzerland, Turkey, United Kingdom, and the United States.

 

One
of the overall objectives of
the IEA, which reflects the original reason for the group’s
establishment, is to seek ways to reduce the members’ vulnerability to a supply
disruption.

 

Organization of
Arab Petroleum Exporting Countries (OAPEC):

The
Organization of Arab Petroleum Exporting Countries (OAPEC) was established in
1968 and is based in Kuwait. Membership is limited to petroleum producing Arab
countries. The three founding members were Kuwait, Libya, and Saudi Arabia. The
OAPEC is not a cartel in the same sense as OPEC. OAPEC is devoted to
developmental activities and increasing the cooperation among its members.

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