Monopoly of Petroleum: OPEC
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A monopoly is evident where a firm is the sole seller of its product and if its product does not have close substitutes, as discussed in (Gans J., King S. Mankiw A. 2003). This essay will discuss the monopoly of petroleum by The Organization Of Petroleum Exporting Countries (OPEC), particularly how it controls the price of petrol, threats to its monopoly and the social costs involved.
OPEC was established in the 1960's and ever since, Saudi Arabia gained a reputation of being the major power of the organization. Saudi Arabia has the biggest oil reserves in the world and production costs lower than any country. (economist.com 2003)This means that it is a natural monopoly and
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(Gans, J. King, S., Mankiw, N., 2003)
Figure 2
Price A Monopolist's demand curve
Demand
Quantity of Output
To further strengthen this fact, we can observe the price plunge in the 1990's. OPEC's leader Mr. Ali Naimi collaborated with another OPEC member's leader, Mr. Hugo Chavez of Venezuela to impose a clever tactic to cut production. As in figure 2, the price for a barrel of oil rose from $10 in 1998 to nearly $30 in 1999.(economist.com 2003)
The downward sloping demand curve also tells us how OPEC gains its revenue. OPEC's marginal revenue, which is the amount of revenue it receives for each additional unit of output or the change of its total revenue divided by the change of quantity, will always be less than price due to the downward sloping demand curve. To increase the quantity sold, they must lower the price. In a recent OPEC meeting, inline with the Iraqi war, OPEC flooded the market with oil which now threatens a price collapse. .(economist.com 2003) Marginal revenue can be negative when the effect of a price reduction on quantity causes total revenue to decrease, as illustrated in figure 3. (Gans, J. King, S., Mankiw, N., 2003)
Figure 3.
Demand and
Short-term: Cleary OPEC policy is to maintain the price down to crumble down the America production especially because of the hydraulic fracking boom. Thus, its goal is to increase production maintaining the oil price low.
The position of the demand and supply curve will shift to the left or right following a change in an underlying determinant of the market. The number of oil people consume during this period decreased because after the change of the season, there will be less number of people willing to drive in winter. Complementary good, is a good 's demand is increased when the price of another good is decreased. Conversely, the demand for a good is decreased when the price of another good is increased. As transportation and Oil are complementary goods the demand of oil will also fall, which lead to the fall in price. It mean that the demand shifted to the left. Refer to Figure 1.
In October of 1973, OPEC announced that it would increase the price of oil by 70% by cutting production by 25%
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.
The 1970s is a significant period in the U.S. oil and gas history. American oil production was declining steadily and imports from mainly Arab producers were relied on to shore up the shortfall. The Arab states, which constituted the majority of the Organization of the Petroleum Exporting Countries (OPEC), imposed an oil embargo in October 1973 against the U.S. and a number of other industrialized nations that backed Israel during the 1973 Arab-Israeli War. Not only did the sanction ban petroleum exports to the target nations, it also introduced cuts in oil production. As a result, between 1972 and 1982, oil prices increased more than tenfold.
According to current estimates, more than 80% of the world's proven oil reserves are located in OPEC Member Countries, with the bulk of OPEC oil reserves in the Middle East, amounting to around 66% of the OPEC total (OPEC Share of World Crude Oil Reserves, 2014). Competition amongst the U.S. and the Middle East has never reached this level before. There is a constant tension between the two countries and refuse to collaborate in dividing the market share equally. Furthermore, as both nations refuse any bipartisan agreement, there is no limiting the production of oil. Each nation is looking to drive out competition by any means. What they don’t realize is if they cooperated and reached an agreement amongst the international community, oil will remain profitable just as it was a few years ago. Though, this is unlikely to happen any time soon, but will eventually cause Saudi Arabia and other Middle Eastern countries to take a drastic decision when their main source of capital plummets due to the current price of oil. Profits are no longer seen in the oil industry. The Price of oil has been selling at around $50-$60 per barrel, not enough to cover production cost. The United States is able to withstand any contraction within the oil sector, as their financial portfolio is diversified, not solely reliant on the price of
on this years by providing the oil gap cause for the OPEC embargo to those
How is it that the country that possesses the world’s largest supply of oil will have to import oil? Venezuela is a study in contradictions. In 1922 oil was discovered in Venezuela and developed and exploited by United States oil companies. During the 1940’s the leftist government negotiated favorable terms for Venezuela, after which the economy grew continuously until it was the strongest in South America. In fact in 1950, Venezuela became the world 's fourth wealthiest nation per capita. In 1960 Venezuela was one of the founding members of OPEC (Organization of the Petroleum Exporting Countries) OPEC was, created at the Baghdad Conference on September 10–14, 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. By 1973 Venezuela voted to simply nationalize the oil industry allowing it to create a massive refining and marketing system to export its oil. There was no doubt that a country rich in natural resources and largest oil reserves in Latin America and one of the largest reserves in the world, and a current population of over 30 million, that Venezuela has tremendous potential.
Chevron Texaco, or Texaco Shell, is the leading competitor to ExxonMobil. Texaco is in the same areas of business as Exxon. Their petroleum products and lubricants are sold in the same markets, stores, and in many cases opposite street corners from each other. The two companies are very similar, but Exxon’s recent petroleum deals in the Middle East and Africa have allowed its stock price to jump ahead for the time being (1). In the industry, the two companies mainly compete for the ability to negotiate for new production. The competition is not made at the pump or at the local auto store. It seems that it’s more important to control oil than it is to sell it quickly. Because oil has so much value and power in the world, the industry is made of semi-friendly companies. Surviving and making as much profit as possible, is more important than trying to put people out of business.
Sinopec, on the other hand, has traditionally focused on downstream activities, such as refining and distribution. It controls the oil fields south of the Yellow River. In this way, the national monopoly in China’s oil sector was established with the CNPC and Sinopec controlling all process from extracting, refining, sale to trade. The government’s main goal of the regrouping is to regulate previous disorder in the oil extracting industry and eliminate oil smuggling issues. The regrouping is intended to improve the efficiency in oil sector by imposing more government oversight through the two national companies. However, the regrouping barely achieved the government’s initial goal. The two national companies benefit from high profits because of monopoly power and government subsidy. Other local and private-owned oil company had little or no market share under the current structure in oil sector. After China joined the WTO, it faced increasing pressure to open up its oil market. In 2006, the state department issued new regulations regarding the markets for crude and refined oil. The state partially opened up the importation of crude oil and the domestic market for refined oil. However, because the oil refining industry was highly monopolized by the two national oil companies, the opening up of oil market actually benefited these two monopolies most. The local and private-owned oil company that were granted the rights to import crude oil had to ask the two national oil
This is evident even today as existing oil producers are reaching their peaks of production, or their production as plateaued and is no longer growing to match demand. The Association for the Study of Peak Oil and Gas USA (ASPO) reports that of the 42 largest oil producers in the world, which account for 98% of all oil production in the world, about 30 have plateaued or peaked. ASPO also notes that of the 12 major OPEC nations, ½ have peaked or plateaued. The International Energy Agency (IEA) has calculated the average depletion rate of oil to be about 5.1% per year meaning that production of oil drops around 3.7 million barrels per day each year. The peak oil crisis is such a demanding threat because as the world’s supply of oil is peaking the demand is rising. The IEA states that given the trend of population growth the demand for oil is rising 1.6% a year. This means that the growing demand will call for 64 million additional barrels of oil per day by the year 2030, this being the equivalent of 6 new Saudi Arabias (ASPO). It becomes clear that the peak oil dilemma is pressing, but it is especially pressing for organizations like OPEC. OPEC is the Organization of the Petroleum Exporting Countries and is an international organization between oil rich nations which work to control, stabilize, and influence the price and exportation of oil. Many countries throughout the world import their oil from OPEC countries which
Consisting of 12 producers of oil and exporting countries Organization of the Petroleum Exporting Countries (OPEC) is one of the intergovernmental organization. Three continents over which the organization is spread is Asia, America, and Africa.12 oil producing countries in the organization are as follows: America, Asia and Africa. These12 countries are: Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela. The present headquarters of the organization is located in Vienna Austria. During the initial stage, Geneva was the headquarters of the organization.
In the panorama of international relations, the absence of universal or potentially universal institution dealing with energy is notable. Established in 1960, OPEC’s original trigger was the continuing slide in posted prices, which at the time were unilaterally established by the International Oil Companies.
The Organisation of the Petroleum Exporting Countries (OPEC) aims to coordinate and unify the petroleum policies of its Member Countries and ensure the
The oil industry is a globally influential process. It includes the exploration, extraction, refining, and marketing of petroleum products. These are broken down into three sectors upstream, midstream, and downstream. The Oil industry is vital for both the US and Saudi Arabia and their economies. The United States being a major importer, in 2015, the US imported 9.4 million barrels of petroleum a day, one barrel equals 42 U.S. gallons. (EIA 2015) Saudi Arabia being 2nd highest import to the US, and Canada being number 1. The US Exported 4.7 million barrels a day.(EIA 2015) Saudi Arabia, on the other hand, one of the world 's largest oil exporters, producing 9.9 million barrels of petroleum a day, as of 2011, (IEA 2011) exported 7,571,000 bp/d, (POB) 17% of the crude petroleum going to the United States. (OEC 2011) the biggest oil company for the US, based on revenue of 2015, Exxonmobil with 268.9 billion USD, and Saudi Arabia’s Saudi Aramco which was on top of the world leaderboard with 478 billion USD (Forbes 2012). The oil companies can range in types, Integrated having both upstream and downstream ops like the top businesses of the countries. Independant companies have either upstream or downstream but not both. Oil service companies which provide products and/or services to the oil companies, and then the oil equipment manufacturers providing the equipment for the oil companies (PSAC 2016). In Saudi Arabia, the oil supplies have gone through what is known as