Project and services, while others exist in illegal

                                                                                Project

 

International
relations and strategy

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Oil Cartels

 

 

 

 

 

 

submitted to-

DR. Sharmila devi

submitted by-

Sahil Chhabra
(3191)

Index

 

 

 

SNO.

TOPIC

PAGE NO.

 
1

Motivating issues to choose the topic

4

2

Origin and nature

5

3

Literature review

7

4

Present situation

9

5

Learning outcomes

10

6

Future recommendations

11

7

References

12

 

 

 

 

 

 

 

 

 

 

 

What
is a ‘Cartel?’

A cartel is an organization created from a formal
agreement between a group of producers of a good or service to regulate supply
in an effort to regulate or manipulate prices. In other words, a cartel is a
collection of otherwise independent businesses or countries that act together
as if they were a single producer and thus are able to fix prices for the goods
they produce and the services they render without competition.

A cartel has less command over an industry than a
monopoly — a situation where a single group or company owns all or nearly
all of a given product or service’s market. Some cartels are formed to
influence the price of legally traded goods and services, while others exist in
illegal industries, such as drugs. In the United States, virtually all cartels,
regardless of their line of business, are illegal by virtue of American
anti-trust laws.

Cartels have a negative effect for consumers because
their existence results in higher prices and restricted supply. The
Organization for Economic Cooperation and Development (OECD) has made the
detection and prosecution of cartels one of its priority policy objectives. In
so doing, it has identified four major categories that define how cartels
conduct themselves: price fixing, output restrictions, market allocation and
bid rigging (the submission of collusive tenders).

 

The
World’s Biggest Cartel

The Organisation of Petroleum Exporting
Countries (OPEC) is the world’s largest cartel. It is a grouping of 14
oil-producing countries whose mission is to coordinate and unify the petroleum
policies of its member countries and ensure the stabilization of oil markets.
OPEC’s activities are legal because it is protected by U.S. foreign trade laws.

Amid controversy in the mid-2000s, concerns over
retaliation and potential negative effects on U.S. businesses led to the
blocking of the U.S. Congress attempt to penalize OPEC as an illegal
cartel. Despite the fact that OPEC is considered by most to be a cartel,
members of OPEC have maintained it is not a cartel at all but rather an
international organization with a legal, permanent and necessary mission.

 

 

 

 

 

MOTIVATION

 

 

·        
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.

 

·        

I believe that OPEC’s actions over the present difficult period provide a vivid
demonstration of the important role the Organization plays in stabilizing the
volatile oil market, a role that it will continue to play well into the future.

 

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

 

 

 

 

 

 

 

ORIGIN
AND NATURE OF OIL CARTELS

 

Organization of the Petroleum Exporting
Countries  is an intergovernmental organization of
14 nations as of May 2017, founded in 1960 in Baghdad by
the first five members (Iran, Iraq, Kuwait, Saudi Arabia, Venezuela),
and headquartered since 1965 in Vienna.
As of 2016, the 14 countries accounted for an estimated 44% of global oil production and
73% of the world’s “proven” oil
reserves, giving OPEC a major influence on global oil prices
that were previously determined by American-dominated multinational oil companies.

As of May 2017, OPEC’s members are Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia (the de facto leader), United Arab Emirates, and Venezuela,
while Indonesia is a former member. Two-thirds of
OPEC’s oil production and reserves are in its six Middle Eastern countries
that surround the oil-rich Persian Gulf.

OPEC was based on principles which are as valid
today as they were then — despite the vast number of changes we have since
experienced in technology, economics, politics and many other aspects of our
lives.

These principles revolve around the coordination of
our 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.

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.

Moreover, we are dedicated to the ideals of last year’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 centred on 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.

 

 

Oil
market stability

OPEC developed its price band mechanism at the 109th
Meeting of its Conference in March 2000. At that time, it identified US $22–28
a barrel as the price range that balances the needs of consumers and producers.
The success of the mechanism can be judged from the fact that, since its inception,
the OPEC Reference Basket has averaged $25.30/b, which is slightly above the
centre of the band. 
The price band mechanism has faced a stern test over the past seven months, in
the light of the supply disruptions in Venezuela, Iraq and, to a lesser extent,
Nigeria.
The Venezuelan oil industry strike, which began last December and extended into
January, withdrew a startling 2.8 million barrels a day from the market. This
pushed prices to more than $3/b above the band. In response, OPEC rapidly organized
an Extraordinary Meeting of its Conference, which raised the OPEC-10 production
ceiling by 1.5 mb/d and restored some balance to a potentially destabilizing
market.

Oil
and cooperation
Cooperation is central to OPEC’s thinking. Recently, eight non-OPEC
oil-producing nations have become observers of our Organization’s activities
and this includes attendance at our Ministerial Conferences. Before these
Conferences, we hold meetings to exchange ideas among our Ministers and the
representatives of observer countries. We also promote workshops and bilateral
meetings between observers and OPEC. 
Moreover, contacts and action plans are being made among producers and
consumers. The Permanent Secretariat of the International Energy Forum has now
been established in Riyadh. The relationship with the IEA has been strengthened
through different events, such as high-level bilateral meetings, joint press
conferences and the Joint Workshop on Oil Investment Prospects we held at our
Secretariat in Vienna just a fortnight ago.

 

Oil
and the environment
In speaking of the future, it is also necessary to dispel another common, but
mistaken notion that fossil fuels are a dirty form of energy. Possibly this can
be traced to the old days of coal. However, the situation has improved greatly
in recent years and this will continue into the future. Currently, natural gas
is a well-used, cleaner-burning form of energy, while new technologies, such as
CO2 sequestration, will allow gas and other hydrocarbons, such as oil, to be
burned at even the zero emissions level. It is important to remember that
fossil fuels are a product — and gift — of nature. Technical advances are
allowing us to use this gift without damaging nature in return. Today, it is
only a question of cost.

REVIEW
OF LITERATURE

 

Organization
of Petroleum Exporting Countries (OPEC) and Role of Saudi Arabia (Dreca, 2012)

The aim of this research is to explain the OPEC
position and the role of Saudi Arabia within OPEC. Saudi Arabia as the largest
producer and country with largest oil reserves of oil attract many attention
and many studies try to explain which role Saudi Arabia plays within OPEC, is
it the role of dominant producer and which strategy Saudi Arabia used during
its membership in order to keep its position and its market share. Saudi Arabia
role is to keep the balance of production within OPEC. Saudi Arabia was
explained as swing producer, and in order to protect itself and its interest
because of cheating of other members of OPEC, it was forced to adopt the strategy
tit-for-tat. There is big question of it is good to have dominant producer, or
all of them to be equal.

 

OPEC
in the Epoch of Globalization: An Event Study of Global Oil Prices (Bina, 2007)

OPEC is neither a cartel nor exhibits any sign of
market domination, market control, or monopoly. This confirmation is also in
accord with the pioneering account of the competitive differential oil rents
formed across the global industry since the crises of the 1970s. OPEC
is reflective of the competitive differential oil rents earned by its members;
and, contrary to both the right and the left, and their obfuscating echo in the
media, it rolls with the heavy-handed punches of global market in the present
epoch

 

Oil
Market Modelling and OPEC’s Behaviour (Ayed Al-Qahtani, 2008)

This literature review is divided into two parts (1) oil
market modeling and (2) OPEC’s behavior within the oil market. In the first
part, I looked at various oil market simulation and optimization models
conducted to date with more emphasis on the optimization ones as I attempted
building an oil market model of a similar nature. The second part of the review
covers the literature on the efforts conducted to date on modeling, testing and
analyzing OPEC’s behavior within the oil market as such a market behavior is
pivotal to the proposed model’s mathematical formulation and solution.

 

 

 

 

A
Review of Factors Determining Crude Oil Prices (Happonen, 2009)

The impacts of the price changes were broad and
altered industrial activity, consumer behavior and political power globally.
Understanding the factors behind these changes is important for commercial
investments and public policy making. Academics, analysts and politicians seem
to disagree on what is the main driver for the oil price development. Usual
explanations are resource scarcity, cartel behavior, commodity speculation and
market conditions.

 

 

 

 

OPEC
and the international oil market: Can a cartel fuel the engine of economic
development? (Noguera, 2005)

The OPEC cartel was formed to promote two economic
goals, one microeconomic — low oil market volatility — the other macroeconomic
— promotes economic development of its members. These goals create a tension
since the cartel’s single tool is output quotas. Using this dual micro/macro
perspective we analyze oil exporting countries’ behavior. We find that the
effects of the cartel’s choices will be reflected in oil market stability,
long-term macroeconomic development, and international oil market structure. If
an oil producing country cares about both oil industry profits and
macroeconomic stability, the goal of output stability may be inconsistent with
cartel membership.

 

 

 

 

 

 

 

 

 

 

 

What
OPEC Means for Today’s Oil Market

At the bi-annual meeting in Vienna last week, the Organization of
Petroleum Exporting Countries announced its decision to extend the production
cut of 1.8 million barrels of oil per day until the first quarter of 2018 to
support the recovery in oil prices. While the market had anticipated the move,
the extension did not have a strong impact on crude oil prices, unlike the
surge in commodity prices witnessed in November 2016 when the OPEC deal was
first announced. To put things in perspective, WTI crude oil prices had gone up
by more than 9% in November following the initial agreement to reduce output,
as opposed to just a 2% jump in oil prices when OPEC announced the extension of
the cuts. This trend not only indicates that the proposed output restrictions
are not enough to have a meaningful impact on oil prices, but also hints at the
fact that OPEC’s power to influence crude oil prices is waning.

 

OPEC’s Changing Position In The Oil
Markets 

Historically, OPEC accounted for more than 40% of
the world’s crude oil production, and was responsible for exporting nearly 60%
of the total petroleum traded internationally. Consequently, the cartel’s huge
spare capacity that could be easily maneuvered to suit the condition in the
global oil markets, coupled with its significantly low cost of production, allowed
it to play the role of a Swing Producer, exerting strong influence on crude oil
prices. 

However, things changed for the worse when oil
prices crashed in mid-2014 due to the oversupply created by U.S. shale
producers. At first, OPEC decided to keep pumping high levels of oil, despite
the plummeting prices, to defend its share in the global oil markets. Until
mid-2016, this strategy seemed to work well for the member countries as they
could easily sustain their oil output even at a price of $30 per barrel. That
said, the prolonged weakness in oil prices started weighing heavily on the OPEC
members and their economies, which are highly dependent on oil exports. Thus,
the cartel members, who had earlier decided to take an aggressive approach to
push back on U.S. shale producers, were forced to pull back their output to
boost oil prices, and in turn stimulate their dwindling economies.

.

 

 

 

LESSONS  LEARNED  

 

The purpose of OPEC for members is
to “coordinate and unify the petroleum policies of its Member Countries
and ensure the stabilization of oil markets in order to secure an efficient,
economic and regular supply of petroleum to consumers, a steady income to
producers and a fair return on capital for those investing in the petroleum
industry.”

OPEC members collectively supply about 43% of the world’s crude oil production.

Together, OPEC members control about 81% of the world’s total proven crude reserves.

OPEC member countries monitor the market and decide
collectively to raise or lower oil production in order to maintain stable prices
and supply.

A unanimous vote is required on raising or lowering
oil production.

Each member country controls the oil production of
its country, but OPEC aims to coordinate the production policies of member
countries.

Oil and energy ministers from OPEC member countries
usually meet twice a year in March and September to determine OPEC’s output
level. They also meet in extraordinary sessions whenever required.

Current Members:
Algeria – 1969-present
Angola – 2007-present
Ecuador – 1973-1992, 2007-present
Gabon – 1975-1995; 2016-present
Iran –
1960-present
Iraq –
1960-present
Kuwait – 1960-present
Libya –
1962-present
Nigeria – 1971-present
Qatar – 1961-present
Saudi Arabia – 1960-present
United Arab Emirates – 1967-present
Venezuela – 1960-present

 

 

 

RECOMMENDATIONS
FOR FUTURE

 

·        
The task of stabilising the oil market
and guaranteeing secure demand and supply, with reasonable prices and fair
returns to investors, cannot be carried out by OPEC alone. Cooperation is
necessary. Cooperation between OPEC and non-OPEC producers. Cooperation between
producers and consumers. Cooperation among organizations.

·        
Stable prices allow consumers and
producers to meet today’s needs. Secure supply prevents disruptions that can
send prices spiralling and stall economic growth. And sufficient investment
ensures that we will be able to provide the necessary oil to meet the growing
energy requirement of the future. 

·        
These are the common goals we share —
although at times this fact might be obscured when we view the challenges too
strongly from one perspective. To achieve these goals will require the efforts
of all of us. But I can assure you that the future looks very bright, if we
seize the opportunity to work together. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                 REFERENCES

 

 

 

 

http://l.web.umkc.edu/leefs/htnf/htn42/Bina-Vo-GEJ-Oil-07.pdf

 

 

http://dahl.mines.edu/LitReviewOPEC.pdf

 

 

http://eprints.ibu.edu.ba/1177/1/31.%20Organization%20of%20Petroleum%20Exporting%20Countries%20%28OPEC%29%20and%20Role%20of%20Saudi%20Arabia.pdf

 

 

http://epub.lib.aalto.fi/en/ethesis/pdf/12067/hse_ethesis_12067.pdf

 

 

http://eprints.maynoothuniversity.ie/8510/1/1-s2.0-S016771870600052X-main.pdf