Oil and OPEC

Oil is a nonrenewable resource• A natural resource with economic value that is slow to

form and is destroyed by use• Another name is fossil fuel How much fossil fuel is left in the United States? (According to Yale University geology department)• Coal- 1500 years• Natural Gas- 48 years• Oil- 17 years (high estimates are up to 50)

This means that countries with lots of oil (i.e.: the Middle East) become influential in world politics, especially if oil

producers organize!

Why is the United States an energy glutton?

We use 7 GB/year (1 gigabarrel = 1 billion barrels)

Until the mid-1970s, the U.S. produced more domestic oil then we could use. We were a net exporter of oil. This tended to make us not conserve oil- big cars, factories converted to oil energy. 25% of the oil we use is in nonfuel substances.

How important is oil in manufacturing and world economies?

Motor oil, kerosene, road tar, ink, stretch pants, transparent tape, purses, carpet sweepers, shoes, electrical tape, mascara, bubble gum, tires, drinking cups, guitar strings, ice chests, toilet seats, eyeglasses, floor wax, dolls, car batteries, hair coloring, loudspeakers, heart valves, tobacco products, fertilizers, frisbees, slip covers, air conditioners… and the list goes on and on.

The cosmetic industry itself is a $2 billion annual industry in the U.S. Primary ingredient of virtually all cosmetic products is petroleum.

Would higher prices affect America’s manufacturing capabilities?

• Higher energy costs cause increases in prices of goods.

• This can cause a country’s economy to stagnate. Incomes do not rise, the economy does not expand but prices go up because the cost of production goes up.

• What happens when prices for goods go up but the real incomes of consumers don’t increase?

Define “inflation.”

An increase in process or a decline in purchasing power caused by an increase in the supply of money.

How do Americans respond to inflation?

• “Buy now, pay later.”• Many Americans begin to buy up available

manufactured goods at higher prices. Many people accomplish this by buying on credit.

• This means more money is in circulation. When more money is out in circulation it is worth less and continues to drive up prices.

What happens when oil producing countries organize?

1. 60% of the world’s known oil reserves are found in the Middle East.

2. OPEC is the Organization of Petroleum Exporting Countries. Founded in 1960 in Baghdad, Iraq.

3. Founding countries include: Iran, Iraq, Kuwait, Saudi Arabia, Venezuela

4. Other countries that have joined OPEC include: Qatar, Indonesia, Libya, Algeria, Nigeria, and UAE.

What happens when oil producing countries organize?

5. OPEC formed for three main reasons:• Foreign companies were developing oil in the OPEC nations

and only paying them limited shares of the profits• OPEC nations wanted to ensure that these foreign

companies did not cut prices for oil• The United States, a major oil user, adopted import quotas

that angered oil exporting nations

6. What is OPEC responsible for:• Determining how much oil will be produced and sold by

each member country• Setting the price for oil• Sometimes using oil as a weapon to promote Arab causes

What happens when oil producing countries organize?

7. Why did OPEC create an oil embargo in 1973 against the U.S.?• OPEC countries were angry at us for our support of

Israel in the Yom Kippur War• OPEC countries saw an opportunity for great profit.• OPEC countries wanted to demonstrate that they had

power.

8. Oil embargo led to an energy crisis in the U.S. and an increase in tension between the Arab nations and the U.S.

What is a cartel?

An organized group of producers formed to obtain higher prices, restrict production, or divide the market.

Is OPEC a cartel?

YES!

OPEC is a cartel because it controlled 66% of world petroleum production in 1979 and it works to restrict production to control pricing. Often times, however, cartels break down because members cheat by selling more than their share to increase personal profit. OPEC still exists today, but not as powerful as they were in the 1970s.