OPEC Commodities Project Laura and Elissa
description
Transcript of OPEC Commodities Project Laura and Elissa
Commodity Product ProjectOPEC
Organization of Petroleum Exporting Countries
Elissa Kam & Laura Du
History of OPEC
• Formed at the Baghdad Conference on September 10 , 1960
• 5 Founding members: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela
• Now consists of 13 countries
Why was OPEC formed?
• 1960: triggered by American quotas on Venezuelan and Persian Gulf oil imports in favor of Canadian and Mexican imports
• Intended to protect the profitability of OPEC’s natural resources
“ The OPEC Member Countries coordinate their oil production policies in order to help stabilise the oil market and to help oil producers achieve a reasonable rate of return on their investments. This policy is also designed to ensure that oil consumers continue to receive stable supplies of oil.”
~ OPEC
Setting Oil Prices
• OPEC is not the only organization responsible for setting prices.
• 3 major international petroleum markets– New York Mercantile Exchange– The International Petroleum Exchange London– Singapore International Monetary Exchange
Does OPEC control oil prices?
• No, it seeks stability rather than controlling prices.
http://www.cartoonstock.com/newscartoons/cartoonists/ksc/lowres/kscn260l.jpg
What causes high oil prices?
• Shortage of supply• Investments not made in advance• Expectations of future supply/ demand• Unfortunate incidents
What causes Low Oil prices
• Too little supply/ too much demand• When oil production rises faster than demand
Why Does OPEC Regulate Production?
• Preserve stability and sustainability in the petroleum market for both oil producers AND consumers
• Prevent sudden shortage or surplus
How Can OPEC Influence Price?
• OPEC currently produces 45% of the world’s crude oil and owns 78% of the world’s oil reserves
• OPEC Member Countries meet to review their oil production policies and analyze market trends (supply vs demand)
• OPEC sets production quotas for each of its members to regulate the amount of oil contributed to the market
Scenario 1: Demand > Supply
• If demand grows or other oil producers supply less oil, demand > supply
• Consumers will still want to buy more but producers will not be supplying enough
• Shortage will occur in the market, price will rise and demand falls/supply rises
• Price increases until supply > demand; surplus causes price to fall again
• Cycle repeats
OPEC’s Role
• BUT: when OPEC sees that demand > supply– quickly increases oil
production because of its large reserves
• Shortage will be prevented, price will remain stable
Scenario 2: Low Demand
• Likewise, when supply > demand:– OPEC can cut production quotas to prevent
surplus & price crash and protect the oil production industry
Pre-2007
• Demand ↑– Economy is HEN HAO
D2
D1
0 Q
P
Meeting High Demand
• Demand > Supply = OPEC Supply ↑• Prevents prices from rising
S1S2
0 Q
P
OPEC Supply
2007- September 2008:Climbing Prices to Financial Crisis
• Price ↑ = Demand ↓• Income ↓ = Demand ↓
D2
D1
0 Q
P
OPEC Supply Cuts
• Nov 1: OPEC cut crude production of 28.8 mil b/d by 1.5 million b/d (5.21%)– Global economic slowdown, oversupplied markets
and the likelihood of a deepening fall in demand for oil.
• Largest individual cuts include:– 466,000 bpd: Saudi Arabia – 199,000 bpd: Iran
Economic Recession
• Demand ↓ = OPEC Supply ↓
S1S2
0 Q
P
OPEC Supply
OPEC Future Plans
• Big drop in oil demand could prompt OPEC to take further action to prevent the collapse of the oil market
• Iraq − exempt from OPEC quotas to rebuild oil sector post-war
• Indonesia − net importer of oil, will leave OPEC at the end of this year
Bibliography
• Carlisle, Tamsin. “Opec cuts output by 1.5m barrels - The National Newspaper.” 24 Oct 2008. <http://thenational.ae/article/20081024/BUSINESS/414788116/1005/LIFE>.
• The McGraw-Hill Companies. “OPEC members start to detail how they will cut output.” <http://www.platts.com/Oil/Resources/News%20Features/opec/index.xml>.
• OPEC. “Frequently asked questions about OPEC.” 2008. 1 Nov 2008 <http://www.opec.org/library/faqs/OPEC.htm>.
• “Organization of the Petroleum Exporting Countries Functions.” 1 Nov 2008 <http://www.opec.org/aboutus/functions/functions.htm>.
• Wikipedia. “OPEC - Wikipedia, the free encyclopedia.” 31 Oct 2008. 1 Nov 2008 <http://en.wikipedia.org/wiki/OPEC>.
• Wikipedia. “Price of petroleum - Wikipedia, the free encyclopedia.” 1 Nov 2008 <http://en.wikipedia.org/wiki/Price_of_petroleum>.
• Zycher, Benjamin. “OPEC | Library of Economics and Liberty.” The Concise Encyclopedia of Economics . 1 Nov 2008 <http://www.econlib.org/library/Enc/OPEC.html>.