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OPEC

BUSINESS ENVIRONMENT PRESENTATION

By: Tejas Singh

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OPEC Fact-File

It is a cartel of twelve countries made up of Algeria, Angola, Ecuador, Iran, Iraq,Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, andVenezuela

Headquarters: Vienna, Austria

Secretary General: Abdallah Salem el-Badri (Since Jan 2007)

OPEC nations still account for two-thirds of the world's oil reserves, and, as of April

2009, 33.3% of the world's oil production

It had been formed at a Baghdad conference on September 14, 1960. OPEC wasorganized to resist pressure by the "Seven Sisters"(mostly owned by U.S., British, andDutch nationals) to reduce oil prices and payments to producing countries

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Challenges

Faced By

OPEC

End of Bretton Woods-How it impacted OilPrices?

The Oil Shock of 70s-Oil Crisis of 19731979 (Or Second) Oil Crisis

1980s Oil Glut

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End of Bretton Woods-Howit impacted Oil Prices?

On August 15, 1971,U.S. pulled out of the Gold Exchange Standard (whereby

only the value of the US dollar had been pegged to the price of gold and allother currencies were pegged to the US dollar), allowing the dollar to"float".

In anticipation of the fluctuation of currencies, the industrialized nationsalso increased their reserves (printing money) in amounts far greater thanever before.

The result was a depreciation of the value of the USD, as well as the othercurrencies of the world.

Because oil was priced in dollars, this meant that oil producers werereceiving less real income for the same price.

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End of Bretton Woods-How itimpacted Oil Prices?

This led to the "Oil Shock" of the 70s

OPECministers had not developed the institutional mechanisms to updateprices rapidly enough to keep up with changing market conditions, so theirreal incomes lagged for several years.

OIL CRISISOIL CRISIS--19731973 On October 6, 1973, Syria and Egypt launched a surprise attack on Israel.

OPEC oil ministers agreed to use oil as a weapon to influence the West'ssupport of Israel in the Yom Kippur war. They recommend an embargoagainst non-complying states and mandated a cut in exports.

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Oil Crisis 1973 & The Oil Shockof 70s-Arab Oil Embargo

This new round in the Arab-Israeli conflict triggered a crisis already in themaking; the price of oil was going to rise.

Price increases were also imposed.

Since oil demand falls little when the price is raised, the prices had to be risendramatically to reduce demand to the new lower level of supply.

Anticipating this, the market price for oil immediately rose substantially, from$3 a barrel to $12.

The world financial system, which was already under pressure from thebreakdown of the Bretton Woods agreement, was set on a path of recessions andhigh inflation that persisted until the early 1980s, with oil prices continuing torise until 1986.

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1979 (Or Second) Oil Crisis

The 1979 (or second) oil crisis in the United States occurred inthe wake of the Iranian Revolution.

Amidmassive protests, the Shah of Iran, fled his country in early1979 and the Ayatollah Khomeini soon became the new leader ofIran.

Protests severely disrupted the Iranian oil sector, with productionbeing greatly curtailed and exports suspended.

When oil exports were later resumed under the new regime, theywere inconsistent and at a lower volume, which pushed prices up

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1980s Oil Glut- When the worldtemporarily floated in a glut of oil

The inflation adjusted real 2004 dollar value of oil fell from

an average of $78.2 in 1981 to an average of $26.8 per barrel in 1986

The 1980s oil glut was a serious surplus of crude oil caused byfalling demand following the 1970s Energy Crisis

The then U.S. President, Ronald Regan signed an executive orderallowing the free market to adjust oil prices in the U.S.

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1980s Oil Glut- When the worldtemporarily floated in a glut of oil

During the 1980s, non-OPEC production increased worldwide [discentives

to U.S. oil producers were lowered in 1980]

This ended the artificial scarcity of oil, encouraging increased oil production

From 1980 to 1986, OPEC decreased oil production several times andnearly in half to maintain oil's high prices.

However, it failed to hold on to its preeminent position, and by 1981, itsproduction was surpassed by Non-OPEC countries

In Feb 1982, it was reported that OPEC's production, which had

previously peaked in 1977, was at its lowest level since 1969.

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1980s Oil Glut- When the worldtemporarily floated in a glut of oil

Non-OPEC nations were at that time supplyingmost of the West'simports.

OPEC had relied on the price elasticity of demand of oil to maintainhigh consumption, but underestimated the extent to which othersources of supply would become profitable as prices increased. [Theother factor]

Electricity generation from nuclear power and natural gas; homeheating from natural gas; and ethanol blended gasoline all reducedthe demand for oil.

New passenger car fuel economy rose from 17mpg in 1978 to morethan 22 mpg in 1982, an increase ofmore than 30 percent.

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When Oil Crisis Peaked

Around 2008

Oil had reached the inflationadjusted levels of April 1980

It widened the trade deficitand raised concerns aboutinflation at a time when a

growing number ofeconomists feared a recessionmay be coming.

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Oil Crisis 2008

Demand rose but supply did not rise to meet the demand

Demand is forecast to increase this year by 1.2 million barrels a day, to

87.2million barrels a day [2008 figures]

In the United States, the worlds most oil-thirsty nation,consumption actually fell a bit because of the economic slowdown.

But that drop was being offset by growth in other countries. World consumption is projected to rise 35 percent, to around 115 million

barrels a day, in the next two decades.

Most of the growth will come from China, India and oil-producingcountries in the Middle East, where retail fuel prices are subsidized,encouraging wasteful consumption.

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Oil Crisis 2008

Unlike the Organization of the Petroleum Exporting Countries, whoseexplicit goal is to regulate supply [Rather restrict supply!!] to keep prices

up, the other countries are the free traders of the internationalm

arket, withevery incentive to produce flat-out at a time of high prices.

A key reason that supply is not rising to meet demand is that producersoutside of the OPEC cartel countries like Russia, Mexico and Norway have been showing troubling signs of sluggishness.

Norways production slumped by 25 percent since its peak in 2001. In Britain, oil production plummeted 43 percent in eight years.

Alaskas giant field at Prudhoe Bay has declined 65 percent since its peak 20 yearsago.

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Oil-A hedging option?

Oil, like other commodities, has become aperceived safe haven for traders who areedgy about the weakening dollar andfallout from the tight credit market in the

United States.

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