OOrganizrganizggPPetroleumetroleumPPetroleumetroleum

CCounounCCounoun

shley Trott Samshley Trott, Sam Won

zation of zation of EExportingxporting EExporting xporting

ntriesntriesntriesntries

Holmberg SaraHolmberg, Sarang

AgeAgeggHistoryHistory

Debunking the MythDebunking the Myth

OPEC v. CIPEC

OPEC in Action

Alternatives to OPEC

Conclusion

endaenda

OPEC OPEC -- A SA SCaCaCaCa

A cartel is definable to raise ththree times thethree times thecost of the meproduction cosproduction cos

Successful Successful rtelrtelrtelrtelned as successful if it is e market price at least

e marginal productione marginal production ember with the highest tt.

i P l ff & C lt- in Perloff & Carlton

OPOP

Th O i ti f th PThe Organization of the PCountries (OPEC) is a peorganization, created at thSeptember 10–14, 1960,September 10 14, 1960, Arabia and Venezuela

ECEC

P t l E tiPetroleum Exporting ermanent, intergovernmenhe Baghdad Conference by Iran, Iraq, Kuwait, Sauby Iran, Iraq, Kuwait, Sau

OPOP

PEC's objective is to co-ordinate and f t l li i M bfy petroleum policies among Member untries, in order to secure fair and ble prices for petroleum producers; ancient, economic and regular supply of roleum to consuming nations; and a return on capital to those investing inreturn on capital to those investing inindustry." - opec.org

ECEC

n

OPEC Press Conference in Vien

OPECOPECOPEC OPEC HistoryHistoryHistoryHistory

History History yyOPEC was founded in Baghdad n response to a 1960 law n response to a 1960 law nstituted by American President Dwight Eisenhower

The law forced quotas on Venezuelan and Persian Gulf oil mports, preferring the Canadian and Mexican oil industries

Asserts its member countries’ rights in global oil market dominated by othersdominated by others

Membership grew to 10 nations

-- 1960s1960s

History History yy

OPEC rpromine

Membesay in gy g

An oil pincreas(1973-7( 9 3

-- 1970s1970s

rises to international ence

er countries establish majoglobal prices of crude oilg p

pricing crises leads to a ste in the price of crude oil

74))

History History yy

A steady decline in prices led to awareness of the need for joint action among oil producersoil producers

Environmental issues begin to appear on the international agendainternational agenda

-- 1980s 1980s

History History yyMega-mergers amongMega mergers amongcompanies fueled by t

Climate change negotheavy decreases in fuheavy decreases in fu

-- 1990s1990sg major international oilg major international oil technological advances

tiations threatened uture oil demanduture oil demand

History History yyPrices reached a high of $145+ b l i J l 200$145+ a barrel in July 200

Price dropped to $32 aPrice dropped to $32 a barrel Dec. 2008

U.S. consumer demand fooil dropped by 8%oil dropped by 8%

The weakening of the gloThe weakening of the gloeconomy also decreased d d fdemand for energy source

Jan 2009 OPEC slashe

-- TodayTodayyy0808

or

balbal

es

ed

DebunkingDebunkingg the Mythsg the Myths

DebunkingDebunkinggg

hU.S. oil shortage and gasyth:

g gwere caused by OPEC’s

bunked:Oil is a fungible (replaceaarbitrage (differing prices g ( g pexist

Shortages were caused bcontrols on crude oil and

g the Mythg the Mythg yg y

s station lines in 1973-197U.S. oil “embargo”

able) commodity => in a market) possibilities ) p

by price and allocation refined products originally

DebunkingDebunking

A price ceiling imposed p g pby the Nixon Administration caused aAdministration caused a shortage of oil

g the Mythg the Myth

DebunkingDebunking

legal? Though cartels areth:

g ghas been able to shut OPE

OPEC i t d b tibunked:OPEC is operated by natioecognized as a legal entitaws

OPEC holds summits in V

g the Mythg the Myth

e technically illegal, no ony gEC down

l t d ional governments and is ty by U.S. foreign trade

Vienna and meets publicly

OPEC vOPEC vOPEC vOPEC v CIPECCIPEC. CIPEC. CIPEC

ConsConsntergouvernentergouverne

ays exportateays exportate

ergovernmenergovernmenuntries Exporuntries Expor

seilseil emental desemental des eurs de cuivreeurs de cuivre

ntal Council ontal Council orters of Copprters of Copp

CIPEC CIPEC -- aa

1967 - 1988 (12 years)

Composed of Chile, Peru, Zaire, ZamPapua New Guinea (8 countries)

Copper demand is very elastic so it

In 1974 members “cheated” and did

an Outlinean Outline

mbia, AUS, Indonesia, Yugoslavia, an

failed

not reduce production as much as wa

OPEC vOPEC vOPEC

World demand for crude very inelastic

When first formed held 2/3 of world oilreserves

nitially OPEC quadrupled world oil price

Faces relatively inelastic fringe supply

Continuing

v. CIPECv. CIPECCIPEC

c World demand for copper elas

Held 1/3 of world’s non-communist coproduction

Unable to raise copper price

Demand for copper elastic (recyclablesubstitutable)

Collapsed in 1988

OPEC inOPEC inOPEC inOPEC inn Actionn Actionn Actionn Action

OPEC ProduOPEC Produuction (2007uction (2007((

Net ExportNet Exportpp

$3 $12$3 => $12

t Revenuet Revenue

Oil price reaches highest point in g p

July 2008 ($145)

OPEC ROPEC RReservesReserves

CompComppp

OPEC’s ability to control osomewhat since 1971somewhat since 1971

Discovery and developmey pthe Gulf of Mexico and th

The opening up of Russia

etitionetition

oil prices has diminished

ent of large oil reserves inge North Sea

an oil reserves

CompCompppetitionetition

Oil ProducinOil Producinng Countriesng Countriesgg

How Oil PricHow Oil PricGlobal EGlobal EGlobal EGlobal E

How dependent is a coun

What is the ability of consconsumption, or switch top ,

Net effect on the world ecprice increases has alway

es Affect thees Affect theEconomyEconomyEconomyEconomy

ntry on imported oil?

sumers to decrease o alternatives?

conomy of OPEC’s major ys been negative

How HigheHow HigheAffect OECDAffect OECDAffect OECDAffect OECDOrganization for EconomiDevelopment - an internapdemocratic countries withthat collects data and mothat collects data and mo

In the short run, higher oiIn the short run, higher oiunfavorable impact in OE

Oil activity accounts for 1

Long term impact is more

r Oil Prices r Oil Prices D CountriesD CountriesD CountriesD Countriesic Co-operation and

ational organization of 30 gh high income economies nitors trendsnitors trends

l prices have anl prices have an ECD countries (2008)

% of GDP

e limited

How HigheHow HigheAffect DeAffect DeAffect DeAffect De

CCCounCounEconomic impact is commfor OECD countriesfor OECD countries

Economies are more fragg

Energy intensive manufacgy

Oil accounts for a larger s

Inefficiency - two times th

r Oil Prices r Oil Prices evelopingevelopingeveloping eveloping

t it intriesntriesmonly more prominent tha

gile and oil intensiveg

cturing g

share of GDP - around 3%

he oil for same output

AlternativeAlternatives to OPECs to OPEC

HEHEHEVs reduce emissions and fuelHEVs reduce emissions and fuel use through increased fuel economy

Americans are currently buying more than 20,000 HEVs per monthmonth

1.6% of annual U.S. market of li ht d t hi l b t l 0 2%light-duty vehicles but only 0.2% of total U.S. light-duty fleet.

Still, HEVs impact and set a standard of achievement for high fuel economy and low emissions

Contests between car-makers to supply latest high-tech, clean and

EVsEVs

A cornflower blue Prius

Domestic HDomestic HHEV SalesHEV Sales

HEV Sales HEV Sales 199919991999 1999 --

M d l 1999 2000 2001 2002Model 1999 2000 2001 2002

nda Insight 17 3,788 4,726 2,216

6yota Prius - 5,562 15,556 20,119

onda Civic - - - 13,700

ord Escape - - - -

nda Accord - - - -

xus RX 400h - - - -xus RX 400h - - - -

ta Highlander - - - -

cury Mariner - - - -

us GS 450h - - - -

yota Camry - - - -

Altissan Altima - - - -

aturn Vue - - - -

us LS600hL - - - -

Estimates, Estimates, 20072007-- 2007 2007

2003 2004 2005 2006 22003 2004 2005 2006 2

1,200 583 666 722

24,600 53,991 107,897 106,971 181

21,800 25,571 18,797 31,251 32

- 2,993 15,800 20,149 21

- 1,061 16,826 5,598 3,

- - 20 674 20 161 17- - 20,674 20,161 17

- - 17,989 31,485 22

- - 998 3,174 3,

- - - 1,784 1,

- - - 31,341 54

8- - - - 8,

- - - - 4,

- - - - 9

BiofBiof

Produced from living organisms or metabolic by-products (organic or food waste products)y p ( g p )

To be considered a biofuel, the fuel must contain over 80% renewable materials

Originally derived from photosynthesis process and can therefore be referred to as a

lsolar energy source.

Biofuels are still a work-in-progress

mpact on bio-diversity and farmer’s ncentives may become perverted; non-sustainable biofuel production p

Net effect is a reduction in greenhouse gas when compared to “traditional” fuels

uelsuels

Share of Share of biofuebiofuetotal roadtotal road fftotal roadtotal road--ff

elel production iproduction ifuel marketfuel marketfuel market fuel market

EthaEtha“A political boondoggle” (RollingA political boondoggle (Rolling Stone)

nternational Institute fornternational Institute for Sustainable Energy found that ethanol subsidies amount to as much as $1.38/gallon - about 1/2 of ethanol’s market price

Why the misguided hype?

PanicPanic

owa - the largest corn producing state

anolanolIraq - “If you love America, how canq y ,love ethanol?”

Infrastructure problemsInfrastructure problems

Tar STar S

Tar Sands (Oil Sands) are made f l d t dup of clay, sand, water and

bitumen (a heavy black oil)

They are mined and then refined nto oil

The mining process is far more complex and expensive than

i i ti l ilmining conventional oil

The largest deposits are in Canada and Venezuela

SandsSands

ConclConcl

Oil demand is very inelasOil demand is very inelascountries, hence OPEC’s

Energy alternatives are bcould affect OPEC’s markcould affect OPEC s mark

With more substitutes deWith more substitutes, demore elastic.

lusionlusion

tic in OECD and developtic in OECD and develop market power.

eing developed, which ket powerket power.

emand for oil would beemand for oil would be

We Shouldn’t AAll be Oil Men

Confused? Confused? Questions?Questions?

SouSouhttp://www.opec.org/aboutus/history/history.htm

http://www.econlib.org/library/Enc/OPEC.html

http://images.google.com/images?q=biofuels&oe=ua&um=1&ie=UTF-8&sa=N&hl=en&tab=wi

www1.eere.energy.gov/.../facts/2008_fotw514.htm

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