How OPEC used its monopoly to manipulate world oil prices

¶ … OPEC, a Natural Progression of Power…

How OPEC muscled its monopoly

"OPEC: A Natural Progression of Power…"

"OPEC: A Natural Progression of Power in the Oil Industry"

Economic Place of OPEC

Reasons for Dominance

Market Share

Impact of Alternative Oil Markets

Alternative Energy Options

Other Players' Support

"OPEC: A Natural Progression of Power in the Oil Industry"

OPEC is often seen by consumers as an evil entity associated with a corruption of power and idealistic standards of corporate social responsibility. It is not unusual for coffee talk to be centered around an ominous organization called OPEC, which most of us understand to have a huge part in how much oil-based fuels and its many offshoot products cost to consumers yet few people really know what OPEC is and what it does. Many assume that OPEC is a multinational business that has undue influence over oil prices. Though this may seem true to some extent the reality is that OPEC which stands for Organization of Oil Producing Countries, is a coalition of nations who all have a serious vested interest in profit from oil exportation. To this end, OPEC attempts, almost at any cost to control oil prices, through manipulation of the market and a huge market share.

OPEC Member Countries:

Country

Joined OPEC

Location

Algeria

1969

Africa

Angola

2007

Africa

Ecuador (**)

rejoined 2007

South America

IR Iran*

1960

Middle East

Iraq*

1960

Middle East

Kuwait*

1960

Middle East

SP Libyan AJ

1962

Africa

Nigeria

1971

Africa

Qatar

1961

Middle East

Saudi Arabia*

1960

Middle East

United Arab Emirates

1967

Middle East

Venezuela*

1960

South America

*founder Members

** Ecuador joined OPEC in 1973, suspended its membership from Dec. 1992-Oct. 2007

http://www.opec.org/library/faqs/aboutopec/q3.htm

The Organization of the Petroleum Exporting Countries (OPEC) stabilizes petroleum prices to promote the economic prosperity of its member nations for which oil is a substantial export. Price stabilization influences the price of petroleum around the world, impacting the economies of developed and developing countries. Under U.S. antitrust jurisprudence, the OPEC quota agreements that stabilize prices would likely be declared illegal, and other countries might also declare price fixing to be illegal under their respective competition laws. (Moore, 2003, p. 243)

This is not to say that U.S. laws have any real influence over a member organization of international origins, yet many argue that they should at least to some degree, not the least of the reasons being the high rate of dependence that the U.S. industry and consumers has on oil. This paper will argue that the real development of OPEC as a market driver in the oil industry is a natural progression of the business model in which it is a dominant player. The work will begin with a brief look at the economic picture of OPEC oil producing member nations, and then explore some of the reasons for the dominance which include, political, economic, business and other reasons for dominance.

Economic Picture of OPEC

Economically, to a large degree the organization acts as a business, as it seeks profitability and attempts to ensure continual growth, with little thought of the consumer at the other end of the market situation. The goal of the OPEC, from its very start was to ensure that its member nations were not unfairly manipulated by foreign interests in the oil market, which was the trend prior to its inception in 1960. ("Oil Industry," 2007) The preceding graph demonstrates both the market share OPEC nations hold on the oil industry as well as the growth of OPEC's dominance over the prices of oil. In short OPEC makes every attempt to produce profit, no matter the nature of demand or in a way that is dependant upon other supplier nations.

The Free on Board (FOB), price, determined entirely by OPEC is the number of significance in this scenario, as this is the actual price that oil companies pay to receive OPEC oil onto their vessels, for transport to a refinery or holding station. This price is determined almost exclusively by the seller, in this case OPEC and can vary by real price and demand to such a degree that it always favors the supplier and gives little concern for the consumer or the middle men. In short when real prices or real demand slows OPEC offsets to ensure profitability by spiking the FOB oil price, so they will continue to make a profit, and the middle men, the big oil companies have little choice other than to pay it, as they are contracted to buy a certain percentage of the oil, no matter the price. This being the case the question then arises, how did OPEC gain such influence over oil prices.

Reasons for Dominance

Market Share

OPEC nations contribute more than 40% of the entire 171 million barrels per day that are exported in the world. The above graph is a OPEC member nation breakdown.

(Eleven nations have joined OPEC since the organization's inception in 1960. Today, these nations supply 40% of the world's oil.)

The simple answer is that OPEC, relatively early in the game created a high market share simply by volume, as the oil production of the member nations collaboratively could always provide, in one area or another oil to feed consumer demand and therefore companies have no choice but to pay the price dictated by OPEC. Another important issue is that member nations recognized early that manipulating prices to better meet the needs of their most important export, oil was a necessary step in ensuring security for their nation, many of whom rely a great deal on oil revenues for state support. They also had the example of the oil industry leaders to use as a gage, as the industry itself manipulated pricing prior to OPECs inception and in fact resulted in OPECs inception. (Falola & Genova, 2005, p. 62)

Impact of Alternative Oil Markets

Alternative oil markets came about as a result of this OPEC monopoly, as smaller reserves or nations with smaller oil market shares began to add to the oil stream and nations developed their own supplies or alternatives to feed the continually growing demand for oil and increasing demands for non-dependant oil pricing. Yet, despite these alternative streams OPEC still has the power to control the market price and dictate FOB pricing, per contract. Though some argue that the OPEC cartel and the additional member nations who collaborate with it do not really control the market there are also many who claim that they do, without question change production (lowering it when prices fall) to artificially drive prices back up. ("The OPEC Delusion," 1999, p. 18) (Kaplan, 1998, p. 8)

Though there is evidence that the market share of OPEC nations is declining, on the world oil market the decline is slow and the dominance is still very evident in reserve statistics and will likely continue to be so for a long time into the future.

Alternative Energy Options

Alternative energy resolutions, will not change this reserve dominance or market share but will offset, only slightly until such time as alternatives are more dominant the need to buy oil, decreasing demand and creating a future need to drive prices back up. (Sterzinger, 2004, p. 5) The drive for alternatives has also brought to light another reason why OPEC has so much control, i.e. that member nations have such an investment in oil as a national economic force that it is actually easier there than it is in other nations to locate and obtain oil. Environmental concerns are set aside to produce oil, while in other nations the politics of finding and obtaining oil are questioned every step of the way as more modern stakeholders register their concerns with regard to environmental and other impact factors. (Falola & Genova, 2005, p. 104) So, in other words it is easier to develop oil production in OPEC nations (and other nations with strong oil industries, in place historically) than it is to find domestic reserves in the U.S. Or European nations.