OPEC

RECENT NEWS
guardian.co.uk  Mar 26  Comment 
Oil cartel says it expects annual rise in demand of 1.14m barrels as US announces 'test' sale of oil reserves Fears grew of an increase in petrol prices after Opec raised its forecasts for world oil demand and the US revealed plans to release...
Financial Times  Feb 13  Comment 
International Energy Agency says Opec needs to produce above its current output levels if oil inventories in the developed world are to be rebuilt
Financial Times  Jan 28  Comment 
Iraqi production has recovered rapidly in recent years leading to pressure within the cartel for Baghdad to adopt production discipline
Financial Times  Jan 1  Comment 
Many believe 2014 will see rising output overwhelming modest demand growth, sending prices lower and testing Opec’s resolve to balance the market
Financial Times  Dec 5  Comment 
The resurgence of Iran and prospects of recovering output and US shale are altering the internal dynamics of the oil cartel
The Straits Times  Dec 4  Comment 
December 04, 2013 11:03 PM VIENNA (AP) - Opec oil ministers have decided to maintain the organisation's production target at 30 million barrels a day.     
Financial Times  Dec 3  Comment 
The shale boom is having a negative impact on Opec’s exports to the US, so some suggest shipments will rise to regions where prices remain higher
Financial Times  Oct 14  Comment 
North America’s energy independence is creating a new supply hub and while governments are not intervening, markets may be working their magic
Financial Times  Oct 10  Comment 
Output fell 400,000 b/d from August levels to 30.05m as disruptions in Nigeria, Libya and Iraq put pressure on Saudi Arabia to pump more crude
Financial Times  Sep 10  Comment 
Cartel believes demand is set to fall as refineries head into maintenance season, and points to substantial crude stocks in industrialised countries




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OPEC stands for the Organization of the Petroleum Exporting Countries, an international cartel consisting of Iraq, Indonesia, Iran, Kuwait, Libya, Angola, Algeria, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. Prospective members include Bolivia, Canada, Sudan and Syria who have been inivted by OPEC to join. The recent discovery of a sizeable oil field in the South Atlantic supports Brazil's possible application. The organization is based in Vienna and controls over 40% of the world's total oil production, and its member nations account for over 60% of the world's estimated oil reserves. Although OPEC is slowly beginning to lose control over crude oil prices, its holdings still give it a large amount of weight in price determination.

Brief Economics of OPEC

Why was OPEC formed in the first place? What gave OPEC the power to hit the news with their every decision, and what do they have to gain?

Unlike competitive industries such as garment production, oil production belongs to what is known as an Oligopoly, in which only a few producers produce most of the output. Businesses or Nations in an oligopoly produce almost the same thing and sell it at a price determined by demand and the overall supply of all the producers. However, in order to maximize profit return on every unit of output (hence economic profit), businesses in an oligopoly need to collude and reduce output together so that prices rise and overall revenue rises. How does overall revenue rise when demand should naturally drop on higher prices? Well, the problem is that the demand for oil all over the world is fairly inelastic, which means that the drop in demand is lower than the rise in price! They would rather sell one unit at $100 then 2 units at $45 each.

So, that is what OPEC does and why it exists. OPEC nations are in an oligopolistic industry trying to maximize profits through production collusion. In a free market, collusion is naturally illegal (hence a cartel) but who is to control NATIONS forming a cartel?

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