OPEC

RECENT NEWS
Financial Times  Jan 18  Comment 
Cartel’s own forecasts predict supply still threatens to overwhelm demand in 2017
Financial Times  Jan 13  Comment 
Attention has shifted to whether cartel will deliver promised cuts
BBC News  Jan 5  Comment 
The price of petrol and diesel in the UK rises to its highest since July 2015, according to the RAC.
Financial Times  Dec 27  Comment 
With prices languishing, the cartel surprised many with the first cut since 2008
Financial Times  Dec 13  Comment 
Gap will on depend on producers sticking to global supply pact
guardian.co.uk  Dec 10  Comment 
First agreement between Opec and non-members since 2001 to jointly limit output is likely to raise prices Oil-producing nations that do not belong to the Opec cartel have agreed to cut output by 562,000 barrels a day, Opec sources have said. The...
Financial Times  Dec 10  Comment 
Members of production cartel will meet non-Opec producers, led by Russia, on Saturday
Financial Times  Dec 9  Comment 
Cartel reliant on rising demand and non-US production declines to keep prices buoyant
Financial Times  Dec 6  Comment 
Oil fund argues price will hit $70 a barrel in wake of first supply cut since 2008
The Economic Times  Dec 6  Comment 
A Crisil report said the price of petrol may rise 5-8 per cent and that of diesel by 6-8 per cent over the next 3-4 months following the production cut and the resultant spike in crude prices.




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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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