OPEC

RECENT NEWS
The Economic Times  12 hrs ago  Comment 
South Korea's KOSPI was flat, while Australian shares dropped 0.15 per cent.
Financial Times  Jun 29  Comment 
Earlier investments set to keep pushing production higher for at least next 18 months
Financial Times  Jun 16  Comment 
A balancing of the market is proving elusive amid a resurgent US shale industry
Financial Times  Jun 13  Comment 
Countries exempt from output curb deal highlight challenge facing the cartel
Financial Times  Jun 13  Comment 
Nigeria and Libya offset cuts from their peers in the cartel
Financial Times  Jun 4  Comment 
Russia giant alert to any sudden end to pact propping up oil prices, Igor Sechin says
Financial Times  May 26  Comment 
The week’s big moves in context, including the action in oil and reaction to the Fed




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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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