OPEC

RECENT NEWS
Financial Times  Sep 12  Comment 
Producer cartel forecasts big surplus until well into 2017
Financial Times  Sep 8  Comment 
Harold Hamm calls for production freeze to boost prices
Financial Times  Aug 25  Comment 
Fuelling speculation of co-ordinated action to prop up prices in the face of persistent oversupply
Financial Times  Aug 8  Comment 
Officials will gather on the sidelines of Algeria energy forum as low crude prices continue to bite
The Times of India  Jun 30  Comment 
Opec's oil output has risen in June to its highest in recent history, a survey found, as Nigeria's oil industry partially recovers from militant attacks. Supply from the Opec has risen to 32.82 million barrels per day in June, from a revised 32.57...
Forbes  Jun 15  Comment 
Opec member states saw revenues fall by 46% last year, due to lower prices and lower production.
The Times of India  Jun 13  Comment 
Opec forecast that the world oil market will be more balanced in the second half of 2016 as outages in Nigeria and Canada help to speed up the erosion of a supply glut. Oil has risen to $50 a barrel from a 12-year low of $27 in January as the...
Financial Times  Jun 3  Comment 
Helped by a rebound in crude prices, Falih manages to diffuse tensions at production cartel
guardian.co.uk  Jun 2  Comment 
The Vienna talks went largely according to the script: the Saudis and Iranians at loggerheads, meaning any agreement was wishful thinking The failure of the once mighty oil cartel Opec to reach a production-curbing deal was hardly a big surprise....




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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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