OPEC

RECENT NEWS
Times Online  Oct 3  Comment 
The price of oil tumbled yesterday as Saudi Arabia fired the first shots in a battle for control of Opec....
Financial Times  Sep 17  Comment 
Analysts were sceptical that Opec members would agree to a collective production cut at the cartel’s forthcoming meeting in November
Financial Times  Jun 17  Comment 
Roughly 60% of the growth in the oil-producing cartel’s production capacity up until 2019 was expected to come from Iraq
Financial Times  Jun 11  Comment 
Brent, the international crude market benchmark, has averaged almost $110 a barrel this year, above the group’s unofficial price target
Financial Times  Jun 11  Comment 
There are several issues that need Opec’s attention even if the group finds itself for now in a “goldilocks period” of high prices and production close to target
FX Street  Jun 9  Comment 
Its Opec week and as I said last week I don’t expect any change in quotas or lengthy discussions on... For more information, read our latest forex news and reports.
FX Street  Jun 6  Comment 
It’s a quiet, sunny, June morning and with few announcements the market is drifting in low volumes.... For more information, read our latest forex news and reports.
Financial Times  Jun 5  Comment 
The focus is no longer about reducing production but whether Opec can pump enough oil to meet the ‘call’, or demand for its crude oil
Financial Times  May 15  Comment 
While the oil cartel’s output rose 400,000 barrels a day last month, a further increase will be needed in the second half of the year, when consumption bounces back after the summer lull




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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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