Case study of Opec

PREPARED BY,

Ankit shah

Arpan shroff

Chirag zala

Jayant rajput

Mehul sinh rajput

Rahul jain

Organization petroleum exporting company

MAIN THREE FEATURE OF COMPETITIVE MARKET

• MONOPOLY:-Monopoly where single seller has control over the

industry and no other firm exists producing a close substitute.

• MONOPOLISTIC:-Monopolistic competition where a large number

of sellers exist selling differentiated products

• OLIGOPOLY:-Oligopoly is an intermediate form of imperfect

competition in which only a few sellers exist in the market with each

offering a product similar or identical to the others.

OPEC STUDY OF OLIGOPOLY

• Oligopoly:- An oligopoly is a market form in which

a market or industry is dominated by a small number of sellers

(oligopolists). Oligopolies can result from various forms of collusion which

reduce competition and lead to higher prices for consumers.

.

Oil –life blood and world economy

•OIL - One of the life bloods of our World economy is oil.

•The impact of oil in today’s economy has been witness by consumers many

times.

•We have seen how human spending and travel got affected as the price of oil

fluctuates. In contrast almost all energies are generated using oil, to mention few;

Cars, Trucks, railways, Plane, use oil in order to run their engine.

•Therefore if oil supply disturbed for one day we can imagine how the Indian

economy can be affected greatly

OPEC - Introduction

• OPEC means that organization of the petroleum exporting countries.

• Its established in 1960s in BAGDAD,IRAQ

• OPEC founding member are Five. Iraq, Iran, Kuwait, Saudi Arabia,

Venezuela.

• OPEC is international organization that have 12 members.

• Its purpose is to help members develop policies on oil production

and trade that will benefits each other.

• OPEC as a cartel, manipulates supply of oil in markets , in hopes of

keeping prices and profits ,high.

• Oil is the main marketable commodity and foreign exchange earner.

• Oil is the vital key to development – economic, social and political.

Main Purpose & Objective of OPEC

• To Coordinate And Unify Petroleum Policies Among Member Countries To

Ensure A Steady Income To The Producing Countries

• A Steady Supply Of Petroleum To The Consuming Nations As Well As A

Fair Return Of Capital For Investors In The Petroleum Industry Itself.

Main Objectives are :-

• Stable oil market, with reasonable prices and steady supplies to consumers

• OPEC was made to make sure that the price of the oil in the world market will

be properly controlled.

• Their main goal is to prevent harmful increase in price of oil in global market

and make sure that nations that produce oil have a fair profit

Side line objective

• Manipulate supply of oil in the market and think that keeping price and

profity high by producing less oil than the markets needs.

• Opec always wants to maximize profits themselves.

• they also don’t want to kill the golden goose by driving prices so high that

alternatives energy exploration becomes a top priority.

• Opec track the oil production of NON-OPEC nation and then adjust its own

production maintain its desired barrel price.

Quantitative dynamic of Opec• 1960 TO 1970

•Not major role played

•During 1970

•Power of price setting shifted from MNC oil companies to OPEC

•By 1973

•Opec countries changed the pricing system

•1975-1985

•Oil production increase from 48% to 71%

•Mid 1980

•Survival becomes uncertain

•Market shares fell from 52% to 30% in 1985

OPEC CHALLENGES• Uncertainty in global demand

• Structural shift in demand from developed world to developing world

• Non- Opec oil producing country just like.russia, norway,maxico etc. increase your production when Opec cuts it.

• Russia overtook Saudi Arabia as the word’s biggest crude supplier in 2009

• Opec share of production has gone down.

• Problem of member cohesion within Opec nation:-maintaining quota discipline within the cartel

• Existence of faction within Opec

• Middle-eastern strife & political instability in Opec oil-producing countries-mostly authoritarian states that use oil money as a means of sustaining political power

• Future development in area of renewable energy sources.

OPEC CARTEL

Quota set by opec

•Production ceiling set u was violated

•1985- price dropped from $ 24 to $ 12.

•1990s $30 per barrel

•1993s $ 15 per barrel

Opec prices:-•price data collected

•March 2000set a price band mechanics in range of $22-$28 per barrel

•Production adjustment on price

•Jan 20058 suspended price and mechanics

Market was tight in its price band

unable to defined by cutting its production.

OPEC ECONOMIC OF CARTEL

• Opec decided to increase or reduce. its collective production of OIL, which

leads to increase/decrease.

• IN SUPPLY, THEREFORE IT HAS DIRECT IMPACT ON

DEMAND, SUPPLY AND PRICE.

• In short:-•Decrease in supply: supply and demand are inelastic

•Decrease in supply:-large increase in price

• Long run:-

•supply and demand are elastic

•Decrease in supply:-small increase in price

Opec fails in keep oil price high

In the 1970 & 1980

•Opec reduced the amount of oil it was willing to supply to world

markets.

•The increase in price was much larger in the short run than the

long run.

•The demand and supply of oil are much more inelastic in the

short run than the long run.

•The demand is more elastic in he long run because consumers

can adjust to the higher price of oil by carpooling or buying a

vehicle that gets better mileage.

•The supply is more elastic in the long run because non Opec

produce will respond to the higher price of oil by reducing price

more.

A Reduction in Supply in the World Market for Oil

• The oil market short run:- 1.in the short run when supply and

Demand are inelastic, a shift in

supply

2.Leads to a large increase in price.

Price

Quantity 0

P1

P2 S1

S2

1

2

Demand

A Reduction in Supply in the World Market for Oil

Quantity 0

P1

P2

S2 S1

Price

Demand

1

2

1. In the long run, when supply and

demand are elastic, a shift in supply. . .

2. leads to a small increase in price

CHANGE IN DEMAND CURVE

• The changes in the price Oil have not kept pace with change in my income.

When market price for petrol was Rs. 50, I could afford 100 Liters, that was

a filled tank for a month commute.

• As the petrol price increased to 75 my equilibrium quantity has now 66

liters. This is simply a movement along the demand curve, Quantity

demanded is changed due to changes in price that we have no control over.

OPEC –OLIGOPOLY OR CARTAL

• Opec can be described as an oligopoly for several reasons.

• Its fits with the conditions of being dominated by more than

two large firms in this case its twelve.

• Its also practice price rigidity as they agree on both level of out

and therefore the price of oil is influenced by the agreement of

a certain supply.

• The goods they provide are also homogenous. In oligopolies

firms also don't choose to maximize profits, and this can be

clearly shown in the OPEC case as they aim was to "secure fair

and stable prices for producers, and ensure an efficient and

regular supply of oil". There is also barriers to entry which is

described in the case study which states that the oil industry has

"high fixed costs and risk" associated with it,

• It can be argued however, that it is also a monopoly. This is due

to the fact that OPEC has 60% of control over the oil that it

traded internationally.

• Under competition, the price of oil is Pcomp and an individual OPEC

member produces qcomp and earns just a normal profit. With a cartel,

joint profits are maximized at Popec and Qopec.

• Since Qopec < Qcomp, qopec must be less than qcomp for each OPEC

member each member is assigned a quota, qopec.

• At qopec, MR > MC profits rise if the country expands production.

Produce at qcheat, where MR = MC.

• total production rises the price of oil falls competitive outcome

OPEC CAN DO CHEAT

• When OPEC limits oil production, they keep the price of oil and profits

high. But those high profits give each member the incentive to cheat a little.

By producing a little more oil, an individual country can earn more. Usually,

cartels can’t last very long because of this strong incentive to cheat.

• As you can tell by chart below, OPEC countries can and do cheat

ITS EFFECTS

• Price being affected due to Speculation

• Fluctuation due to change in Quota Decision

• 1980 – OPEC made a mistake by increasing OIL price to $40 per barrel.

Result – Reduction in demand – reduction in price

• Problem with Cartel

• Maintaining the price

• Allocate sales among OPEC countries

• Growth Expectation?

CONCLUSION

• OPEC Still Exists today and still has considerable influence in

determining the price per barrel of petroleum by setting quotas, but

their best days are behind them. The cartel seems to understand that

raising prices is easier in short run than in long run.

• Non-OPEC nations such as Russia, Canada and Mexico have

stripped the cartel of its power to single-handedly manipulate the

petroleum market

• The World has benefited from the increased production of

petroleum by Non-OPEC nations and thus reduced their annual

imports from the OPEC countries in recent years.

Thank you