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International Relations and Strategy: Oil Cartels

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What is a ‘Cartel?’ A cartel is an organization created from a formal agreement between a group of producers of a good or service to regulate supply in an effort to regulate or manipulate prices. In other words, a cartel is a collection of otherwise independent businesses or countries that act together as if they were a single producer and thus are able to fix prices for the goods they produce and the services they render without competition. A cartel has less command over an industry than a monopoly — a situation where a single group or company owns all or nearly all of a given product or service’s market. Some cartels are formed to influence the price of legally traded goods and services, while others exist in illegal industries, such as drugs. In the United States, virtually all cartels, regardless of their line of business, are illegal by virtue of American anti-trust laws. Cartels have a negative effect for consumers because their existence results in higher prices and restricted supply.

The Organization for Economic Cooperation and Development (OECD) has made the detection and prosecution of cartels one of its priority policy objectives. In so doing, it has identified four major categories that define how cartels conduct themselves: price fixing, output restrictions, market allocation and bid rigging (the submission of collusive tenders). The World’s Biggest Cartel The Organisation of Petroleum Exporting Countries (OPEC) is the world’s largest cartel. It is a grouping of 14 oilproducing countries whose mission is to coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets. OPEC’s activities are legal because it is protected by U.S. foreign trade laws. Amid controversy in the mid-2000s, concerns over retaliation and potential negative effects on U.S. businesses led to the blocking of the U.S. Congress attempt to penalize OPEC as an illegal cartel. Despite the fact that OPEC is considered by most to be a cartel, members of OPEC have maintained it is not a cartel at all but rather an international organization with a legal, permanent and necessary mission.

OPEC’s activities are focused on oil, a commodity that has contributed more than any other form of energy to economic development around the world, over the past century and a half. Analysts agree that hydrocarbons will remain the most important source of energy for decades to come. I believe that OPEC’s actions over the present difficult period provide a vivid demonstration of the important role the Organization plays in stabilizing the volatile oil market, a role that it will continue to play well into the future. The obvious conclusion from what I have just said is that OPEC is not a cartel, as some people still insist on calling us. Instead, it is an international organization of sovereign states, with a legitimate, permanent and essential mission for both its Member Countries and mankind generally.

Organization of the Petroleum Exporting Countries is an intergovernmental organization of 14 nations as of May 2017, founded in 1960 in Baghdad by the first five members (Iran, Iraq, Kuwait, Saudi Arabia, Venezuela), and headquartered since 1965 in Vienna. As of 2016, the 14 countries accounted for an estimated 44% of global oil production and 73% of the world’s”proven oil reserves, giving OPEC a major influence on global oil prices that were previously determined by American-dominated multinational oil companies. As of May 2017, OPEC’s members are Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia (the de facto leader), United Arab Emirates, and Venezuela, while Indonesia is a former member. Two-thirds of OPEC’s oil production and reserves are in its six Middle Eastern countries that surround the oil-rich Persian Gulf. OPEC was based on principles which are as valid today as they were then — despite the vast number of changes we have since experienced in technology, economics, politics and many other aspects of our lives. These principles revolve around the coordination of our Member Countries’ oil policies, so as: to ensure price stability in the world oil market; to obtain a stable revenue for oil-producing nations; and to provide a regular, reliable, efficient and economic supply to consuming countries and a fair return to investors in the oil industry. Commitment to these principles was reaffirmed as recently as the year 2000, in the Solemn Declaration that concluded the Second Summit of Heads of State and Government of OPEC Member Countries, which was held in Caracas, Venezuela.

Moreover, we are dedicated to the ideals of last year’s World Summit in Johannesburg, to ensure that energy reaches all people and all nations, rich and poor alike, as an essential element in the sustainable development of mankind. OPEC’s mission is not restricted by time or circumstance, however. It is, instead, a permanent one, which is centred on petroleum, but broadens out into the energy industry generally. It involves close cooperation and exchanges with other leading, influential parties in the sector at national and international levels. Oil market stability OPEC developed its price band mechanism at the 109th Meeting of its Conference in March 2000. At that time, it identified US $22–28 a barrel as the price range that balances the needs of consumers and producers. The success of the mechanism can be judged from the fact that, since its inception, the OPEC Reference Basket has averaged $25.30/b, which is slightly above the centre of the band. The price band mechanism has faced a stern test over the past seven months, in the light of the supply disruptions in Venezuela, Iraq and, to a lesser extent, Nigeria. The Venezuelan oil industry strike, which began last December and extended into January, withdrew a startling 2.8 million barrels a day from the market. This pushed prices to more than $3/b above the band. In response, OPEC rapidly organized an Extraordinary Meeting of its Conference, which raised the OPEC-10 production ceiling by 1.5 mb/d and restored some balance to a potentially destabilizing market. Oil and cooperation Cooperation is central to OPEC’s thinking.

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Recently, eight non-OPEC oil-producing nations have become observers of our Organization’s activities and this includes attendance at our Ministerial Conferences. Before these Conferences, we hold meetings to exchange ideas among our Ministers and the representatives of observer countries. We also promote workshops and bilateral meetings between observers and OPEC. Moreover, contacts and action plans are being made among producers and consumers. The Permanent Secretariat of the International Energy Forum has now been established in Riyadh. The relationship with the IEA has been strengthened through different events, such as high-level bilateral meetings, joint press conferences and the Joint Workshop on Oil Investment Prospects we held at our Secretariat in Vienna just a fortnight ago. Oil and the environment In speaking of the future, it is also necessary to dispel another common, but mistaken notion that fossil fuels are a dirty form of energy. Possibly this can be traced to the old days of coal. However, the situation has improved greatly in recent years and this will continue into the future. Currently, natural gas is a well-used, cleaner-burning form of energy, while new technologies, such as CO2 sequestration, will allow gas and other hydrocarbons, such as oil, to be burned at even the zero emissions level. It is important to remember that fossil fuels are a product — and gift — of nature. Technical advances are allowing us to use this gift without damaging nature in return. Today, it is only a question of cost.

Organization of Petroleum Exporting Countries (OPEC) and Role of Saudi Arabia (Dreca, 2012) The aim of this research is to explain the OPEC position and the role of Saudi Arabia within OPEC. Saudi Arabia as the largest producer and country with largest oil reserves of oil attract many attention and many studies try to explain which role Saudi Arabia plays within OPEC, is it the role of dominant producer and which strategy Saudi Arabia used during its membership in order to keep its position and its market share. Saudi Arabia role is to keep the balance of production within OPEC. Saudi Arabia was explained as swing producer, and in order to protect itself and its interest because of cheating of other members of OPEC, it was forced to adopt the strategy tit-for-tat. There is big question of it is good to have dominant producer, or all of them to be equal. OPEC in the Epoch of Globalization: An Event Study of Global Oil Prices (Bina, 2007) OPEC is neither a cartel nor exhibits any sign of market domination, market control, or monopoly. This confirmation is also in accord with the pioneering account of the competitive differential oil rents formed across the global industry since the crises of the 1970s. OPEC is reflective of the competitive differential oil rents earned by its members; and, contrary to both the right and the left, and their obfuscating echo in the media, it rolls with the heavy-handed punches of global market in the present epoch Oil Market Modelling and OPEC’s Behaviour (Ayed AlQahtani, 2008) This literature review is divided into two parts (1) oil market modeling and (2) OPEC’s behavior within the oil market. In the first part, I looked at various oil market simulation and optimization models conducted to date with more emphasis on the optimization ones as I attempted building an oil market model of a similar nature. The second part of the review covers the literature on the efforts conducted to date on modeling, testing and analyzing OPEC’s behavior within the oil market as such a market behavior is pivotal to the proposed model’s mathematical formulation and solution. A Review of Factors Determining Crude Oil Prices (Happonen, 2009) The impacts of the price changes were broad and altered industrial activity, consumer behavior and political power globally. Understanding the factors behind these changes is important for commercial investments and public policy making. Academics, analysts and politicians seem to disagree on what is the main driver for the oil price development. Usual explanations are resource scarcity, cartel behavior, commodity speculation and market conditions.

OPEC and the international oil market: Can a cartel fuel the engine of economic development? (Noguera, 2005) The OPEC cartel was formed to promote two economic goals, one microeconomic — low oil market volatility — the other macroeconomic — promotes economic development of its members. These goals create a tension since the cartel’s single tool is output quotas. Using this dual micro/macro perspective we analyze oil exporting countries’ behavior. We find that the effects of the cartel’s choices will be reflected in oil market stability, long-term macroeconomic development, and international oil market structure. If an oil producing country cares about both oil industry profits and macroeconomic stability, the goal of output stability may be inconsistent with cartel membership. What OPEC Means for Today’s Oil Market At the bi-annual meeting in Vienna last week, the Organization of Petroleum Exporting Countries announced its decision to extend the production cut of 1.8 million barrels of oil per day until the first quarter of 2018 to support the recovery in oil prices. While the market had anticipated the move, the extension did not have a strong impact on crude oil prices, unlike the surge in commodity prices witnessed in November 2016 when the OPEC deal was first announced. To put things in perspective, WTI crude oil prices had gone up by more than 9% in November following the initial agreement to reduce output, as opposed to just a 2% jump in oil prices when OPEC announced the extension of the cuts. This trend not only indicates that the proposed output restrictions are not enough to have a meaningful impact on oil prices, but also hints at the fact that OPEC’s power to influence crude oil prices is waning.

OPEC’s Changing Position In The Oil Markets. Historically, OPEC accounted for more than 40% of the world’s crude oil production, and was responsible for exporting nearly 60% of the total petroleum traded internationally. Consequently, the cartel’s huge spare capacity that could be easily maneuvered to suit the condition in the global oil markets, coupled with its significantly low cost of production, allowed it to play the role of a Swing Producer, exerting strong influence on crude oil prices. However things changed for the worse when oil prices crashed in mid-2014 due to the oversupply created by U.S. shale producers. At first, OPEC decided to keep pumping high levels of oil, despite the plummeting prices, to defend its share in the global oil markets. Until mid-2016, this strategy seemed to work well for the member countries as they could easily sustain their oil output even at a price of $30 per barrel. That said, the prolonged weakness in oil prices started weighing heavily on the OPEC members and their economies, which are highly dependent on oil exports. Thus, the cartel members, who had earlier decided to take an aggressive approach to push back on U.S. shale producers, were forced to pull back their output to boost oil prices, and in turn stimulate their dwindling economies.

The purpose of OPEC for members is to”coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry. OPEC members collectively supply about 43% of the world’s crude oil production. Together, OPEC members control about 81% of the world’s total proven crude reserves. OPEC member countries monitor the market and decide collectively to raise or lower oil production in order to maintain stable prices and supply. A unanimous vote is required on raising or lowering oil production. Each member country controls the oil production of its country, but OPEC aims to coordinate the production policies of member countries. Oil and energy ministers from OPEC member countries usually meet twice a year in March and September to determine OPEC’s output level. They also meet in extraordinary sessions whenever required.

The task of stabilising the oil market and guaranteeing secure demand and supply, with reasonable prices and fair returns to investors, cannot be carried out by OPEC alone. Cooperation is necessary. Cooperation between OPEC and non-OPEC producers. Cooperation between producers and consumers. Cooperation among organizations. Stable prices allow consumers and producers to meet today’s needs. Secure supply prevents disruptions that can send prices spiralling and stall economic growth. And sufficient investment ensures that we will be able to provide the necessary oil to meet the growing energy requirement of the future. These are the common goals we share — although at times this fact might be obscured when we view the challenges too strongly from one perspective. To achieve these goals will require the efforts of all of us. But I can assure you that the future looks very bright, if we seize the opportunity to work together.

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International Relations and Strategy: Oil Cartels. (2022, September 15). Edubirdie. Retrieved January 30, 2023, from https://edubirdie.com/examples/international-relations-and-strategy-oil-cartels/
“International Relations and Strategy: Oil Cartels.” Edubirdie, 15 Sept. 2022, edubirdie.com/examples/international-relations-and-strategy-oil-cartels/
International Relations and Strategy: Oil Cartels. [online]. Available at: <https://edubirdie.com/examples/international-relations-and-strategy-oil-cartels/> [Accessed 30 Jan. 2023].
International Relations and Strategy: Oil Cartels [Internet]. Edubirdie. 2022 Sept 15 [cited 2023 Jan 30]. Available from: https://edubirdie.com/examples/international-relations-and-strategy-oil-cartels/
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