OPEC: Oligopoly

Organization of Petroleum Exporting Countries (OPEC) has been called many names; monopoly, oligopoly, cartel, or all of the above. Reading further will give information on to why OPEC is an oligopoly. To give you a brief background on OPEC, explain to you how OPEC acts like a cartel and of why OPEC is a successful oligopoly and cartel. Is OPEC a successful oligopoly? Some people refer to OPEC as a cartel which is another name for oligopoly. Some people like to think OPEC is a monopoly but the press likes to exaggerate of what power it has.

Monopoly is defined as when a person or enterprise is the only controller of a commodity. An oligopoly is a market form which a market or industry is dominated by small number of sellers. The Organization of Petroleum Exporting Countries (OPEC), is best defined as an oil company which is located in Vienna, Australia. It was established in Baghdad in 1960 to coordinate the petroleum production and export policies of its members. Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela were the original members. Qatar joined in 1961 followed by Indonesia and Libya in 1962.

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Abu Dhabi in 1967 joined which later transferred to the United Arab Emirates in 1974. Algeria joined in 1967 as well as Nigeria inn 1971. Ecuador (1973) and Gabon (1975) are no longer OPEC members. The policy decisions are voted upon at its Vienna headquarters. In 1973 Arab-Israeli war, and OPEC member’s income has drastically increased as a result. Non OPEC countries are trying to combined together to limit the effect of the OPEC cartel. OPEC countries supplies are about two-fifths of the world’s oil consumption and possess about two-thirds of the world’s proven oil reserves.

Oligopoly is defined as that of an industry’s that is controlled by a few major players. OPEC is a prime example of an oligopoly. OPEC meets to discuss the amount of oil they will allow into the worlds market. Thus controlling the price and quantity OPEC desires. Often oligopolies are also called cartels. A Saudi royal family recognized Sheik Ahmed Zaki Yammi from Saudi Arabia who had much potential. Yammi was one of the first English-speaking capable to deal effectively with the American and Europeans who were anxious to secure access to the important oil of the Arabian Gulf. A quote from Pamela Sherrid in U. S. News and World report “For more than two decades Ahmed Zaki Yammi’s commands boosted or battered personal pocketbooks and national economies around the world” (February 15, 1988). In 1988, he made an abandoned attempt to take the control over Vacheron Constantin, a reputable maker of luxury watches of Swiss watches. In 1989, he formed the Centre for Global Energy studies in London a forum of OPEC oil ministers, oil company leaders and representatives of governments and consumers. Over the years resources have been gradually giving way to the next big thing in energy and fuels.

For example, wood made way for coal; and coal made way for oil. As you can see, oil is a source of energy efficient that many use to succeed many tasks. Keeping a steady supply of oil with stable prices keep consumers buying the resource. With the thoughts and risks of environmental harm OPEC takes the environment in consideration. This organization devotes resources to be put through a safer, and cleaner process that promotes environmental improvements, as far as oil producers go. Not only does OPEC keep a good relationship with their consumer and prices, but they also encourage cooperation with other countries.

OPEC is an established and well-known member of the Global Energy community. Today, OPEC is intending to further supply oil persisting into 2013. It has been thought that oil prices and demand would increase. In a recent review, the expected demand has frequently been decreasing. Although there has been a drop, OPEC continues to pump to keep up with worldwide production. How do other nations survive when a cartel, like OPEC exists? The answer is very carefully. Normally in a competitive market, oligopoly needs to concern themselves with supply and demand along with competition.

This doesn’t happen when oligopolies encage in the illegal practice of forming cartels. Cartels are formed within an oligopoly work together by fixing the prices, quantities, locate markets geographically or engage in any combinations of these non-competitive market behaviors. OPEC has engaged in all of these behaviors at one time or another. OPEC supplies the U. S. with 40% or more of its oil. OPEC is fine with what is called “approved cheating” from the rules set by them regarding pricing and quantities as long as OPEC still is the major oil supplied to the U. S. The U. S. has begun exploring off shore reserves in Atlanta, the Gulf of Mexico, and the Arctic Ocean (Keefe, 2010). This is fine by OPEC standards as long as they are not in jeopardy of being replaced, thus still supporting the U. S. with 40% of its crude oil. If the fine line or rule is broken in OPEC rules, OPEC would retaliate by raising the price of crude oil only to the U. S. or go as far as placing an oil embargo on the U. S. Who policies all of this? Saudi Arabia does. Saudi Arabia is the leading producer of OPEC and acts as the punisher.

For this cartel, OPEC relies on Saudi Arabia to punish those nations that deviate from their quotas by lowering the price or raising the price of crude oil that offending nation is purchasing from OPEC is buying their crude oil for. All of these price fluctuations can be avoided if other nations remain within the “allowable cheating range” Iraqi president Saddam Hussein, leading up to 1990-91 Gulf War, suggested that OPEC push world oil prices up, thereby helping Iraq and other member states help debts. The division of OPEC countries gathered by the Iraq-Iran war and the Iraq invasion of Kuwait marked a low point in the unity of OPEC.

Once the supply accompanied these conflicts, oil prices began to slide dramatically. After oil prices slumped at around $15 a barrel in the late 1990s, collaborative diplomacy, sometimes noted to Venezuela’s president Hugo Chavez, achieved a coordinated scaling back of oil production beginning in 1998. In 2000 Chavez hosted the first summit of heads of state of OPEC in 25 years. However, the next year on September 11, 2001 attacks against the U. S. as well as the following invasion of Afghanistan, and 2003 invasion of Iraq prompted a surge in oil prices to levels far higher than those targeted by OPEC during that time frame.

Indonesia withdrew from OPEC to protect its oil supply. November 17, 2007, global oil prices responded strongly as OPEC members spoke openly about converting their cash reserves to the Euro and away from U. S. dollars. As this paper has shown you by definitions and examples, OPEC is a very successful oligopoly and cartel. Much of this success is due to the basic need of its product, crude oil, but also by allowing the other nations to get by with what is “acceptable” cheating under the cartel rules. This llows the other nations to feel the tiny bit of freedom to explore their own crude oil while still fixing both quantity and price of crude oil. Although people may misunderstand OPEC as aggressive producers, without OPEC the promotion to create some sort of organization alike to it, would be in deep interest of industrial improvements.

References

Keefe, B. (2010). Obama opens waters off georgia, other states to oil exploration. Retrieved from http://www. ajc. com/news/obama to open waters off georgia. com

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