OPEC Commodities Project Laura and Elissa


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OPEC Commodities Project

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OPEC Commodities Project Laura and Elissa

  1. 1. Commodity Product Project OPEC Organization of Petroleum Exporting Countries Elissa Kam & Laura Du
  2. 2. History of OPEC <ul><li>Formed at the Baghdad Conference on September 10 , 1960 </li></ul><ul><li>5 Founding members: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela </li></ul><ul><li>Now consists of 13 countries </li></ul>
  3. 3. Why was OPEC formed? <ul><li>1960: triggered by American quotas on Venezuelan and Persian Gulf oil imports in favor of Canadian and Mexican imports </li></ul><ul><li>Intended to protect the profitability of OPEC’s natural resources </li></ul>
  4. 4. <ul><li>“ The OPEC Member Countries coordinate their oil production policies in order to help stabilise the oil market and to help oil producers achieve a reasonable rate of return on their investments. This policy is also designed to ensure that oil consumers continue to receive stable supplies of oil.” </li></ul><ul><li>~ OPEC </li></ul>
  5. 5. Setting Oil Prices <ul><li>OPEC is not the only organization responsible for setting prices. </li></ul><ul><li>3 major international petroleum markets </li></ul><ul><ul><li>New York Mercantile Exchange </li></ul></ul><ul><ul><li>The International Petroleum Exchange London </li></ul></ul><ul><ul><li>Singapore International Monetary Exchange </li></ul></ul>
  6. 7. Does OPEC control oil prices? <ul><li>No, it seeks stability rather than controlling prices. </li></ul>http://www.cartoonstock.com/newscartoons/cartoonists/ksc/lowres/kscn260l.jpg
  7. 8. What causes high oil prices? <ul><li>Shortage of supply </li></ul><ul><li>Investments not made in advance </li></ul><ul><li>Expectations of future supply/ demand </li></ul><ul><li>Unfortunate incidents </li></ul>
  8. 9. What causes Low Oil prices <ul><li>Too little supply/ too much demand </li></ul><ul><li>When oil production rises faster than demand </li></ul>
  9. 10. Why Does OPEC Regulate Production? <ul><li>Preserve stability and sustainability in the petroleum market for both oil producers AND consumers </li></ul><ul><li>Prevent sudden shortage or surplus </li></ul>
  10. 11. How Can OPEC Influence Price? <ul><li>OPEC currently produces 45% of the world’s crude oil and owns 78% of the world’s oil reserves </li></ul><ul><li>OPEC Member Countries meet to review their oil production policies and analyze market trends (supply vs demand) </li></ul><ul><li>OPEC sets production quotas for each of its members to regulate the amount of oil contributed to the market </li></ul>
  11. 12. Scenario 1: Demand > Supply <ul><li>If demand grows or other oil producers supply less oil, demand > supply </li></ul><ul><li>Consumers will still want to buy more but producers will not be supplying enough </li></ul><ul><li>Shortage will occur in the market, price will rise and demand falls/supply rises </li></ul><ul><li>Price increases until supply > demand; surplus causes price to fall again </li></ul><ul><li>Cycle repeats </li></ul>
  12. 13. OPEC’s Role <ul><li>BUT: when OPEC sees that demand > supply </li></ul><ul><ul><li>quickly increases oil production because of its large reserves </li></ul></ul><ul><li>Shortage will be prevented, price will remain stable </li></ul>
  13. 14. Scenario 2: Low Demand <ul><li>Likewise, when supply > demand: </li></ul><ul><ul><li>OPEC can cut production quotas to prevent surplus & price crash and protect the oil production industry </li></ul></ul>
  14. 15. Pre-2007 <ul><li>Demand ↑ </li></ul><ul><ul><li>Economy is HEN HAO </li></ul></ul>D 2 D 1 0 Q P
  15. 16. Meeting High Demand <ul><li>Demand > Supply = OPEC Supply ↑ </li></ul><ul><li>Prevents prices from rising </li></ul>S 1 S 2 0 Q P OPEC Supply
  16. 17. 2007- September 2008: Climbing Prices to Financial Crisis <ul><li>Price ↑ = Demand ↓ </li></ul><ul><li>Income ↓ = Demand ↓ </li></ul>D 2 D 1 0 Q P
  17. 18. OPEC Supply Cuts <ul><li>Nov 1: OPEC cut crude production of 28.8 mil b/d by 1.5 million b/d (5.21%) </li></ul><ul><ul><li>Global economic slowdown, oversupplied markets and the likelihood of a deepening fall in demand for oil. </li></ul></ul><ul><li>Largest individual cuts include: </li></ul><ul><ul><li>466,000 bpd: Saudi Arabia </li></ul></ul><ul><ul><li>199,000 bpd: Iran </li></ul></ul>
  18. 19. Economic Recession <ul><li>Demand ↓ = OPEC Supply ↓ </li></ul>S 1 S 2 0 Q P OPEC Supply
  19. 20. OPEC Future Plans <ul><li>Big drop in oil demand could prompt OPEC to take further action to prevent the collapse of the oil market </li></ul><ul><li>Iraq − exempt from OPEC quotas to rebuild oil sector post-war </li></ul><ul><li>Indonesia − net importer of oil, will leave OPEC at the end of this year </li></ul>
  20. 21. Bibliography <ul><li>Carlisle, Tamsin. “Opec cuts output by 1.5m barrels - The National Newspaper.” 24 Oct 2008. <http://thenational.ae/article/20081024/BUSINESS/414788116/1005/LIFE>. </li></ul><ul><li>The McGraw-Hill Companies. “OPEC members start to detail how they will cut output.” <http://www.platts.com/Oil/Resources/News%20Features/opec/index.xml>. </li></ul><ul><li>OPEC. “Frequently asked questions about OPEC.” 2008. 1 Nov 2008 <http://www.opec.org/library/faqs/OPEC.htm>. </li></ul><ul><li>“ Organization of the Petroleum Exporting Countries Functions.” 1 Nov 2008 <http://www.opec.org/aboutus/functions/functions.htm>. </li></ul><ul><li>Wikipedia. “OPEC - Wikipedia, the free encyclopedia.” 31 Oct 2008. 1 Nov 2008 <http://en.wikipedia.org/wiki/OPEC>. </li></ul><ul><li>Wikipedia. “Price of petroleum - Wikipedia, the free encyclopedia.” 1 Nov 2008 <http://en.wikipedia.org/wiki/Price_of_petroleum>. </li></ul><ul><li>Zycher, Benjamin. “OPEC | Library of Economics and Liberty.” The Concise Encyclopedia of Economics . 1 Nov 2008 <http://www.econlib.org/library/Enc/OPEC.html>. </li></ul>