OPEC and the Oil Economy

1/1/09

Overview

With gas prices on a rollercoaster ride, Americans are more focused than ever on the oil economy. Join Active Minds® as we examine OPEC and the role it plays in affecting the world's supply of oil and what the future may hold for U.S. oil (in)dependence.

Key Lecture Points

  • In 2008, Americans experienced significant peaks and valleys in gas prices. In mid-June, the average hovered around $4.00/gal; by December 31, the price had dropped to $1.61/gal. Although the price of gas has not quite fallen to the 2004 average of 1.43/gal, the last five months have seen both the largest and fastest price drop in years.
  • Since the price of oil began to plummet, the Organization of Petroleum Exporting Countries (OPEC) has met twice, first in October and more recently in December 2008. At these meetings, OPEC member countries attempted to address the dramatic decrease in oil prices by announcing a reduction in production levels. Taken as a whole, OPEC nations declared their intention to reduce production by over 14.5% to 24.845 million barrels/day. In response, crude oil futures rose very moderately to just above 39/barrel, still down precipitously from its peak price of $147 in July 2008. OPEC hopes that its production cuts will lead to stabilizing prices in the oil market to between $75 and $80 a barrel.
  • OPEC, however, does not control the entirety of oil production. Indeed, only one third of the world’s oil production comes from OPEC nations. As such, in order to stabilize oil prices OPEC is currently pursuing high-level dialogues with Russia. the largest oil-exporting country which is not a member of OPEC.
  • While OPEC has cut production significantly, Russia has only cut its production moderately. OPEC officials have therefore been disappointed by Russia’s smaller production cuts. Reports the BBC, “[Russia] has said it would not join OPEC countries' efforts to bolster prices by cutting production, but has said it would like closer ties with the cartel and more influence on prices.”
  • Additionally, the issue of speculation cannot be underestimated in discussing the volatility in oil prices. One expert suggests that as much of 60% of the recent price spike was attributable to the role of “derivatives” and other investment devices.

Exploration Questions

  • The term “cartel” is used across the board – from academics to journalists to policymakers- to describe OPEC as an organization. Is this a fair characterization? Is OPEC different from other organizations that regulate trade?
  • At the root, an economy’s stability or lack thereof has to do with supply and demand- yet an organization like OPEC has the power to set the terms of supply and demand. To what extent does this regulation make their actions political in addition to economic in orientation?

Reflective Questions

  • When do you recall first hearing about OPEC? In what context did you learn of it, and how was it presented?
  • What were your impressions of the 1973 oil crisis? Do you remember anything about how your life changed?

More to Explore

Books For Further Reading

  • Amuzegar, Jahangir. Managing the Oil Wealth: OPEC's Windfalls and Pitfalls. I.B. Tauris, 2001 282 pages. This book charts OPEC’s rise, decline, and virtual disappearance as a commercial force in the world until its recent half-hearted re-emergence in the face of collapsed oil prices.
    Click here to order
  • Parra, Francisca. Oil Politics: A Modern History of Petroleum. London: I.B. Tauris, 2004. 352 pages. Parra sets out the events that have shaped the industry over the past fifty years--the displacement of coal as the world's prime fuel; the tight control of international oil by the seven major oil companies (all US or British), monopolizing production in the Middle East and Venezuela; the rise of OPEC and the ousting of the companies in a bitter struggle in which the companies were abandoned by their home governments; how the world was hypnotized for more than a decade by the delusion of impending depletion; and the political turbulence that has led to wars in the Middle East, to US sanctions on Iran, Iraq, and Libya, and, most recently, to the invasion of Iraq.
    Click here to order