opec is an example of
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OPEC IS AN EXAMPLE OF CARTEL
WHAT IS CARTEL
A Cartel is formal “agreement’’ among competing firms
It is a formal organization of producers and manufacturers
that agree to fix prices, marketing, and production
Cartels usually occur in an oligopolistic industry
A group of parties, factions, or nations united in a common
cause
FACTS OF CARTELThe name is derived from Edmund Cartel and Georges Cartel.
The aim of such collusion is to increase individual members' profits by reducing competition.
Cartels usually occur in an Oligopolistic Industry .
Cartel members may agree on matters as Price Fixing Total Industry Output , Market Shares, Allocation Of Customers
DEFINITIONA cartel is a collection of businesses or countries that act
together as a single producer and agree to influence prices for certain goods and services by controlling production and marketing. 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
▪ They earn greater profit by coordinating their activities rather than acting independently
Cartel Theory of OligopolyThe conditions that give rise to an oligopolistic market are also
conducive to the formation of a cartel
Cartels tend to arise in markets where there are few firms and each firm has a significant share of the market.
In the U.S., cartels are illegal; however, internationally, there are no restrictions on cartel formation.
The organization of petroleum‐exporting countries (OPEC) is the best‐known example of an international cartel;
OPEC members meet regularly to decide how much oil each member of the cartel will be allowed to produce.
Why Cartel ?▪ By working together, the cartel members are able to behave like a
monopolist
▪ To increase market power
▪ Level the out put of each member
▪ Price each member will charge
▪ Demand of curve each firm will face will be horizontal at the market price
▪ Same as monopolist
▪ The cartel members choose their
▪ combined output at the level
▪ where their combined marginal revenue equals their combined marginal cost
▪ The cartel price is determined by market demand curve at the level of output chosen by the cartel
▪ The cartel's profits are equal to the area of the rectangular box labelled abcd in Figure
Cartel is a CrimeThese types of agreements are crimes
They breach section 4 of the Competition Act 2002
Businesses and individuals found guilty of hard-core cartel offences face a number of penalties, including fines and imprisonment
You can find information on cartel cases under Criminal Court Cases
▪ Price fixing: Competitors illegally agree the price for, or discounts on, goods or services.
▪ Market sharing: Competitors illegally agree on which locations each of them can or cannot operate in, or customers to whom they can or cannot sell. They also divide locations and/or consumers up among competitors
▪ Limiting production: Competitors illegally agree to control the amount of goods or services provided, in order to ensure that prices remain high
▪ Bid-rigging/collusive tendering: Collusive tendering involves competitors illegally agreeing on who will win a tender. Bid-rigging or collusive tendering may take the form of any or all of the specifically prohibited activities, by fixing prices, sharing markets or limiting access to goods or services
PROBLEMS CAUSED BY CARTELSConsumers suffer various disadvantages as a result of cartels :
High Prices
Low Product Variation
Low Quality and Service
WHY CARTELS ALWAYS FAILSFirms don’t cooperate due to lack of trust
Firms cheat
Produce extra output or lower the price
ORGANISATION OF PETROLEUM EXPORTING COUNTRIES
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Organization of Petroleum Exporting Countries It is a permanent intergovernmental organization, currently consisting of 12
oil producing and exporting countries, spread across three continents America, Asia and Africa
Oil is the main marketable commodity and foreign exchange earner.
Oil is the vital key to development – economic, social and political. Their oil revenues are used not only to expand their economic and industrial base, but also to provide their people with jobs, education, health care and a decent standard of living
OPEC was formed at a meeting held on September 14, 1960 in Baghdad, Iraq,
Five Founder Members: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. OPEC was registered with the United Nations Secretariat on November 6, 1962
Member CountriesCountry Joined OPEC Location
Algeria 1969 Africa
Angola 2007 Africa
Ecuador ** rejoined 2007 South America
IR Iran * 1960 Middle East
Iraq * 1960 Middle East
Kuwait * 1960 Middle East
Libya 1962 Africa
Nigeria 1971 Africa
Qatar 1961 Middle East
Saudi Arabia * 1960 Middle East
United Arab Emirates 1967 Middle East
Venezuela* 1960 South America
Countries in blue are the members countries
Ecuador and Gabon were early members of OPEC, but Ecuador withdrew on December 31, 1992 because it was unwilling or unable to pay a $2 million membership fee and felt that it needed to produce more oil than it was allowed to under the OPEC quota, although it rejoined in October 2007
OPEC’S ObjectivesThe organization’s principal objectives are:
To co-ordinate and unify the petroleum policies of the Member Countries and to determine the best means for safeguarding their individual and collective interests
To seek ways and means of ensuring the stabilization of prices in international oil markets, with a view to eliminating harmful and unnecessary fluctuations
To provide an efficient economic and regular supply of petroleum to consuming nations and a fair return on capital to those investing in the petroleum industry.
OPEC Statute & Membership
Any country with a substantial net export of crude petroleum,
Which has fundamentally similar interests to those of Member Countries, may become a Full Member of the Organization,
If accepted by a majority of three-fourths of Full Members, including the concurring votes of all Founder Members
OPEC functions
Cartel enforcement problem:
overproduction and price cheating by members.The methods available to engage in such cheating
Extending credit longer then the standard 30 day period
Selling high grade oil at the price of low grade oil. Crediting for the
transportation cost.
MORE ON OPEC… The OPEC Conference: The Conference generally meets twice a year, in
March and September, and in extraordinary sessions whenever required setting oil price and quotas for each country and the determination of the appropriate ways and means of its implementation.
The Heads of Delegation : The Ministers of Oil, Mines and Energy of Member Countries.
Headquarters : Vienna, Austria
Official language : English
President : Rostam Ghasemi
Secretary general : Abdallah el-Badri
Currency : USD per barrel
Rivalry between two groups within OPEC Hawks-Countries having lower production ask for higher prices to
get maximum revenue.(Iran and Iraq)
Doves- Countries having Higher output can set lower prices to achieve economies of scale and make sure that the demand of oil is maintained in the market and people do not switch to substitutes(Saudi Arabia, Kuwait, United Arab Emirates)
INDIA AND OPEC In 2008 OPEC rejected India’s call for a price band
OPEC doesn’t have uniform pricing policy
India having high current account deficit as it imports 70% of oil
India-Iran payment issue
Non- OPEC Countries▪ Seven of the world's fifteen largest oil producers are outside of OPEC
and one of the major producer is Russia
▪ The former Soviet Union, i.e., the CIS countries form one of the largest groups of oil and gas producing countries outside OPEC
▪ The countries produce about 10 per cent of the world's oil and about 30 per cent of the gas
▪ Some of the world's biggest oil and gas fields are situated in Russia, especially in Siberia
CURRENT SENARIOTotal World Output of Crude oil in 2010 was 69.7 million barrels per
day
OPEC ‘s output was 29.2 million barrels per day which is 41.8% of World output.
OPEC crude oil reserves are sufficient to last more than 112 years.
CHALLENGES FACEDUncertainty in Global Demand
Structural shift in demand from developed world to developing world.
Non-OPEC oil-producing nations (Russia , Norway, Canada, Mexico etc.)often increase production when OPEC cuts it.
Russia overtook Saudi Arabia as the world’s biggest crude supplier in 2009.
OPEC’s share of production has gone down from around 51% in the mid-1970s to just over 40% now.
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