3.  Give an outline of OPEC and the global petroleum
industry.
 Explain oil price shock, supply and demand in the oil
industry, and a harsh winter’s adverse effects
on supply.
 Reveal OPEC’s monopolistic stranglehold on the
market.
 Show how oil prices can and have been changed in
the short and long run.
 Show the change in the US oil industry from the
1970s to the present.
 Provide some insight as to possible alternative
energy sources to oil.

4.  The Organization of the Petroleum Exporting
Countries (OPEC) is a voluntary inter-
governmental organization that coordinates and
unifies the petroleum policies of its member
countries.
 “Meets to promote stability and prosperity in the
petroleum market, by unifying their petroleum
policies.”

5. % world’s
crude oil
produced
% crude oil
reserves
owned
Lifetime of
reserves at
current prod.
rate
OPEC
member
countries
40% 76.6% 80 years
Non-OPEC
countries
58%
Less than
25%
15 years
 OPEC can have a strong influence on the oil market.

7.  An oil price shock is when the supply of oil
decreases and the price of oil increases at the
same time.
 Oil shock is rooted in the fact that: gas as a
normal commodity is price inelastic.
 As price changes, the demand for gas changes
very little.
 Importing countries and consumers have less
free money to spend on other things because of
the higher price of gas during an oil shock.

8.  Fuel demands of developing countries is
increasing:
 Worldwide demand for oil in 1998: 74 million
barrels/day (bbl/d)
 Worldwide demand for oil in 1999: 75.3 million
bbl/d (up 1.7%)
 While demand was increasing, supply of oil was
decreasing by 2.7% in the fourth quarter of 1999.
 With winter on the way, demand will increase
even more.

9.  While the US has invested in oil pipelines to
reduce costs and delay, most petroleum is
transported by other means:
 Oil tankers, semi-trucks, and railroad.
 In the winter months, delay, equipment failure,
and accidents are inevitable.
 Rather than absorbing these costs, oil
companies pass it along to consumers in the form
of higher prices at the pump.

10.  Problems concern overseas transport.
 Problems at tanker ports.
 Problems on railroads and highways.
 These costs account for much of the higher
petroleum prices encountered during the winter
months.

11. Quantity
Price
1. Initial Low Supply
2. Typical increase
in Demand
3. 800,000 bbl/d –
increase in supply
4. Winter – increase
in Demand
5. Winter – decrease
in supply
12
3
4 5
Q1 Q2
P1
P2
New price and
quantity

12.  While OPEC may not consider itself a
monopoly, a study of the world oil price
chronology from 1970-1999 indicates otherwise.
 Spikes in oil prices coincide with political unrest
in OPEC nations:
 In 1990, oil prices rose 19 dollars/barrel
(d/bbl) during Operation Desert Storm.
 OPEC also uses price discrimination:
 In 2000, gas prices were on average $1/liter in
Japan and Europe, while in the US they were on
average $0.42/liter.

13.  From here on out, the economics of the world oil
industry will be evaluated assuming OPEC is a
monopoly.
 As a monopoly, OPEC can choose its price and
quantity while facing only a declining market
demand curve for oil.

14.  Since a monopolist, having control of the
market, can choose its supply at any price,
increasing its output results in a lower marginal
revenue, and thus a lower market demand price.
 OPEC takes advantage of its power as a
monopoly to adjust the world oil price.
 On September 10, 2000, OPEC agreed to raise
production quotas by 800,000 bbl/d in an attempt
to lower crude oil prices.
Is this enough though?

15. Is this enough though?
 1997-1998: record low gas prices coincide with a
2.5 million bbl/d increase.
 1982: a 6 d/bbl decrease follows a 2.5 million
bbl/d increase.
 But these were increases of 2.5 million bbl/d,
not 800,000.
 In fact, total world consumption increased by
800,000 bbl/d from 1997-1998.
 800,000 barrels supplied by OPEC is enough
only to cover demand.

16.  In a short run competitive market, improvement
in technology increases supply, decreases ATC,
and decreases price.
 In the long run, decreased ATC is good.
 Long run supply is ideally constant with no new
technology (minimum efficient scale = constant
returns to scale).

17.  With the introduction of new technology, ATC
would shift down.
 This lower min. efficient scale allows more firms
to enter the oil industry, and creates more
competition for OPEC and more stability in the
price of oil.

18.  With the breakup of Standard Oil, US petroleum
firms were competitive, but drastically smaller.
 Proved unfortunate during the Oil Crisis of the
1970s, as our increased dependency on foreign oil
left us vulnerable to the whims of the world market.
 Our oil companies, while large, were still too
small to exert enough influence to keep oil prices
down.

19.  Since that time, consolidation has had more
freedom.
 Ex. Exxon/Mobil merger, Marathon/Ashland
merger, Royal Dutch-Shell/Texaco merger,
BP/Amoco Merger.
 Brings stability to oil prices and increased
efficiency within firms (by creating economies of
scale).
 Companies also purchasing more foreign fields
and offshore rigs.
 Ex. Marathon Oil.

20.  In the 1970s: US had smaller, independent
firms with no power.
 “Petrodollars” used in massive spending sprees
by rich foreign oil producing nations.
 Today: US oil industry is stronger and more
united, providing a better front against OPEC.
 The global economy is larger and more efficient.
 “Petrodollars” no longer have the spending
power they once did; foreign nations now aim at
paying off debts.

21.  Petroleum suppliers claim the present supply of
oil will last for many years to come…
 But what happens after those years are up?
 Possible alternative technologies:
 Coal gasification and liquefaction
 Shale-oil recovery
 Organic wastes
 Synthetic oils
 Renewable resources such as solar and wind
power

22.  Investors are reluctant to finance new
technologies because oil is still present in
substantial quantities
 Synthetic oil is one of the most hopeful
prospects, having gained popularity since the
1970s
 Developed chemically from substances such as
organic esters
 Not as cheap as natural oil, but has its benefits:
 Little strain placed on environment
 Better for engines and in extreme
temperatures

23. Alternate technologies are absent from the short
run, and are currently in few peoples’ long run
agendas

24. Considering an approaching winter and the
problems that ensue, a continuing rise in
worldwide demand for oil, and the gargantuan
number of barrels produced per day, OPEC’s
release of a measly 800,000 bbl/d will do little to
help current oil prices. However, with the trend in
consolidation of US oil companies, the US oil
industry may soon offer OPEC enough
competition where we won’t have to rely on them
to decrease oil prices.