Oil Cartels Whydid I choose this topic?The primary reason I selected this topic is because it interests meto know more and more about oil exporting countries in the world. Since thistopic interests me, I thought researching issues related to oil cartels wouldbe stimulating. Specifically, I wanted to learn about how oil cartels like OPECwhich is the largest oil cartel in the world is operating, and what steps arebeing taken to control oil production.
I thought it is quite easy to gather information about oil cartelsand there is many websites government and non-government websites which we canfind the related data to this topic. Origin & natureA cartel is an organization created from a formal agreement betweena group of producers of a good or service to regulate supply in an effort toregulate or manipulate prices. In other words, a cartel is a collection ofotherwise independent businesses or countries that act together as if they werea single producer and thus are able to fix prices for the goods they produceand the services they render without competition.The term cartel, can be defined as “a group of parties,factions, or nations united in a common cause; a bloc” as well as “acombination of independent business organizations formed to regulateproduction, pricing, and marketing of goods by the members.
” History showsmany examples of successful and not so successful cartels – they have beenaround for hundreds of years. The steel industry and diamond industries aresome examples. However, one of the most powerful modern cartels is theOrganization of the Petroleum Exporting Countries more commonly referred to asOPEC.
Oil and gas are considered among the world’s most importantresources. The oil and gas industry plays a critical role in driving the globaleconomy. Petroleum itself is used for numerous products, in addition to servingas the world’s primary fuel source. The processes and systems involved in producingand distributing oil and gas are highly complex, capital-intensive and requirestate-of-the-art technology. This issue of the Business & EconomicsResearch Advisor provides a comprehensive overview and guide to resources onthis vast and important industry.Prior to the rise of OPEC, the oil industry was dominated by thelarge oil companies often known as the Seven Sisters that possessed thetechnology and skills for exploration and production that the countries lacked.OPEC was born, to some extent, to reduce the influence the oil multinationals.
As Skeet suggests in his book, “The governments of the oilproducing countries in varying degree, but in all cases with increasing fervor,viewed the systems under which the companies operated as an outdated example ofimperialist domination.” In fact, one of the first things written in the1st OPEC Conference Resolution in Baghdad states, “Members can no longerremain indifferent to the attitude heretofore adopted by the Oil Companies ineffecting price modifications.” Literature Review1) Theinterest in oil market modeling grew rapidly right after the Arab embargo andthe quadrupling of the oil price in 1973. Stephen Powel (1990) mentions that bythe late seventies there were more than thirty publicly available oil marketmodels. Since then the oil market modeling efforts have slowed downsignificantly. In this part of the review, we briefly present the more popularoil market models that were mentioned in surveys and studies conducted to dateand then elaborate more on the optimization models as they are more related toour proposed model.
2) In1990, Stephen Powel noted that most existing oil market models are eitherinter-temporal optimization or behavioral simulation and listed three models asinter-temporal optimization models including ETAMACRO (Manne, 1981), Salant(1981) known as Salant-ICF, and Marshalla and Nesbitt (1981) known as DFI-CEC.Eight years later, Baldwin and Prosser (1998) conducted a similar survey andfollowed the same classification as that of Powel (1990) and believed that mostof the oil market models belong to either recursive simulation models orinter-temporal optimization models.3) In1998, Mabro surveyed and criticized the literature on OPEC behavior for theperiod 1960-1998 and grouped it into six categories including: history,previous literature surveys, economic modeling, political economy, policyproposals, and trade journals reporting. More surveys but rather shorter onesare included as part of the literature reviews in studies conducted by Moran(1982), Griffin (1985), Dahl and Yucel (1991), Al-Yousef (1998), Alhajji andHuettner (2000 a, b and c), Ramcharran (2001 and 2002), Smith (2005) andKaufmann et al (2006).4) Gately(1984), Griffin and Teece (1982), Griffin (1985), Bockem (2004), and Smith(2005) where Gatley noted “it remains an open question how best to design amodel of the behavior of OPEC”. Twenty years later, Bockem still noted, “thereexists neither an accepted theoretical model, nor an econometric model of thismarket. Moreover, there is a surprising dispute between economic theorists andenergy economists whether OPEC can be regarded as a cartel or not.” Similarly,Smith concluded that contributions “remain largely inconclusive regarding thebehavior and impact of OPEC, despite the best efforts of those authors.
“5) In2005, Smith briefly surveyed and criticized the literature on OPEC behavior andapplied an econometric production-based approach to examine alternativehypothesis regarding the world oil market. He conducted two analyses: priceanalysis (assuming that market price greater than marginal cost indicatesmarket power) and production decision analysis (testing responses to exogenousshocks for evidence of interdependence among firms). In the former case, thenull hypothesis of perfect competition (price equals marginal cost) was testedagainst the alternative of a perfect cartel. In the latter case, the studytested four null hypotheses relating to OPEC and Saudi Arabia competitiveness. Historyof the Oil IndustryThe use of oil and gas has a long and fascinating history spanningthousands of years. The development of oil and gas has evolved over time andits numerous uses have also expanded and become an integral part of today’sglobal economy.
The use of oil eventually replaced coal as the world’s primarysource of industrial power in the early twentieth century. Just as oil and gasdrives today’s world economy, the control and availability of oil and gasplayed a major role in both World Wars and still remains the critical fuelsource that powers industry and transportation. This section provides anoverview of the history of the oil and gas industry, looking at the use of oiland gas in ancient times, as well as the early days of the modern oil and gas industry.Oiland gas have played an important role throughout world history.
Ancientcultures used crude oil as a substance for binding materials and as a sealantfor waterproofing various surfaces. Five thousand years ago, the Sumerians usedasphalt to inlay mosaics in walls and floors. Mesopotamians used bitumen toline water canals, seal joints in wooden boats and to build roads.
By 1500 B.C., techniques for lighting consisted of a censer or firepan filled with oil made of a certain volatility so that it would burn slowlyand not cause uncontrollable flames or explosions. Over time, the wick oil lampreplaced the fire pan using a flammable oil similar to today’s kerosenelanterns.