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OPEC-A case of cartel

SUBMITTED BY, SHRI NIDHI 17136

SOURAV PATTANAIK 17137

SUMAN KUMAR 17138

SUNIDHI SRIVASTAV 17139

TARUN TALREJA 17140


OPEC-A case of cartel

Table of Contents
I. SCENARIO ............................................................................................................................ 1
II. OLIGOPOLY ......................................................................................................................... 1
CHARACTERISTIC OF OLIGOPOLISTIC MARKET: -
III. CAREL ................................................................................................................................... 2
REASONS OF CARTEL
IV. OPEC ..................................................................................................................................... 3
ADVANTAGES OF OPEC-
OPEC AS AN OLIGOPOLY-
OPEC AS A MONOPOLY-
OPEC AS A CARTEL-
V. NON-OPEC COUNTRIES .................................................................................................. 6
VI. IMPACT OF OIL PRICES ON INDIAN ECONOMY ...................................................... 8
VII. IMPACT OF OIL PRICES ON THE GLOBAL
ECONOMY ........................................................................................................................... 8
VIII. CONCLUSION ..................................................................................................................... 9
IX. Bibliography ......................................................................................................................... 10
OPEC-A case of cartel

SCENARIO
Nations that are produce a large portion of the world's oil have framed a cartel called the organization of
petrol exporting countries OPEC. As initially formed in 1960, OPEC incorporates Iran, Iraq, Kuwait, Saudi
Arabia, and when is Julia. By 1973, eight different countries had joined. These nations control around three
fourth of the world’s oil reserves. Like any cartel, OPEC tries to raise the price of its items through a
planned reduction in quantity produced. OPEC tries to set creation levels for each of the member countries.

As of late, the Members have kept on meeting routinely, yet the cartel has been less effective at coming to,
upholding understanding, and enforcing agreement. In spite of the fact that the price of gold rose altogether
in 2007 and 2008, the essential driver was expanded request on the planet oil showcase, in part of a blasting
Chinese economy, as opposed to limited supply. While this resistance among OPEC countries as decreases
benefits of the oil – delivering countries underneath what they may have been, it has profited buyers around
the globe.

OLIGOPOLY
Oligopoly is a sort of market where there is a small group seller and there are numerous purchasers. In
oligopoly, showcase there is less rivalry since sellers are less in no for these reason dealers can offer any sort
of price they need. Oligopoly market structure is not the same as others. By amusement hypothesis we can
come to realize that the choice of one firm may influences the other firm, oligopolistic should remember the
response of their rivals.

Oligopoly showcase is a place where a gathering of same product dealer make a union. Rivalry in oligopoly
market can give result, which is not quite the same as the others. Largely they can execute numerous
prohibitive strategies with a specific end goal to build the price similarly as done in monopoly market.
Whenever there is a secrete conspiracy between companies to deceive others they go into competition

Companies regularly make mystery bargains between them with the goal that the competition between them
would stay low, in light of the fact that on the off chance that they make any sort of R&D on those items.
They could accomplish the most elevated position however this is exorbitant so to dodge this they take after
the way of agreement. In intrigue, no organization influences any sort of lawful arrangement all the
arrangement to happen verbally one organization sets the price and others tail them.

Then again, the competition between oligopoly market can be wild where everyone needs to increase
significant piece of the overall market and subsequently they would offer the ware however much low price
as could reasonably be expected and would produce however much as could be expected

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CHARACTERISTIC OF OLIGOPOLISTIC MARKET: -


1. Maximizes profit—in oligopoly market the seller wants to maximize its profit as much as possible.
2. Ability to set prices—in oligopoly market seller can set price according to his will, as the
competition in this market is low.
3. Entry & Exit—In this market entry for the new comers is very tough because of the govt. restriction
such as licence, many kind of clearance etc. many times govt. make some law which is favourable
for the existing company but for the survival of new company is quite tough.
4. No. of firms—as the no of firms in this competition is less so they can set the price according to their
mutual understanding.

CARTEL
Cartel is the union of gathering of companies who produces their item freely and offer them their principle
point is to expand the benefit by any methods it can be settling the price and restricting the supply of their
produced goods. The for the most part controls the offering price of the merchandise and controls the price
of the crude materials they purchase for their production. A solitary firm who satisfy all the normal for cartel
cannot be a cartel. Cartel are largely oligopoly where there is less number of dealer and numerous
purchasers When all is said in done cartel, assertions are temperamental because they cheat their individuals
by offering underneath the concurred price or deliver more than the concurred generation standard. Thus,
numerous cartels neglected to set price for quite a while.

For instance: OPEC, as this recommends it is a union of many states so it is not limited to a specific
government laws so the individual from OPEC all the time don't look after the law set by OPEC. They at
some point offer oil underneath the concurred price or at some point create more than the normal day-by-day
production quota.

Cartels have a negative effect for consumers because their existence results in higher prices and restricted
supply. The Organization for Economic Cooperation and Development (OECD) has made the detection and
prosecution of cartels one of its priority policy objectives. In so doing, it has identified four major categories
that define how cartels conduct themselves: price fixing, output restrictions, market allocation and bid rigging
(the submission of collusive tenders). 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. Some
cartels are formed to influence the price of legally traded goods and services, while others exist in illegal
industries, such as drugs. In the United States, virtually all cartels, regardless of their line of business, are
illegal by virtue of American anti-trust laws.

REASONS OF CARTEL
 Cartel members are able to behave like a monopolist by working together

 To increase market power and Level the output of each member

 Price of each member will charge

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 Demand curve of each firm will face horizontal at the market price

 Same as monopolist the cartel members choose their Combined output at the level

 Combined marginal revenue equals combined marginal price

 The cartel price is determined by market demand curve at the level of output chosen by the cartel

OPEC
Organizations of the oil exporting countries is an Intergovernmental Organization of 14 countries as of May
2017. It was established in 1960 in Baghdad. Its headquarter is arranged in Vienna, Austria, 1965. It
comprises of five member’s nation (Iraq, Iran, Kuwait, Saudi Arabia, Venezuela) its main goal is to arrange
and bring together the oil approaches of its member nations and guarantee the oil strategies of its member
nations and guarantee the adjustment of oil markets, keeping in mind the end goal to secure an effective,
monetary and standard supply of oil to customers, a relentless wage to makers, and a reasonable profit for
capital for those putting resources into the oil business. It additionally gives data about worldwide oil
market. Six Middle Eastern nations that encompass the oil-rich Persian Gulf secured two-third of OPEC's oil
creation and stores. It assumes an unmistakable part on the planet oil market and worldwide relations. The
development of OPEC brought transformation towards national sway over regular assets. It will dynamic
when there will any war or common issue prompt expanded intrusions in supply. By taking a case, in the
1980's, OPEC begun setting generation focuses for its part's countries; and for the most part when the
creation targets are lessened, oil prices increment, most as of late from the association's 2008 and 2016
choices to him an oversupply. Worldwide exchange is occasionally tested and affected by OPEC by the
repeating allurement for singular OPEC nations to surpass generation roofs and seek after clashing self-
interests.

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ADVANTAGES OF OPEC-
1. Unifies different countries
Objective- to join various countries with similar interest of petroleum industry. Established to unite against
Western oil companies who were lowering oil prices. It produced 45% of total crude oil production in
whole world. This means that any actions that are going to be taken by this particular organization are
going to be felt in the entire world

2. Regulates oil prices


OPEC member nations produce high amounts of crude oil it has strong effect on the overall oil market
and its price. The member nations usually meet each year and make important decisions regarding oil
production, current oil market conditions, and demand and supply issues to regulate oil prices.

3. Enables economic growth


OPEC ensures the economic advancement of poorer countries and environmental harmony. The unified
policies enforced across the member nations makes certain that people who invest in the oil industry are
going to have fair returns on their respective investments. Which mean no country is going to be left behind
concerning economic advancement.

4. Ensures market stability


OPEC is also committed to ensuring market stability through secure supply at reasonable prices. It helps
in maintaining an adequate amount of spare oil that is used for balancing the market as well as keeping it
sufficiently supplied.

Since OPEC can easily flood the oil market using very cheap petroleum, it could lead to huge losses for
Western oil firms.

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They mainly focused on stable prices, secure supply and sufficient investment. Stable prices allow consumers
and producers to meet today’s needs. Secure supply prevents disruptions that can send prices spiraling and
stall economic growth. In addition, sufficient investment ensures that we will be able to provide the necessary
oil to meet the growing energy requirement of the future. The statistics of OPEC share market of world crude
oil reserves. (Until 2015 updated).

The trade agreement made between the OPEC countries broke down or collapsed because of the following
reasons:

1) OPEC was less successful in reaching out and implementing trade agreements
2) Excess capacity of oil production was there in the industry due to decrease in demand and
this led to the fall in the prices of oil
3) The organisation had failed to implement effective cooperation among the member nations
4) There were a few conflicts among the member countries regarding the production and the
pricing of oil, i.e., if there were excess production, it would lead to fall in price of oil and
reduction in profits.
5) The profits of the member nations through the sale of oil was reduced due to lack of
cooperation
6) Initially, the cartel members had agreed on profit maximisation jointly, but later on they
focussed on profit distribution
7) As the cartel members decide on the price of the products, it is difficult to change the price of
the product even if the market conditions demands for changing the price
8) Unless all the members of the cartel decide to fully cooperate with each other without any
external influences, it may well lead to the breakdown of the cartel
9) More number of members present in the cartel makes it difficult for the members to survive
for long because of the distrust formed and this can lead to breakdown

OPEC experience tells that:


(i) It is highly profitable for competitive firms to form a cartel and behave like monopoly in the short run by
restricting output given inelastic demand curve.
(ii) In the long run however, it becomes increasingly difficult to retain the monopoly power and firms have
to choose between short run and lone run profits.
(iii) Also in the end, it is not possible to continue output restrictions due to loss in revenues and threat of
breaking down of cartel.

OPEC AS AN OLIGOPOLY-

For several reasons, OPEC can be depicted as an Oligopoly. It gives a circumstance of Oligopoly where more
than two firms are dominating. As the organizations under OPEC agree among themselves on the level of
yield, it hones price inflexibility. Moreover, through the understanding of a specific measure of supply, the
price of oil is influenced through it. The merchandise gave by the organizations are homogenous. OPEC's
primary point is to guarantee effective and reasonable supply of oil to nations and to guarantee steady and
reasonable prices for the makers of oil. In oligopolistic markets, the organizations go for augmenting benefits.
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OPEC AS A MONOPOLY-

OPEC can likewise be depicted as a Monopoly as there are numerous hindrances to entry in the market.
Another purpose behind portraying it as a Monopoly is the fact that OPEC control more than 0% of the supply
of crude oil in the world market.

OPEC AS A CARTEL-

Cartel can be portrayed as an affiliation or association of different contender firms, all of which consolidate
to shape a solitary monopolistic market.

OPEC expands the prices of oil and builds the benefits of the organizations when every one of the associations
under OPEC choose to restrain the oil production. Nevertheless, these organizations, since they have a high
rate of profits, would tend to swindle. What's more, the organizations can procure more profits by delivering
more oil.

Typically, cartels do not keep going for a long stretch because of the inclinations of the organizations to cheat
because of acquiring more benefits.

(i) OPEC activity of confining its yield caused increment in supply of oil by non-OPEC countries due to
increment in price. This made move in supply bend of these nations the privilege. The share of OPEC
declined. By 1985, it decreased to 30 percent. The price fell and with a specific end goal to keep up
price OPEC needed to additionally diminish its yield.
(ii) Secondly, the long demand curve turns out to be more versatile when contrasted with the short-run
request bend in above outline. This is because individuals need to spend their cash more on protection
of oil-warmed structures, practical diesel motors and so forth. In the end, more cash was redirected
for research to grow more oil proficient and elective advances, for example, sunlight based innovation
and so on. All these brought about fall of OPEC sends out. Creation constraints kept on keeping up
the price at abnormal state.
(iii) Because of substantial reduction in yield to keep up price, OPEC began encountering fall in income.

Disturbed by this development member started violating their quotas and had to meet frequently to settle
things. Ultimately, OPEC had to eliminate quotas by 1985. The price fluctuated before settling clown in the
1990s.

NON-OPEC COUNTRIES
In all the non-OPEC producers, just 30 have huge creation i.e. more than 100 thousand barrels for each day.
It is an analysis of the EIA information. Those main 30 non-OPEC makers and each of the 12 OPEC
makers. Of these 42 biggest oil producing nations on the planet, speaking to about 98% of all oil generation
thirty have either leveled or passed their pinnacles. Rather than OPEC oil creation, which is liable to central
coordination, non-OPEC makers will settle on autonomous choices about oil generation. Rather than OPEC,
where oil production is for the most part in the hands of national oil organizations, international or investor
possessed oil organizations perform the majority of the generation exercises in non-OPEC nations. IOCs
look for principally to expand investor esteem, settle on speculation choices in view of financial
components. While a few NOCs work in a comparative way as IOCs, a large portion of them have additional
objectives, for example, giving as providing employment, or revenue, infrastructure that influence their
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nation in a more extensive sense. Accordingly, non-OPEC speculation, along these lines future supply
ability has a tendency to react all the more promptly to changes entirely in economic situations.

Producers in non-OPEC nations largely viewed as price takers that seems to be; by managing production,
they react to market prices instead of endeavor to impact prices. As result, non-OPEC makers tend to deliver
at or close full limit thus have minimal extra limit. Different things being equivalent, bring down levels of
non-OPEC supply tend to put upward weight on prices by diminishing aggregate worldwide supply and
expanding the approach OPEC. The more noteworthy the approach OPEC, the more prominent it cannot
avoid being it likely capacity to impact prices. Non-OPEC producers frequently drove in growing new
production technology. While this has in some cases brought about improvement of higher-price supplies
prices regularly, fall as technology propels which can eventually put descending weight on price.
Notwithstanding non-OPEC crude oil, natural gas production gives extra supplies of fluids that are called
natural gas liquids. Rising flammable gas production as of late brought about generous increments in NGLs.
This added to add up to world liquids supply moderated price increments. While increments of non-OPEC
supply contribute lower oil prices of non-OPEC production diminishing worldwide oil supply and will
prompt higher oil prices. Spontaneous blackouts can persevere for long stretches. The vulnerability about
when the production will come back to business sectors additionally adds to price volatility. Oil prices are
not just influenced by real non-OPEC creation additionally by changes in assumptions about future non-
OPEC supply. From 2005 to 2008, last production reports for non-OPEC generation were reliably lower
than forecast expectations. This decrease in foreseen production constrained world to surprisingly depend all
the more vigorously on OPEC crude, drawing down their levels of extra limit. The descending amendments
in desires of non-OPEC creation added to upward weight on oil prices.

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IMPACT OF OIL PRICES ON INDIAN ECONOMY

India is one of the world's fastest developing economy. Around 45% of the commercial energy needs are full
filled from crude oil and natural gas. For this India needs to import around 70% of its needs from the Middle
East nations who are the dynamic individuals from OPEC. What's more, this dependence on the Middle East
nations is probably going to rise because of expanding interest and low gradual addition of domestic oil and
gas reserves. It is likewise expected that the dependence will keep on increasing on the OPEC nations when.

India has spent about $39 billion of every 2005-06 for importing crude oil. While, India has spared Rs.2.14
lakh crore on its oil import in 2016. It is because of the price cut of the crude oil price diving to an 11-year-
low of $37.34 a barrel. It is proposed by the specialists that there is a plausibility of breaking the record levels
in around two day time to recuperate the low level by OPEC.

Change in oil price has coordinate impact of GDP growth of India. Expanding oil price can prompts the
reduction of the GDP growth of India. For this situation, India needs to change its procedure and endeavor to
move their concentration from here and now of vitality prerequisites and estimating to long haul vitality
strategy so the price does not influence the Indian economy badly. For this, the principle challenge is getting
a steady supply alternate energy at affordable price.

As per Economic theory, more organizations working in a specific segment, the higher will be rivalry and
more prominent the profitability benefits. Nevertheless, because of crude oil and gas is it impractical to
discover perfectly competitive market. This is so since oil is gone head to head with national interests and
vitality is perceived as crucial for economic function. Indeed, it is simpler to discover control and direction in
oil division all the more so in the developing countries.

IMPACT OF OIL PRICES ON THE GLOBAL ECONOMY

Oil prices have stayed as an imperative issue of the financial execution comprehensively. On the oil price
expanded prompting an exchange of pay from importing and exporting countries in move as far as
exchange. The course of impact of a given price increments relying upon the offer of the price of oil in the
national income pay. It additionally relies upon degree at which the gas prices ascend to reaction on the oil
prices increment, the higher prices on the types of vitality that contends on the gas power of the economy.
Nevertheless, if there should be an occurrence of power, are produced from oil and gas. Greater the oil price
has been expanded and longer the higher prices are supported, greater the full scale monetary effect. At the
oil, Exporting nation’s price is expanded specifically as genuine national pay through higher fare profit, this
would expect in trades largely because of financial retreat enduring by the exchanging accomplices.

The modification impacts brings about real wage, price and basic rigidities in the economy. Higher oil prices
prompt to inflation increased input prices, and decreasing non-oil request and lower investment in net oil
importing nations. The tax revenues will fall and the budget deficit is expanding because of the rigidities in
the government budget prompting interest rates up. Wages weight with the lessened request that prompt
higher unemployment. An expansion in the oil price changes the balance of exchange between the nations
and the trade rates. The oil Importing nations regularly involvement in adjust of their payments, and putting
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the descending weight on exchange rates. Additionally, imports turn out to be more expensive and exports
less profitable. Without the adjustment in government, monetary policies and national bank the dollar price
tend to ascend as oil creating nations interest for dollar named worldwide save as assets. Notwithstanding,
government strategy will not take out the unfavorable effects portrayed above it can limit them. Quantitative
evaluations the general macroeconomic harm caused by past oil price and picks up from the price crumple to
the economies of oil Importing nations generously.

The development of the economy in the majority of the oil importing nations in the times of the
accompanying climbs of 1973-74 and 1979-80. Likewise, the development in oil Exporting nations gave the
higher oil prices in the past has less in dependably been loss of financial development in Importing nations,
with the goal that net impact has been negative. Global capital market valuations of price and obligation in
the oil importing nations would be re-examined downwards and those in the oil exporting countries
upwards. The reliability of some Importing nations are running in vast current account deficits. There will
likewise be an upward weight on loan fees. Higher the ascent in the oil prices will ascend in the estimation
of the US dollar, a more grounded dollar would raise the price of adjusting the external debt of oil importing
creating nations. As it, increase the effect of higher oil prices in pushing in the oil import charge in any event
temporarily. By the by, past oil stuns incited the obligation management crisis in numerous other creating
nations. The lopsided characteristics in the oil importing nations caused by a lower wage in those developing
nations. India and Indonesia that keep on providing the direct subsidies on the oil items to ensure poor
families in the domestic industry. It has a tendency to develop the worldwide prices by including to the
weight the government expenditure.

CONCLUSION
Despite the fact that OPEC has a wide region to affect the oil cost in the present oil-valuing framework, we
have accentuated that OPEC estimating power is not steady and changes as indicated by oil economic
situations. What's more, affect the oil showcase as they build up their stores and pick up a more noteworthy
piece of the pie. In spite of the fact that the paper's emphasis has been on monetary variables, stretch that
OPEC does not work in a political vacuum. It has been contended somewhere else that evaluating
frameworks in the past mirrored adjust of the energy at those circumstances and this present framework is
no special case. For some, adjust of the political power can affect OPEC conduct. As cutoff points on the
amount Saudi Arabia can build its oil cost in light of the fact that high oil costs can be "harming to their own
advantage in view of the peril to the world economy and to their bigger business involvements and as a
result of the motivating force to outside military weight by troubled consumer governments". There is no
harm in consolidating some of these thoughts into investigation of OPEC estimating power. In any case,
push that the effects of such political elements are not free of the oil market. Thus, forcing oil embargoes is
more attainable when oil costs are low and markets are very much provided. These and different illustrations
recommend that in spite of the fact that oil is a political commodity, it is as yet a commodity and like any
other, over the long run its price reacts to a great extent economic forces.

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Bibliography
https://en.wikipedia.org/wiki/OPEC

https://en.wikipedia.org/wiki/Oligopoly

https://en.wikipedia.org/wiki/Cartel

http://www.opec.org/opec_web/en/

http://www.business-standard.com/article/economy-policy/india-to-save-rs-2-lakh-cr-on-crude-imports-as-
oil-hits-11-year-low-115120900956_1.html

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