IPE WEEK 13

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IPE - WEEK 13

• IPE of Oil Wealth and Power Shifts
• Berkeley City College

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(No Transcript)
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The Organization of the Petroleum Exporting
Countries (OPEC)

• Form of organization Cartel
• Values
• Price stability and higher revenues
• National security and political power
• Created in 1960 in response to the dominance of
  foreign MNC seven sisters
• HQ in Vienna
• Members 5 8
• Prisoners dilemma
• Collective interest cut production to keep
  prices high
• Individual members interest increase production
  beyond quota, defect, and raise economic profits

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OPEC Plays the Oil Card

• Oil Shocks of 1970s
• 1973 triggered by the Arab oil embargo
• from 2.90 to 11.65 overnight
• 1978 the outbreak of the Iranian Revolution in
  1979
• OPECs power is economic and political
• Weak response of importing nations
• Bilateral agreements between exporters and
  importers
• Leading role of Saudi Arabia
• Consequences
• Need for global financial markets to recycle of
  petrodollars
• Creation of Strategic Petroleum Reserve, 1973 (US)

World history records few equivalent
redistributions of wealth and power in such a
short period of time R. Gilpin
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Iran-Iraq War, 1980-88

• Curtailed supply to the world markets - 10
  decline
• Surprising inability of OPEC to control prices
• Collapse of oil price Effect of supply
  diversification and energy efficiency programs
• Increased production and investment of non-OPEC
  nations
• Mexico
• US
• Norway
• Britain
• Investment in oil conservation and fuel-efficient
  facilities
• Tax incentives
• 55mph US highway speed limit
• Diminishing price-setting ability of OPEC
• Risk mitigation Spot vs. forward market
• Long-term contract
• Futures markets

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The Gulf War,1990

• Political causes of Iraqs invasion in Kuwait
• Kuwaits defection
• Neutral zone disputes
• Economic causes
• Operation Desert Storm allied military response

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Rise of Russia

• Russia vs. Saudi Arabia as a hegemonic state in
  the oil regime
• Russia 5 of oil reserves
• Saudis 25 of oil reserves
• Russias production
• Grew to 12.5 million barrels per day by 1988
• Peaked and collapsed to 7.1 million barrels per
  day by 1995/96
• Suddenly rebounded in 1999
• Today it is back to 75 to 80 of peak
• Growth is not sustainable
• Exports are now at capacity limits
• Prospects
• Political importance need for oil revenues to
  raise standard of living
• FDI
• New pipelines

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World Primary Energy Demand
Oil
Natural gas
Coal
Other renewables
Nuclear power
Hydro power
Source IEA, WEO 2004, BP
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Rising World Oil Demand

• In 2000, 75 mln barrels per day
• Today, 85 mbpd
• 1992 through 2004 demand growth was 18 to 20
  mbpd
• Uses of Oil
• 70 transportation fuel. No substitutes
• Cars, trucks, buses, motorcycles
• Planes
• Trains
• Vessels
• Remaining 30 oil use is plastics, asphalt
• Oil is a scarce resource
• Short-run Inelastic demand or not very
  responsive to price changes
• Long-run elastic

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Rising Oil Prices (Aug 27th, 2005)
gt65
BP Statistical Review 2005
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Source EIA
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Source EIA
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Top World Oil Producers, 2004(OPEC members in
italics)
Source EIA
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Top World Oil Net Exporters, 2004(OPEC members
in italics)
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Oil Import Dependence in Net Importing Regions ()
Source IEA, WEO 2004
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Oil Price Volatility

• Control of prices limited by OPEC
• Production costs vary
• Middle East 2 a barrel
• US 10
• Russia 14
• Volatility thrives with no long-term guidelines
• We will be more dependent on unstable countries
  for oil and gas
• Investorsneed stability and predictability.
  price volatility
• is not conducive to either stability or
  predictability.
• H.E. Ali Al-Naimi, Minister of Petroleum, Saudi
  Arabia, World Petroleum Congress, Sept 27, 2005

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On the one handMarch 1999
On the other October 2003
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World Nominal Oil Price Chronology, 1970-2005
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Importance of IPE of Oil

• Oil is power and wealth
• Tension between states and markets state
  collective action influence market outcomes and
  vice versa
• Oil is truly an IPE issue price volatility leads
  to political and social changes