Readers Question: The Oil Petroleum and Exporting Countries (OPEC) comprise the main oil procedures in the world. With the aid of diagrams show how OPEC is able to fix the price of oil on the world markets and comment on its recent activity in this area. Suggest what would happen if OPEC kept increasing prices rapidly over time.
OPEC comprise over 50% of the world’s oil suppliers. Therefore, if they restrict the supply of oil it will have a significant impact on increasing price. (Diagram will be a simple supply and demand, with supply shifting to the left. Don’t forget demand for oil is quite inelastic, so a fall in supply has a big effect on price. Note this diagram shows an elastic demand, but for oil, it should be steeper and more inelastic
Graph of fall in Supply of Oil
Therefore, if prices are falling below their target they will try to set quotas and restrict supply.
Recent OPEC activity
- I believe the recent rise in the price of oil is not really due to OPEC it is due to:
- Increased Demand (especially from China)
- Falling Supply in Iraq
- Falling Supply in non-OPEC countries.
- Speculation about future of Iran and the Middle East politics
- The fall in the dollar. Note – measure in Yen, the fall in the price of oil is much less severe. The oil price’s fall is exaggerated because of the weakness of the dollar
What Happens if Oil Prices continue to rise?
- There is an increased incentive to increase supply in areas where it is more expensive to extract oil. E.g. the Antarctic. – could even cause friction as countries race for the right to extract from remote areas.
- Increases the attractiveness of alternative fuels such as biofuels and solar panels.
- Increases Demand for alternative forms of cycling (well maybe pretty insignificant)
- Depends on whether the rise is short term or long term.
- OPEC may not want the price to rise too much because it will lead to higher supply in non-OPEC countries.
OPEC in the 1970s
In the 1970s, the oil price was much lower. As a result, fewer countries produced oil, giving the Middle-Eastern oil producers more market power. This enabled a few countries to form a cartel, restrict output and price nearly tripled overnight.