Opec Case Study

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BE – Group Assignment
Group No – 15 Centre – Thane OPEC Case Study Course - IIFT EPGDIB ( Vsat) 2009

Participants :1) Dinesh Jhamnani 3) Neelesh Naik 5) Koshy John 2) Anup Nair 4) Prashant Lohade 6) Smita Meshram

What is OPEC? The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization of 12 oil-exporting developing nations that coordinates and unifies the petroleum policies of its Member Countries. It was founded at a meeting held on 10–14 September 1960 in Baghdad, Iraq, by five oil-producing countries: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. (These countries are referred to as the Founder Members of the Organization) This unified front was created primarily in response to the efforts of Western oil companies to drive oil prices down. The original members of OPEC included Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. OPEC has since expanded to include seven more countries (Algeria, Angola, Indonesia, Libya, Nigeria, Qatar, and United Arab Emirates) making a total membership of 12. The first move towards the establishment of the Organization of the Petroleum Exporting Countries (OPEC) took place in 1949, when Venezuela approached Iran, Iraq, Kuwait and Saudi Arabia and suggested that they exchange views and explore avenues for regular and closer communications between them. The need for closer cooperation became more apparent when, in 1959, the oil companies unilaterally reduced the posted price for Venezuelan crude by 5¢ and 25¢ per barrel and that for the Middle East by 18¢/b. OPEC’s principal aims are the coordination and unification of petroleum policies of Member Countries and the determination of the best means for safeguarding their interests, individually and collectively. The Organization also seeks to devise ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations, due regard being given at all times to the interests of the producing nations and to the necessity of securing a steady income for them; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on their capital to those investing in the petroleum industry. OPEC MEMBER NATIONS

Oil supply scenario before 1960

After World War II, all middle east oil business was controlled by Anglo-Iranian Oil Company (later British Petroleum now BP), Compagnie Francaise de Petrole (now Total), Royal Dutch/Shell, Standard Oil of New Jersey (now Exxon) and Socony- Vacuum (later Mobil, now part of Exxon), Gulf, Standard Oil of California (now Chevron) Texaco (now part of Chevron). Together there were eight companies, but they were called “Seven Sisters” depending who was doing the counting. What lead to formation of OPEC? In 1959 the U.S. government established a Mandatory Oil Import Quota Program (MOIP) restricting the amount of crude oil (and refined products) that could be imported into the United States. The MOIP gave preferential treatment to oil imports from Mexico and Canada. This partial exclusion of the U.S. market to Persian Gulf producers depressed prices for their oil. As a result oil prices 'posted' (paid to the selling nations) by the major oil companies were reduced in February 1959 and August 1960. At the longstanding posted price of $2.04 a barrel, a host government received 92 cents and the oil company took $1.12. These countries were in the dire need of foreign revenues, due to lack of technology they were not self sufficient to explore and produce the oil on their own, so they gladly accepted it. This deal was very healthy for the sisters they were able to generate a whole lot of margin by refining their crude oil (at that time development cost in middle east was 20 cents per barrel). In this cold war era Soviet oil production kicked up and around 1960 the Soviet Union displaced Venezuela as the second largest oil producer in the World, behind the United...
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