OPEC IS AN EXAMPLE OF CARTEL

WHAT IS CARTEL

A Cartel is formal “agreement’’ among competing firms

It is a formal organization of producers and manufacturers

that agree to fix prices, marketing, and production

Cartels usually occur in an oligopolistic industry

A group of parties, factions, or nations united in a common

cause

FACTS OF CARTELThe name is derived from Edmund Cartel and Georges Cartel. 

The aim of such collusion is to increase individual members' profits by reducing competition.

Cartels usually occur in an Oligopolistic Industry .

Cartel members may agree on matters as Price Fixing Total Industry Output , Market Shares, Allocation Of Customers

DEFINITIONA cartel is a collection of businesses or countries that act

together as a single producer and agree to influence prices for certain goods and services by controlling production and marketing. 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

▪ They earn greater profit by coordinating their activities rather than acting independently

Cartel Theory of OligopolyThe conditions that give rise to an oligopolistic market are also

conducive to the formation of a cartel

Cartels tend to arise in markets where there are few firms and each firm has a significant share of the market.

In the U.S., cartels are illegal; however, internationally, there are no restrictions on cartel formation.

The organization of petroleum‐exporting countries (OPEC) is the best‐known example of an international cartel;

OPEC members meet regularly to decide how much oil each member of the cartel will be allowed to produce.

Why Cartel ?▪ By working together, the cartel members are able to behave like a

monopolist

▪ To increase market power

▪ Level the out put of each member

▪ Price each member will charge

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

▪ Same as monopolist

▪ The cartel members choose their

▪ combined output at the level

▪ where their combined marginal revenue equals their combined marginal cost

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

▪ The cartel's profits are equal to the area of the rectangular box labelled abcd in Figure 

Cartel is a CrimeThese types of agreements are crimes

They breach section 4 of the Competition Act 2002

Businesses and individuals found guilty of hard-core cartel offences face a number of penalties, including fines and imprisonment

You can find information on cartel cases under Criminal Court Cases

▪ Price fixing: Competitors illegally agree the price for, or discounts on, goods or services.

▪ Market sharing: Competitors illegally agree on which locations each of them can or cannot operate in, or customers to whom they can or cannot sell. They also divide locations and/or consumers up among competitors

▪ Limiting production: Competitors illegally agree to control the amount of goods or services provided, in order to ensure that prices remain high

▪ Bid-rigging/collusive tendering: Collusive tendering involves competitors illegally agreeing on who will win a tender. Bid-rigging or collusive tendering may take the form of any or all of the specifically prohibited activities, by fixing prices, sharing markets or limiting access to goods or services

PROBLEMS CAUSED BY CARTELSConsumers suffer various disadvantages as a result of cartels :

High Prices

Low Product Variation

Low Quality and Service

WHY CARTELS ALWAYS FAILSFirms don’t cooperate due to lack of trust

Firms cheat

Produce extra output or lower the price

ORGANISATION OF PETROLEUM EXPORTING COUNTRIES

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Organization of Petroleum Exporting Countries It is a permanent intergovernmental organization, currently consisting of 12

oil producing and exporting countries, spread across three continents America, Asia and Africa

Oil is the main marketable commodity and foreign exchange earner.

Oil is the vital key to development – economic, social and political. Their oil revenues are used not only to expand their economic and industrial base, but also to provide their people with jobs, education, health care and a decent standard of living

OPEC was formed at a meeting held on September 14, 1960 in Baghdad, Iraq,

Five Founder Members: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. OPEC was registered with the United Nations Secretariat on November 6, 1962

Member CountriesCountry    Joined OPEC  Location 

 Algeria   1969   Africa 

 Angola   2007   Africa 

 Ecuador **  rejoined 2007   South America  

IR Iran *  1960   Middle East

  Iraq *  1960   Middle East 

 Kuwait *   1960  Middle East

  Libya   1962  Africa

  Nigeria   1971   Africa

  Qatar  1961  Middle East 

 Saudi Arabia *  1960   Middle East  

United Arab Emirates  1967   Middle East

  Venezuela*  1960   South America

Countries in blue are the members countries

Ecuador and Gabon were early members of OPEC, but Ecuador withdrew on December 31, 1992 because it was unwilling or unable to pay a $2 million membership fee and felt that it needed to produce more oil than it was allowed to under the OPEC quota, although it rejoined in October 2007

OPEC’S ObjectivesThe organization’s principal objectives are:

To co-ordinate and unify the petroleum policies of the Member Countries and to determine the best means for safeguarding their individual and collective interests

To seek ways and means of ensuring the stabilization of prices in international oil markets, with a view to eliminating harmful and unnecessary fluctuations

To provide an efficient economic and regular supply of petroleum to consuming nations and a fair return on capital to those investing in the petroleum industry.

OPEC Statute & Membership

Any country with a substantial net export of crude petroleum,

Which has fundamentally similar interests to those of Member Countries, may become a Full Member of the Organization,

If accepted by a majority of three-fourths of Full Members, including the concurring votes of all Founder Members

OPEC functions

Cartel enforcement problem:

overproduction and price cheating by members.The methods available to engage in such cheating

Extending credit longer then the standard 30 day period

Selling high grade oil at the price of low grade oil. Crediting for the

transportation cost.

MORE ON OPEC… The OPEC Conference: The Conference generally meets twice a year, in

March and September, and in extraordinary sessions whenever required setting oil price and quotas for each country and the determination of the appropriate ways and means of its implementation.

The Heads of Delegation : The Ministers of Oil, Mines and Energy of Member Countries.

Headquarters : Vienna, Austria

Official language : English

President : Rostam Ghasemi

Secretary general : Abdallah el-Badri

Currency : USD per barrel

Rivalry between two groups within OPEC Hawks-Countries having lower production ask for higher prices to

get maximum revenue.(Iran and Iraq)

Doves- Countries having Higher output can set lower prices to achieve economies of scale and make sure that the demand of oil is maintained in the market and people do not switch to substitutes(Saudi Arabia, Kuwait, United Arab Emirates)

INDIA AND OPEC In 2008 OPEC rejected India’s call for a price band

OPEC doesn’t have uniform pricing policy

India having high current account deficit as it imports 70% of oil

India-Iran payment issue

Non- OPEC Countries▪ Seven of the world's fifteen largest oil producers are outside of OPEC

and one of the major producer is Russia

▪ The former Soviet Union, i.e., the CIS countries form one of the largest groups of oil and gas producing countries outside OPEC

▪ The countries produce about 10 per cent of the world's oil and about 30 per cent of the gas

▪ Some of the world's biggest oil and gas fields are situated in Russia, especially in Siberia

CURRENT SENARIOTotal World Output of Crude oil in 2010 was 69.7 million barrels per

day

OPEC ‘s output was 29.2 million barrels per day which is 41.8% of World output.

OPEC crude oil reserves are sufficient to last more than 112 years.

CHALLENGES FACEDUncertainty in Global Demand

Structural shift in demand from developed world to developing world.

Non-OPEC oil-producing nations (Russia , Norway, Canada, Mexico etc.)often increase production when OPEC cuts it.

Russia overtook Saudi Arabia as the world’s biggest crude supplier in 2009.

OPEC’s share of production has gone down from around 51% in the mid-1970s to just over 40% now.

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