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When you finish this chapter, you should: Define a cartel, model how a cartel can make their members large sums of money, show why cartels are not typically stable and describe the conditions necessary for creating cartel stability, evaluate whether OPEC qualifies as a cartel, summarize the history of inflation-adjusted oil and gasoline prices. | Chapter 39 Energy Prices McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter Outline HISTORICAL VIEW OPEC WHY PRICES CHANGE SO FAST WHAT WILL THE FUTURE HOLD Electricity Prices Historical Events Relating to Oil and Gas Prices 1972 Arab-Israeli War US support for Israel prompted an embargo by Arab oil producers against the US and Europe. This led to a significant increase in crude oil prices. 1979 Iranian Revolution Iran’s Islamic revolution led to instability in the Persian Gulf. This led to a significant increase in crude oil prices. 1980’s Rapid increases in profits led to significant discoveries of oil in Mexico and the North Sea 1980-1988 Iran-Iraq War The war led to increased production by both parties as each needed to fund their war effort. This caused a precipitous fall in crude oil prices. World Oil Reserves Group Billions of Barrels in Reserve Percentage of World Reserves Persian Gulf 664 63% Non-Persian Gulf OPEC 134 13% Rest of the World | Chapter 39 Energy Prices McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter Outline HISTORICAL VIEW OPEC WHY PRICES CHANGE SO FAST WHAT WILL THE FUTURE HOLD Electricity Prices Historical Events Relating to Oil and Gas Prices 1972 Arab-Israeli War US support for Israel prompted an embargo by Arab oil producers against the US and Europe. This led to a significant increase in crude oil prices. 1979 Iranian Revolution Iran’s Islamic revolution led to instability in the Persian Gulf. This led to a significant increase in crude oil prices. 1980’s Rapid increases in profits led to significant discoveries of oil in Mexico and the North Sea 1980-1988 Iran-Iraq War The war led to increased production by both parties as each needed to fund their war effort. This caused a precipitous fall in crude oil prices. World Oil Reserves Group Billions of Barrels in Reserve Percentage of World Reserves Persian Gulf 664 63% Non-Persian Gulf OPEC 134 13% Rest of the World 238 24% OPEC The Organization of Petroleum Exporting Countries (OPEC) Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela OPEC began as a cartel. A cartel is an organization of individual competitors that join to form as a single monopolist. Was OPEC a Cartel? OPEC production has always been a significant part of the oil market but it has never reached the level of monopoly. The cartel model is still useful because it has been a dominant player. The Cartel Model One Country’s Oil MC ATC P Q MR Pcartel MR’ Qcartel P Q D S=MC Market for Oil QPC PPC MR QPC Qquota Profit Qcheat Profit Why Oil and Gas Prices Change So Fast Because expected price is a determinant of supply and demand a world event that causes people to expect a price increase will Increase current demand (as middlemen and consumers try to buy as much as possible) Decrease current supply (as middlemen and gas stations try to hold onto their current stocks) This .
