OPEC was founded on September 14, 1960 by Iran, Iraq, Saudi Arabia, Kuwait and Venezuela. The goal is the establishment of OPEC to set world oil prices and allocation of production of each member. In other words, short-term goal of this organization is how to transfer income from the oil companies to each country’s oil producers. Meanwhile, the OPEC has a long-term goal to achieve and maintain monopoly power in the international oil market.

In the process, the organization has a big role in controlling the price level and the development of the world oil market. This is seen how the organization is the “First Oil Crisis” caused by the embargo made by Saudi Arabia that creating a supply of oil decreased while the demand for oil increased more than twofold. In addition, the shock from the supply side is also caused by the Iranian revolution in 1978 until 1979. To avoid the oil crisis, OPEC tried to increase international tax reference price, the price level that is determined by the oil companies. Thus, OPEC can do monopoly in world markets.
Various factors that affect the fluctuation of oil prices in world markets to give our interpretation that the oil price fluctuation is caused by political factors that occurred in the country’s oil producers compared with the economic factors. However, some energy economists try to rebut the argument and said that the price fluctuation in world oil market is also caused by economic factors.

The establishment of basic World Oil Price

Determination of the level of world oil prices by OPEC influenced by the following factors:

• Inventories of oil producers in each country.
• A Trade
• Economy refinery
• Psychological and political factor (factor is more happening in the Middle East).
• Meanwhile, world crude oil prices will be influenced by factors:
• The composition of hydrocarbons contained in the oil
• The weight of the expressed in degrees API (American Petroleum Institute)
• The content of sulfur contained in the oil

The price system used by OPEC before the 1973 system is the fix, where the organization is determining the amount of oil price level that will be traded in international markets. However, in line with the development of the regional market and the market structure that is competitive, the system used by OPEC is no longer effective to run. Furthermore, price is no longer determined by OPEC but by each country in accordance with the basic determination that is used. Basics used by producers in the country determine the price level is as follows:

• Price directly SPOT
• Netback price of oil products (oil prices set to back calculation based on the price of oil products),
• Calculation of the cost of the process,
• Barter and trade agreements with the counter.
However, due to increasing competition, which is not healthy tend to make the price of the printer in the international market to become very low, and the next OPEC set a price of Spot and Forward as a benchmark in determining the price of oil.

Economic arguments Oil Price Rise

1. Property Right
The basic idea of this argument is oil price is determined by factors that implemented interest rate by the state oil producers. Based in the facts, before 1973 the determination of oil prices was caused by the large level of production undertaken by the company in order to achieve the maximum profit even if the price happens to be low. It makes the oil reserves in the country to become low. To keep the oil reserves from depression, the producer countries to apply and set lower interest rate in order to get profit although lower oil production or exploration. This is because the investment does not require a high level of achievement so that the break-even point more quickly even though the level of production is low.

2. Revenue Targeting
In this argument, oil price is related to the ongoing development process in the state oil producers. Where revenue is generated from oil production is highly dependent on the government budget. This means the export of small oil producing country is influenced by the size of investment needed in the development of the producers in the country. This is a great investment as the revenue target.

3. OPEC as a cartel economy
This argument is based on the fact that the increase in oil prices in the 1970s due to control the oil production of OPEC member states. Second, the various council, meeting conducted by the OPEC created the understanding that this organization is a cartel that tries to control the level of oil prices in the world market. While the third, the level of production by OPEC member countries do not independent, meaning that production is done with the share of production for each member of OPEC. This is very different to that level of production by non-OPEC countries.

Problems in OPEC
Problems faced by OPEC is very clear, namely the inability of OPEC to control prices. As we all know that this organization to control the price level by cutting production as a strategy for fulfilling the first and residual demand as the world’s second strategy. The first strategy is not effective when non-OPEC countries able to meet the excess demand for oil caused by cutting production by OPEC member countries so that the price rise is expected to remain at a low level. While the second strategy will not be effective because of the lack of excess world oil demand caused the implementation of this strategy is bad impact on the price level, where prices in the world market will experience a decrease in line with the addition of supply.

After made new record high $147 USD /barrel in July 2008, oil price has been declined more than 100 percent. Premium price is lowest in last 3 months in America after cut 53 cent. Oil price is predicted will go down below $40 USD/barrel as Global Financial Crisis result. Oil shipping contract in New York Mercantile Exchange show the opposite after run high after closed in $49.93 USD/barrel higher than before $48.25 USD/barrel.

In Asia, Oil price has no power also. January shipping for light sweet oil is closed at $48.47/barrel, or declined 95 cent yesterday afternoon in Singapore. Merchant claims and scare about Global recession because demand for energy is running low.

December Shipping, Oil price goes rise to level $49.62 after sit lowest price since 18 may 2005, $48.50 USD/barrel. As we know, Oil price declined to fantastic price after running record high (upper $100USD/barrel). United State Government has cut premium price to follow the lowering on oil crude price. Analysts then said to predict that Oil price contract shipping will go down below $40 USD/barrel.
Fantastic declining as resulted of Global crisis where demand from business (read Industry) declined in high percentage. To anticipate over supply (over supply has positive correlation to reduce oil price), OPEC might decide to cut their oil crude quota in near. Last month, OPEC had cut their supply with declined their quota to 1.5 million barrel/day. When OPEC start to cut their supply? Analysts predict OPEC will do it in December next month. So far, OPEC supplies 40 percent of total Global demand and to make OPEC as important rule in pricing manipulated.

OPEC tries to prevent the worst price

In 19 November 2008, OPEC decided to consolidate with NON OPEC Countries in order to stabilize oil price-working together. They will meet in Cairo in November, IRNA reported. The main agenda are to talk about the current oil price condition and try to make plan in preventing oil price to worst. According to OPEC Staff, one of their solutions (decision) is walking together in oil market management. They must stick together to keep fairly oil price and that is very important move.
IRNA reported that Nozari has contacted Russian Ministry of Energy Sergey Shmatko last week. Russia takes 10 percent of total oil production, and OPEC really hopes that Russian will agree with them, walking together with OPEC to manage oil market. As one of the biggest NON-OPEC supplier has sent their staff as observer countries in OPEC submit meeting in September last two month

When the plan was decided, university students and citizens had been demonstrating against the plan. The plan was cutting the subsidy on oil price so Gas Price (gas, premium ect) will be sold up to 30 percent when before. The policy will active in near. According to government staff the new oil price will available on 23 may next year!Government excuses that Indonesian must accept the fact, government can’t stay longer while the oil price attacks their budget.

Demonstrations against the policy were happened in many places in Indonesia, Students in Makasar had been demonstration since 2 weeks ago. Others students in Java also turn to road, to shout their disagree opinion against the policy. Wife houses also objective about the policy; they was said, increasing the oil price make their budget consumption is lower (Purchasing Power Parity is lower), and the also scare with the fired from company because the companies is also attacked by high in Cost so fired are potentially happened to their husbands.

Government opposition also objective and disagree with the policy. Maybe these statements contain politics issue but here it is. They consider that citizens needn’t suffer with the policy (oil subsidy cutting), and they think there are others tools to avoid Budget Attacking while oil price increasing.

Government should find other policy in my opinion. Maybe they must reduce all inefficiency in national companies like Pertamina, and others departments. Corruption must be stopped. So money from corruption can be used to subsidy. Government says that they have no money to subsidy more while oil price is high, but corruption are happening everyday and every time. We can see it in the TV channels.

I know it well because I studied economic; learning how government plans, organize their budget to public. I learned how government handles their budget if external problems raised.

If we assumption no corruption and no social cost of cutting on oil subsidy, I believe, the policy is very rationalistic because previously government assumption 60 USD/ barrel but now oil price run up to 120 USD / barrel. No governments will close their eyes, don’t do anything. Their Budget has been attacked.

Today, oil makes its new record again. Oil runs to $120 per barrel. The main factors behind the new record are USD weak against Euro and Sabotage in Nigeria. If we look back, when governments worried when Oil ran close to $100 per barrel then $108 per barrel, some day before $112 per barrel and $118 per barrel, and hold at $120 per barrel today.
Some week ago, we got good news from Brasilia that they have found the new oil mine. The new oil mine can supply more then 20 percent of OPEC supply. The new made oil price declined to $112 per barrel. Now bad news comes.

Why oil price is too sensitive? When Oil Price was running high and high, the factors didn’t come from the supply, but Stock Exchange did. Investor took profit; Dollar was declined against Euro and some major currencies.
Why Dollar is too sensitive to make Oil Price fluctuating? Why we still use Dollar as Oil Price? Why not Euro or Japan Yen?
The question had been asked to my lecture in university. Why we still use Dollar as the measurement of Oil Price? I said. Actually I didn’t get best answer from him? I read the television; some analysts said that the main factor why we still use USD as Oil Price is because Dollar is transparent and more fluctuating currency if we combined with others.
I wish my confused cleared. If readers know the answer, please tell me.

I know that the oil price run high in recent months. Oil did it because the supply is limited and demand is larger than supply. Conflict in Iraq, enharmonic between Venezuela and America is also the big factor.
But the trend is oil price run high because of external factor, such as the weakness of Dollar against others major currencies.
Investors don’t know that when they take profit, causing dollar is declined, the oil prices run high or they know but close their eyes. Do they think that their activity make governments think twice to rearrange their budget. They don’t think that other need cheap oil price. Poor countries and net exporters’ countries are so hurt by them.