The History of OPEC-Vision and Mision

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.

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