Mba Project On Opec

INTERNATIONAL BUSINESS :: MID TERM PROJECT
INDIAN
STRATEGY
TO
DEAL
WITH
OPEC
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Contents
EXECUTIVE SUMMARY
OPEC – The Organization
OPEC – History
THE WORLD CRUDE SCENARIO
AVAILABILITY AND CONSUMPTION PATTERN
THE OPEC FACTOR
WHY ARE PRICES RISING
THE INDIAN SCENARIO & ITS STRATEGY
FUTURE ROAD MAP
REFERENCE
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Executive Summary
The history of OPEC and formative years are described. OPEC has evolved as a cartel with immense influence on
World economy and this has happened over a period of time mainly through the moves and countermoves between
OPEC and rest of the world led by the US. Some of the main reasons behind the success of OPEC are that the
economies of its member countries are largely dependent on oil and high prices mean prosperity, also religion plays
a major role many of these countries are Islamic as well as Geo-Political factors such as regional protectionism and
fear of supremacy of the US if they fail to stay united keeps OPEC remain strong.
The reasons behind the immense clout of OPEC are explored by taking a holistic view of world supply and demand of
oil, the geo-political factors, roles of speculators and the US as the largest consumer of oil. It is interesting to note
that most of the oil refining capacity is in the Non-OPEC countries of the world while OPEC countries have majority of
oil reserves.
The recent third oil shock situation is analyzed from the perspective of the accuser and the accused i.e. rest of the
world vs. OPEC. While OPEC has maintained that main culprits for soaring oil prices are a weakening in dollar prices
and excessive buying by speculators, rest of the world led by the US has put pressure on the cartel to increase
production of oil to curb the rising prices. More recently price of oil has started coming down due to adoption of a
multi pronged strategy by the US and other Non-OPEC countries. Diplomatic pressures forced Saudi Arabia, the
largest producer of oil among the OPEC countries to increase oil production and a conscious move by the American
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people to cut consumption of oil and wide publicity of falling demand for oil and threat of an imminent attack on Iran
by the US, led OPEC to rethink its strategy. Also forecast of a moderate winter in the US and Europe gave an
indication that the demand for oil/gas is not going to increase at any time in the near future. All these factors led to
a decrease in the oil prices.
India and China among other emerging economies are among the most affected countries by rising oil prices as high
growth rates mean higher consumption of energy resources and soaring oil prices increase these countries
vulnerability by adversely affecting their BOP accounts as they rely mainly on imports of oil to meet their oil
demands. While the US and other developed economies are growing at a rate of 1%-2% these countries are growing
at a rate of 8%-10% so they are more vulnerable to any oil shocks. The demand for oil in these countries is fuelled
not only by increased industrial activity but also due to emergence of a newly affluent middle class with ever
increasing dependence on personal automobiles as well as absence of good public transport system. India also
adopted a multi-pronged strategy to deal with OPEC by using its good diplomatic relations with Saudi Arabia
influenced their decision to increase production and exercising other options available.
As the recent examples show the cartel is vulnerable on many accounts like lack of unity among its member
countries, awareness and increasing activism among public, concern for environment and extinction of world oil
reserves, emergence and increasing demand for non-conventional energy sources etc. If the public opinion swings
against OPEC and they start perceiving it as a villain who is holding the world at ransom just to earn more profits
then OPEC stands to face its biggest challenge ever because in the US the excessive demand is more of a hedonistic
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nature than of a necessity and the same trend to a smaller extent is emerging in the rapidly developing countries
such as India and China. The demand for battery operated vehicles soared as a consequences of soaring oil prices
and if world shifts to non-conventional options available then it would have a lasting impact on the demand for oil
and the monopoly of OPEC.
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OPEC – The Organization
The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization,
currently consisting of 13 oil producing and exporting countries, spread across three continents America, Asia and
Africa. The members are Algeria, Angola, Ecuador, Indonesia, the Islamic Republic of Iran, Iraq, Kuwait, the Socialist
People’s Libyan Arab Jamahiriya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates & Venezuela.
These countries have a total population of about 585 million and for nearly all of them, oil is the main marketable
commodity and foreign exchange earner. Thus, for these countries, 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.
The organization’s principal objectives are:
1. 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;
2. To seek ways and means of ensuring the stabilization of prices in international oil markets, with a view to
eliminating harmful and unnecessary fluctuations; and
3. 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.
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OPEC can be considered a trade organization with precedents in numerous industries, but in practice it
operates as a cartel. It isn’t alone:
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• De Beers is a diamond cartel composed of a number of different companies involved in mining diamonds.
Collectively, they control 40% of the world’s diamond production.
• The MPAA (Motion Picture Association of America) is a ‘trade organization’ that protects and advocates
the interests of major movie studios.
• The RIAA (Recording Industry Association of America) is another ‘trade organization’ whose member
businesses distribute about 90% of the recorded music sold in the US.
The latter two have faced chronic accusations of monopolizing their markets, of anti-competition and
price-fixing—in short, of collusion in an effort to control a market and eliminate their competition, all
hallmarks of cartels.
In the following pages we’ll look at the OPEC history, its formation and rise to power, anti-competition
accusations against it, the curious legal status it enjoys in the US, and some of the effects it has had, both
temporary and long-term.
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OPEC – HISTORY
1960 - founded by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela
1965 - Moves from Switzerland to new headquarters in Vienna, Austria
1973 - Opec embargo causes oil price shock
1990 - Iraq's anger at Kuwaiti over-production sparks Gulf War
1998 - World oil price drops to $10 a barrel
2000 - Opec introduces $22-$28 a barrel price band
2005- Price band abandoned
2008- Indonesia decides to leave Opec
The 1960s
These were OPEC’s formative years, with the Organization, which had started life as a group of five oil-
producing, developing countries, seeking to assert its Member Countries’ legitimate rights in an
international oil market dominated by the ‘Seven Sisters’ multinational companies. Activities were
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generally of a low-profile nature, as OPEC set out its objectives, established its Secretariat, which moved
from Geneva to Vienna in 1965, adopted resolutions and engaged in negotiations with the companies.
Membership grew to ten during the decade.
The 1970s
OPEC rose to international prominence during this decade, as its Member Countries took control of their
domestic petroleum industries and acquired a major say in the pricing of crude oil on world markets. There
were two oil pricing crises, triggered by the Arab oil embargo in 1973 and the outbreak of the Iranian
Revolution in 1979, but fed by fundamental imbalances in the market; both resulted in oil prices rising
steeply. The first Summit of OPEC Sovereigns and Heads of State was held in Algiers in March 1975. OPEC
acquired its 11th Member, Nigeria, in 1971.
The 1980s
Prices peaked at the beginning of the decade, before beginning a dramatic decline, which culminated in a
collapse in 1986 — the third oil pricing crisis. Prices rallied in the final years of the decade, without
approaching the high levels of the early-1980s, as awareness grew of the need for joint action among oil
producers if market stability with reasonable prices was to be achieved in the future. Environmental issues
began to appear on the international agenda.
The 1990s
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A fourth pricing crisis was averted at the beginning of the decade, on the outbreak of hostilities in the
Middle East, when a sudden steep rise in prices on panic-stricken markets was moderated by output
increases from OPEC Members. Prices then remained relatively stable until 1998, when there was a
collapse, in the wake of the economic downturn in South-East Asia. Collective action by OPEC and some
leading non-OPEC producers brought about a recovery. As the decade ended, there was a spate of mega-
mergers among the major international oil companies in an industry that was experiencing major
technological advances. For most of the 1990s, the ongoing international climate change negotiations
threatened heavy decreases in future oil demand.
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THE WORLD CRUDE SCENARIO
World crude oil demand grew an average of 1.76% per year from 1994 to 2006, with a high of 3.4% in 2003-2004.
Demand growth is highest in the developing world. World demand for oil is projected to increase 37% over 2006
levels by 2030, according to the U.S.-based Energy Information Administration's (EIA) annual report. Demand is
projected to reach 118 million barrels per day (18.8×106 m3/d) from 2006's 86 million barrels (13.7×106 m3), driven
in large part by the transportation sector.
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International Petroleum Supply and Consumption
2007 2008 2007 2008

Supply Supply Demand Demand
(million barrels per (million barrels per (million barrels per (million barrels per
day) day) day) day)
OECDb 21.42 21.13 48.94 48.46
U.S. (50 States) 8.49 8.7 20.7 20.3
Canada 3.36 3.43 0.32 0.29
Mexico 3.5 3.19 2.33 2.34
North Seac 4.54 4.19 15.28 15.21
Other OECD 1.53 1.62 4.97 4.97
Non-OECD 63.14 65.35 5.34 5.36
OPECd 35.42 37.1 36.6 37.94
Crude Oil Portion 30.9 32.32 4.28 4.41
Other Liquids 4.52 4.78 0.79 0.8
Former Soviet Unione 12.61 12.78 7.58 8.02
China 3.9 3.92 8.78 8.83
Other Non-OECD 11.21 11.55 15.17 15.88
Total World
Production 84.56 86.48 85.54 86.4
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As countries develop, industry, rapid urbanization and higher living standards drive up energy use, most
often of oil. Thriving economies such as China and India are quickly becoming large oil consumers. China
has seen oil consumption grow by 8% yearly since 2002, doubling from 1996-2006, indicating a doubling
rate of less than 10 years. A 2008 report from the IEA predicted that the observed drops in demand from
developed countries would continue due to high prices, but that a 3.7 percent rise in demand by 2013 in
developing countries would cause a net rise in global petroleum demand.
The sector that generally sees the highest annual growth in petroleum demand is transportation, in the
form of new demand for personal-use vehicles powered by internal combustion engines. Cars and trucks
will cause almost 75% of the increase in oil consumption by India and China between 2001 and 2025. As
more countries develop, the demand for oil will increase further. This sector also has the highest
consumption rates, accounting for approximately 68.9% of the oil used in the United States in 2006, and
55% of oil use worldwide as documented in the Hirsch report. In 2008, auto sales in China were expected
to grow by as much as 15-20 percent, resulting in part from economic growth rates of over 10 percent for
5 years in a row.
Another large factor on petroleum demand has been human population growth. Because world population
grew faster than oil production, production per capita peaked in 1979 (preceded by a plateau during the
period of 1973-1979).[31] The world’s population in 2030 is expected to be double that of 1980.
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The world's oil supply comes from a wide variety of sources. While the Middle East (home to the largest
OPEC producers) was the largest producing region in 2004, with 29 percent of total world production,
North America accounted for 19 percent, with the remaining 52 percent dispersed fairly evenly throughout
the globe. OPEC member countries together accounted for about 40 percent of world total oil production in
2004, up from 38 percent in 2003.
Of the 14 countries that produced more than 2 million bbl/d of total liquids in 2004, seven were OPEC
members. The remaining seven were not OPEC members, including: the United States (the world's third-
largest total oil producer for the year); Russia; Mexico; China; Canada; and North Sea countries Norway
and the United Kingdom. It should be noted that the United States' total liquids production is boosted by
the very large refinery gain that occurs there - over one million bbl/d in 2004.
Of the world's top net oil exporters, OPEC countries are strongly represented. Ten of the 14 countries
exporting more than one million barrels per day of total oil (net) in 2004 were OPEC members. Russia,
Norway, Mexico, and Kazakhstan are the world's largest non-OPEC net oil exporters. The United States is
the world's largest net oil importer. China is also a net oil importer, while Canada and the United Kingdom
are smaller net oil exporters. (Note: EIA does not have 2004 data for worldwide gross oil exports, and
computes net oil exports from production and consumption data.)
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Top World Oil Producers and Oil Net Exporters 2004 Tables
Non-OPEC oil production is expected to rise during the next 2 years, though not enough to keep pace with
total world oil demand growth. The greatest increases are expected in the former Soviet Union (FSU),
including Russia (though less growth from Russia than in the previous two years) and the states bordering
the Caspian Sea, and in other non-OECD producers, particularly Angola and Brazil. Brazil is expected to
become a net exporter sometime in the next two years. (view a table of world production data).
PRODUCTION COORDINATION WITH OPEC?

A few non-OPEC countries that share some traits of OPEC countries sometimes have indicated that they
would coordinate production policies with OPEC (though they have not always actually carried out these
policies). While the stated volumes of non-OPEC production (or export) restrictions have usually been
small, the participation of these non-member countries can make member countries more likely to
maintain their own output restriction policies. Therefore, non-OPEC coordination with OPEC often has
carried a significance beyond what the output data might imply. It should be noted that the absence of low
oil prices since early 2002 have meant that non-OPEC producers have seen little reason to restrain output
of late - there has been no explicit cooperation with OPEC to cut production and/or exports since 2002.
Mexico, Norway, Russia, Oman, and Angola have announced intentions to cut production or exports in the
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past, but it is extremely unlikely that any of them would do this in the current price environment. Indeed,
on June 16, 2005, oil ministers of Mexico and Norway announced that they have no spare capacity and
asserted that all of the world’s spare capacity that might remain lies in OPEC countries.
Of the estimated preliminary 82.5 million bbl/d of oil the world consumed in 2004, OPEC countries together
consumed about 7 million bbl/d, or 8.5 percent of total consumption. Most of the world's largest oil
consumers are also net oil importers. Of the world's top ten oil consumers in 2004, only Russia and Canada
were net oil exporters. The remaining top consumers also are listed as the world's largest oil importers,
with the exception Brazil, which was the 18th largest net oil importer in 2004.
Top World Oil Consumers and Oil Net Importers 2004 Tables
PROVEN CRUDE OIL RESERVES
It is generally agreed that the location of proven world crude oil reserves is far more concentrated in OPEC
countries than current world oil production. Note that estimates of reserves vary; EIA does not assess oil
reserves, but does list several independent estimates here. According to one independent estimate (Oil
and Gas Journal), of the world's 1.28 trillion barrels of proven reserves, 885 billion barrels (69 percent) are
held by OPEC, as of January 2005. The non-OPEC reserves include Canadian non-conventional reserves.
Not including Canada, according to this estimate the world's proven oil reserves are about 1.1 trillion
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barrels, of which OPEC holds 84 percent. In the future, the inclusion of non-conventional oil reserves for
other countries may also significantly impact OPEC member Venezuela, as well as non-OPEC countries
such as Australia. Non-conventional reserves are generally more expensive to produce than conventional
crude oil reserves and may require special facilities and technologies. Because non-OPEC countries'
smaller reserves are being depleted more rapidly than OPEC reserves, their overall reserves-to-production
ratio -- an indicator of how long proven reserves would last at current production rates -- is much lower
(about 26 years for non-OPEC and 83 years for OPEC, based on 2004 crude oil production rates). This
implies increased OPEC production as a proportion of world production over the long term.
REFINED PRODUCTS
As of January 2005, 89 percent (73.4 million bbl/d)

of the world's 82.4 million bbl/d of crude oil
refinery capacity was located in non-OPEC
countries. Countries with high petroleum demand
tend to have large refinery capacities. The United
States has far more refinery capacity than any
other country, with 149 of the world's 691
refineries, and a crude oil refinery capacity of
about 16.9 million bbl/d (not including territories).
Russia's refinery capacity stands at an estimated
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5.4 million bbl/d. Japan (4.7 million bbl/d) and China (4.6 million bbl/d) are the only remaining countries
with refinery capacities exceeding 3 million bbl/d.
There are several countries that are important to world trade in refined petroleum products despite very
low (or non-existent) levels of crude oil production. For instance, Caribbean nations (including U.S. and
European territories) have very limited oil production (233,000 bbl/d in 2004), but refinery capacity of
about 1.7 million bbl/d. Much of this refined product is exported to the United States. Other countries that
are important sources of refined petroleum products yet have very limited domestic production include the
Netherlands, South Korea, and Singapore.
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THE OPEC FACTOR
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The Middle East remains the biggest player in oil.
The region dwarfs the rest of the world, when it comes to reserves, ensuring its prominence on the global
political stage. Saudi Arabia alone possesses 21.9% of the world's proved reserves.
The North Sea and Canada still have substantial reserves.
No-one knows how long the world's oil reserves will last, but even the oil industry suspects the world
"peak" is now approaching.
It says it has 40 years of proven reserves at the moment - but it also said that 30 years ago.
In fact, the estimate has actually increased in recent years as production has fallen. Cutting consumption
would prolong oil's life.
OPEC Strategies
The Organisation of Petroleum Exporting Countries (Opec) is an association of oil-producing nations set up
in 1960 with the express purpose of influencing oil prices by controlling supply. Things have changed a
great deal for the cartel in recent years.
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In 2000, it adopted a price band of between $22 and $28 a barrel, levels a world away from current prices.
If the price went below $22 a barrel, production quotas would be cut. If it went above $28 a barrel,
production would be raised.
Opec abandoned the price band in 2005 and now has no official price target. When its members meet,
they try to co-ordinate future production with their predictions for demand.
Financial sector
While there have been increases in production recently, the price of oil has continued to soar. Opec's
official position is that there is plenty of supply in the market. It says rising prices are the fault of investors
in the financial sector, who are buying oil contracts in order to sell them on without ever planning to take
delivery. Clearly there are limits to the amount production can be raised, and Opec also sees dangers in
increasing supply further.
They feel that producers fear that the financial sector will decide that there is over-supply in the market
and move into other investments. If there is a sudden change in sentiment like that, then the price could
collapse.
That problem is exacerbated by the time delays in the system.
If producers in the Gulf, for example, decide to increase production, it will be about three months before
any extra oil reaches the market.
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If the announcement of extra production caused a big fall in prices, then the extra oil actually hitting the
market three months later would exacerbate the problem and the members of Opec have a great deal at
stake.
Uniquely vulnerable
Many of the oil-rich states are rich in very little else. Crude oil is their only export, making them uniquely
vulnerable to world oil prices. When prices fell to $10 a barrel in 1998, their economies were hit hard.
The one thing the Opec countries all have in common is their absolute reliance on one product - oil.
The Opec countries cannot afford to treat oil "as just another commodity".
On the other hand, when Opec members decided to stop supplying oil to countries they said were
supporting Israel in the Yom Kippur War of 1973, a great deal of damage was done to the economies of the
targeted countries.
Besides supply concerns, many other issues have also had some effect on oil prices. Labour strikes,
hurricane threats to oil platforms, fires and terrorist threats at refineries, and other short-lived problems
are not solely responsible for the higher prices. Such problems do push prices higher temporarily, but have
not historically been fundamental to long-term price increases
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2003
The U.S.-led 2003 invasion of Iraq was a significant event for oil markets because of Iraq's large oil
reserves. The price of oil rose in the months running up to the invasion in March. Prices dropped in mid-
2003, and several observers attributed this to the perception that the armed conflict would come to a
quick resolution. The conflict coincided with an increase in global demand for petroleum, but it also
reduced Iraq's current oil production, and has commonly been blamed in part for oil price increases since.
However, peakniks such as Matthew Simmons tend to emphasize the simultaneous peaking and decline of
many present or former oil-exporting countries[ around the world, such as Mexico, Indonesia, and the U.K.
for the overall upward price trend of oil, contending that the combination of relentlessly rising global
demand and peaking or eventually declining supply means the price must eventually go up. According to
Simmons, isolated events such as the Iraq war affect short-term prices but by themselves do not
determine the long-term trend. Simmons cites the use of enhanced oil recovery techniques in large fields
such as Mexico's Cantarell, which maintained production for a few years, but only made the eventual
decline all the more drastic. Pumping oil out of Iraq faster may reduce petroleum prices in the short term,
but cannot keep the price low forever. From Simmons' point of view, then, the invasion of Iraq happened to
be a major event that we can associate with the start of the long-term oil price rise, but at most this
merely shifted the schedule ahead a few years, and may actually mitigate the inevitable decline in oil
production by keeping some of Iraq's oil in reserve.
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2004
As a direct consequence of the Iraq War that followed the 2003 Invasion of Iraq, the oil production capacity
of Iraq was cut from more than three to two million barrels per day.
Overnight gasoline price hike shown at a United States Chicago area BP station (background) on August
12, 2005. The Shell station (foreground) had not yet posted the 12 U.S. cent price increase.
After retreating for several months in late 2004 and early 2005, crude oil prices rose to new highs in March
2005. The price on NYMEX has been above USD 50 per barrel since March 5, 2005. On March 16, 2005, the
price surpassed the October 2004 high of USD 55.17 to close at USD 56.46. In April 2005 the price began
to fall, reaching USD 53.32 on April 9. It then reversed course and headed to an all time high of USD 58.28,
driven mainly by lingering concerns of a prolonged weak dollar. In June 2005 crude oil prices broke the
psychological barrier of USD 60.
2005–2006 increases
In the United States gasoline prices reached a record high during the first week of September 2005 in the
aftermath of Hurricane Katrina. The average retail price was nearly USD 3.04 per U.S. gallon. The previous
high was USD 1.42 per gallon in March 1981, which would be USD 3.20 per U.S. gallon after adjustment for
inflation. In comparison, the average retail price of a litre of petrol in the United Kingdom was 86.4p on 19
October 2006. This equates to USD 6.13 per U.S. gallon.
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On January 17, 2006 crude oil for February delivery rose by USD 2.38 (3.7%) to USD 66.30 a barrel. This
was the highest increase since early October 2005. Observers believe that violence in Nigeria, and the
increasing tension between USA and Iran are responsible for this price increase. Continued tension
between Iran and USA raised the price to USD 68.38 on January 31. However, due to rising stockpiles of
crude oil and an abnormally warm northern winter, on February 14 the price of crude hit a 2006 low of USD
59.60.
Oil production in Iraq continued to decline as result of the ongoing conflict, decreasing to an output of just
1 million barrels per day (160,000 m³/d).
Mid-2006 increase
July 2006, San Francisco, California
Regular gasoline prices were averaging USD 3.036 per U.S. gallon across the U.S. in August, 2006, slightly
below the post-Katrina peak of USD 3.057. Adjusted for inflation, these U.S. prices were the highest in 25
years. The all-time U.S. inflation-adjusted record is approximately USD 3.20 per U.S. gallon, set in March
1981.
In July 2006, crude oil for August delivery traded over USD 79 per barrel (bbl), an all-time record. The mid-
2006 runup is attributable to increasing gasoline consumption, up 1.9% year over year in the U.S., and
geopolitical tensions as North Korea launched missiles, the tension between Iran and USA drags on, and
Israel and Lebanon went to war. The early 2006 runup in prices has been attributed to a number of factors,
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including continuing supply disruptions from the 2005 Atlantic hurricane season (18% of Gulf Coast
supplies were still off-line in early 2006), supply disruptions from the changeover from MTBE to ethanol,
lingering concerns over Iran and Nigeria, and anticipation of higher summer demand in the Northern
Hemisphere. Hostilities in Nigeria alone have caused a supply disruption of 675,000 bbl per day. On August
7, BP shut down its Prudhoe Bay, Alaska field due to pipeline corrosion, bringing supply down by up to
400,000 bbl/day or about 8% of total U.S. production.
The higher price of oil substantially cut growth of world oil demand in 2006, including an outright reduction
in the oil demand of the OECD.
September 2006 decreases
Oil prices began to decrease during September 2006, closing below US$66/barrel on September 11. The
U.S. national average gas price dropped to US$2.70/gallon in early September, down US$0.11 from the
previous week. Some cities were seeing average prices below US$2.40/gallon.
In September, prices continued to fall, and the average cost of gasoline per gallon (U.S. nationwide) was
below US$2.50. On September 19, crude oil fell US$2.14 to a 6-month low of US$61.66. The recent
significant fall in the price of crude oil has led some to speculate that price of gasoline may fall to as low as
$1.15/gallon. By October 3, the price closed at US$58.68, its lowest close since mid-February. Reasons for
the recent price decreases have included easing tensions with Iran, ample supply and the lack of hurricane
activity in oil-producing regions of the Gulf of Mexico After news of North Korea's successful nuclear test on
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October 9, 2006, oil prices rose past $60 a barrel, but fell back the next day. Also, for several days in early
October, oil prices bounced around the $60 mark on possible news that some OPEC countries would cut oil
production by 1 million barrels per day (160,000 m³/d). OPEC had not cut its production since December
2004. However, the oil market has lately seemed to shrug that news off, especially considering that Saudi
Arabia said that no such agreement exists (to cut production).
On October 11, oil prices fell below US$58 for the first time since February. Days later, on October 20, a
barrel of crude oil closed at US$56.82 per barrel. The same day, OPEC declared that they would cut
production by 1.2 million barrels per day (190,000 m³/d) in order to arrest the sliding price, the first drop
since December 2004.
GSCI reweighting
In early August, the weighting of gasoline futures in the Goldman Sachs Commodity Index was significantly
reduced, causing investors who were long oil to sell. The extent to which the price deceases of late 2006
can be attributed to the reweighting is disputed.
Mid-2007 increases
The U.S. national average on May 16, 2007 was $3.09, and some parts of the West Coast were selling
regular unleaded at $3.33/gallon (e.g. San Francisco and Los Angeles). On NYMEX, a barrel was trading at
$73.93, based on civil unrest in Nigeria. A pipeline disruption in the North Sea has also bumped the price
of Brent Crude up to $79.64 (an all time high).
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Legislation from the U.S. Congress, from approving the No Oil Production and Exporting Cartels Act of 2007
(in which the Sherman Act is amended towards foreign companies acting as cartels), and hearings in May
2007 from the House Energy and Commerce Committee's Oversight and Investigations Subcommittee will
address the following: price gouging (especially from oil companies) as a federal crime, and the
intervention of the Joint Economic Committee led by Senator Charles Schumer to which lawmakers should
intervene where the current corporate mergers (Exxonmobil, ConocoPhillips, Chevron, Shell) should break
up, as a way to protect American consumers.
The "NOPEC" bill passed the U.S. House of Representatives with a 345-72 vote on May 22, 2007.
On September 12, 2007 oil prices rose to an all-time high of $80 per barrel, which surpassed even the
highs of the early 1980s. High prices and restricted supplies have increased the concerns of those who
believe that peak oil is either imminent, or may have already passed, because of the implication that oil
supplies will not increase significantly beyond that point, and in the longer term a decline will occur. It
should be remembered that some of this trend in prices is partly due to the slide of the dollar against other
currencies. Measured in Euro for example, as the dollar has been falling steadily, the price of oil appears
much less volatile. This results in worldwide price gains being relatively mild, but as the dollar loses its
value against the euro, oil prices in the United States rise because they are priced in dollars.
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Late 2007 increases
On October 19, 2007, U.S. light crude rose to a new height of $90.02 per barrel due to a combination of
ongoing tensions in eastern Turkey and the reducing strength of the U.S. dollar. Prices fell briefly on the
expectation of increased U.S. crude oil stocks, however they rose again rapidly to a peak of $92.22 on
October 26, 2007 when stocks were revealed to have instead fallen.
Prices increased throughout late October and early November. On November 7, 2007 light crude oil
reached another record, closing at $98.10 per barrel. On November 21, 2007, oil prices rose to a new high
of $99.29 per barrel, leading to fears of the price breaking the $100 per barrel mark due to a Wall Street
Journal report which stated that peak oil had arrived.
Early 2008 increases
March 15, 2008, Redwood City, California
On January 2, 2008, U.S. light crude surpassed the psychological barrier of $100 before falling to $99.69,
due to tensions on New Years Day in Nigeria and on suspicion that U.S. stocks of crude will have dropped
for the seventh consecutive week. A BBC report from the following day stated that a single trader bid up
the price. Stephen Schork, a former floor trader on the New York Mercantile Exchange and the editor of an
oil market newsletter, said one floor trader bought 1,000 barrels (160 m³), the smallest amount permitted,
and sold it immediately for $99.40 at a $600 loss. However, on January 3, oil rose to $100.05 a barrel in
33
intraday trading. Oil fell back later in the week to $97.91 at the close of trading on Friday, January 4, in
part due to a weak jobs report that showed unemployment had risen.
Despite news on weakened demand, the price of oil once again rose to $100.10 a barrel on February 19th
after a Texas refinery fire, rumors about OPEC production cuts, and evidence that the supply of oil is
decreasing faster than demand of oil. Oil prices rose above $101 a barrel February 27, 2008.[87] Oil prices
surpassed $103 a barrel February 29, 2008 as continued weakness in the U.S. dollar and the prospect of
lower Federal funds rates attracted fresh capital to the oil market.
Oil prices continued to rise to $104 on March 3, 2008 continued by the weakness in the United States
dollar] The OPEC on March 5, 2008 accused the United States of economic "mismanagement" that it said is
pushing oil prices to record highs, rebuffing calls to boost output and laying blame at the feet of the
George W. Bush administration. Oil prices surged above $110 to a new inflation-adjusted record on March
12, 2008 before settling at $109.92.[90] Oil continued its soar skywards, hit $111 a barrel, on March 13,
2008, before sliding back to below $110 amid fears of economic recession in the United States. The record
was again broken on March 17, 2008, with U.S. light sweet crude reaching $111.80. On April 15, 2008 the
price of oil broke the $114 mark for the first time. The price increased to $115.07/barrel on April 16, 2008
due to the increasing weakness of the U.S. dollar, and increased again to $117 per barrel on April 18, 2008
after a militant group in Nigeria said it had attacked an oil pipeline. Oil prices rose to a new high of
$119.90 a barrel on April 22, 2008, before dipping and then rising $3 on April 25, 2008 to $119.10 on the
34
New York Mercantile Exchange after a news report that a ship contracted by the U.S Military Sealift
Command fired at an Iranian boat.
Mid-2008 increases
Gas prices on May 26, 2008 (Memorial Day in the United States) outside Bakersfield, California
On May 9, 2008, the oil price exceeded $125 per barrel for the first time, while on May 21, 2008 the oil
price exceeded already $130 per barrel of Brent Crude. In approximately 24 hours from May 21 to May
22nd, 2008, the price per barrel of oil passed $135.
On June 6, prices rose $11 in 24 hours, the largest gain in history. The possibility of an attack on Iran by
Israel was considered to have contributed to the rise. The combination of two major oil suppliers reducing
supply has generated fears of a repeat of the 1973 energy crisis. The mid-July decision of the Saudi
kingdom to increase oil output has caused no significant influence on prices, but the caused the Iranian
government misgivings. According to the oil minister of the Islamic Republic of Iran Gholam-Hossein Nozari
the world markets are saturated and that a Saudi promise of increased production would not lower prices.
Several Asian refineries were refusing Saudi petroleum in late June as over priced and of the wrong grade.
Oil prices on June 28, hit record of $142.99 at 1:58 p.m., the highest since 1983 and to $142.97, the
highest intraday price since 1988, owing to a weak dollar, geopolitical unrest and global equities slump. [103]
[104][105]
Oil rose on July 1 to a NYME record $143.67 and a London's ICE Futures Europe exchange record
$143.91.
35
On July 3, "the Brent North Sea crude contract for August delivery rose to $US145.01 a barrel" in Asian
trade. London Brent crude reached a record of $145.75 a barrel, and Brent crude for August delivery
peaked to a record $145.11 a barrel on London's ICE Futures Europe exchange, and to $144.44 a barrel on
the NYMExchange. By midday in Europe, light, sweet crude for August rose to a record $ 145.85 a barrel
on the NYME while Brent crude futures rose to a trading record of $ 146.69 a barrel on the ICE Futures
exchange. On July 11, Oil hit another record of $US147.00 a barrel, after a $10.00 decline in oil before.
On July 15, a selloff began after remarks by Chairman of the Federal Reserve Ben Bernanke which
indicated significant demand destruction within the US because of the high prices. Within hours of his
statements, an $8 drop had occurred, the biggest since the first US-Iraq war. By the end of the week,
crude oil had fallen by 11% to US$128, also affected by an apparent easing of tensions between the US
and Iran.
36
WHY PRICES ARE

RISING
37
38
Forecasted prices and trends
Fatih Birol, chief economist of the International Energy Agency expressed his opinion in October, 2007 that
oil prices will remain high for the foreseeable future due to rapid increases in demand from the huge
developing economies of China and India. Although India has raised prices, China has "no plans" to do so.
According to informed observers, OPEC, meeting in early December, 2007, seemed to desire a high but
stable price that would deliver substantial needed income to the oil producing states, but avoid prices so
high that they would negatively impact the economies of the oil consuming nations. A range of 70–80
dollars a barrel was suggested by some analysts to be OPEC's goal.
Some analysts point out that major oil exporting countries are rapidly developing; and because they are
using more oil domestically, less oil may be available on the international market. This effect, outlined in
the export land economic model, could significantly reduce the oil available for trade and cause prices to
continue to rise. Particularly significant are Indonesia (which is now a net importer of oil), Mexico and Iran
(where demand is projected to exceed production in about 5 years), and Russia (whose domestic
petroleum demand is growing rapidly).
In May 2008, Barclays Capital raised its forecast for average crude oil price in 2008 from its previous
prediction of $100.80/bbl to $116.90/bbl, citing the only modest decreases in oil consumption among
OECD countries, strong demand growth among non-OECD countries, the slow development of alternative
39
fuels, and weak non-OPEC supply which "continues to under-perform dramatically relative to consensus
expectations.
Also in May 2008, Arjun N. Murti and other Goldman Sachs analysts issued a research report predicting oil
prices are likely to rise to between $150 to $200/bbl in the next six to 24 months. This was a marked
increase from Goldman Sachs' earlier (September, 2007) forecast of oil prices averaging $85/bbl through
2008, rising to $95/bbl at year end, which was in turn an increase from still-earlier predictions.
Also in May 2008, T. Boone Pickens, Jr., the influential oil investor who believes the world’s oil output is
about to peak, warned oil prices would hit $150 a barrel by the end of the year. “Eighty-five million barrels
of oil a day is all the world can produce, and the demand is 87m,” Mr Pickens said in an interview with
CNBC. “It’s just that simple.”
In June 2008, Alexei Miller, head of Russian energy giant Gazprom, warned that the price of oil is likely to
hit $250 a barrel sometime in 2009. Miller said that while speculation had played a role in oil prices, "this
influence was not decisive." Bloomberg reported that, as of mid-June, "At least 3,008 options contracts
have been purchased giving holders the right to buy oil at $250 a barrel in December".
Also in June 2008, Shukri Ghanem, head of Libya's National Oil Corporation, said: "I think it [the oil price]
will go higher. That is a trend that will continue for some time. The easy, cheap oil is over, peak oil is
looming."
40
On 26 June 2008, OPEC President Chakib Khelil said in an interview: "I forecast prices probably between
$150-170 during this summer. That will perhaps ease towards the end of the year." Iran's OPEC governor
Mohammad-Ali Khatibi predicts that the price of oil would reach $150 a barrel by the end of this summer.
Near-term peak oil proponent Matthew Simmons predicts a rise to $300 a barrel or higher by 2013 as
sweet crude petroleum becomes more scarce and major producers begin failing to meet demand.
Demand is at an all-time high, fuelled by the continued economic expansion of the economies of China and
India.
China overtook Japan as the world's second-largest consumer of oil in 2003 and is closing in on the US,
with demand for oil growing at about 15% a year.
Western Europe and Japan are heavily dependent on oil imports as production cannot meet massive
domestic demand.
The gas-guzzling US is the world's largest per-capita oil consumer but produces much of its requirements
itself.
Producers in the Middle East, where oil costs so little, are also heavy users. Poorer countries consume
much less per head.
The Middle East is the biggest oil producer, currently providing nearly one-third of the world's total.
41
Europe and Eurasia (mainly Russia and the UK) and North America are also big producers. The difference
is, nearly all the Middle East oil is for export while Europe and the US do not produce enough to meet their
own needs.
42
43
The weaker dollar has been driving up oil prices as investors have been using the commodity as an
alternative to holding dollars.
Oil prices nearly doubled in value during 2007, but prices have still not reached a record high if inflation is
taken into account.
Adjusting for inflation, US light crude's record peak of $101.70 came in 1980 against a backdrop of war
between Iraq and Iran.
44
Differing strategies
Since the 1970s, Opec's power has waned, with its control over oil prices being questioned.
There have been continuing disputes about whether member countries are actually sticking to their agreed
quotas. Also, strategies favoured by countries such as Kuwait and Saudi Arabia, which have enormous oil
reserves and relatively small populations, are often at odds with those of countries such as Iran and
Nigeria, that have bigger populations and few other exports.
Indonesia has announced that it may leave Opec when its membership expires.
The official reason is that it is no longer a net exporter of oil. But the cartel's only South East Asian
member is also understood to have been upset that there have not been greater increases of production
to try to bring prices down from their record levels.
Another factor weakening the cartel is that as oil prices have risen, reserves that were not previously
worth tapping in non-Opec countries have now become viable and Russia has become a particularly
significant supplier.
World heading for much worse oil crisis
45
With demonstrations and strikes against rising oil prices hitting not only India, but also the rest of the
world, the crisis is set to get worse in the days ahead. It won’t be too long before the Indian Government is
forced to think afresh on the strategy to deal with the imminent disaster in the making.
Oil producing nations have hardly done anything so far through OPEC to increase production. Saudi Arabia
has claimed that it had increased production and the rise in oil prices is not justified. Many think that oil
market speculation has in part been responsible for keeping the prices at a high level.
Many experts feel that oil could be headed for $250 a barrel. They hold market speculators as being partly
responsible for the continuing rise in oil prices. But they also holds the market situation of supply and
demand being responsible for the current crisis and the impending disaster.
The International Energy Agency in its latest monthly report has stated that the huge rise in oil prices is
due to the mismatch between demand and supply of the oil, the failure of governments to harness other
sources like nuclear energy.
In many countries, especially developed countries like United Kingdom, the demand for petrol by the
46
motorists has fallen by nearly 20 per cent as many have started using public transport. However most
developing countries, including India, lack an efficient public transport system.
If oil prices do touch even $200 per barrel, and not $250 as warned by the experts, the world could be
headed for a crisis in which food prices could soar to new heights as the costs of running tractors,
tubewells and production of fertilisers are pushed upwards. Civil aviation would be hit hard as would also
be tourism and travel industry. Household electricity and cooking gas bills could rise to all-time high
making them beyond the reach of an average Indian family.
For India, the crisis could be a devastating. Having failed to deal with the subsidies on oil, the country will
be headed for an unmanageable rise in inflation.The oil crisis is already causing serious problems in
developed countries. In Europe transporters went on strike asking governments to slash the tax on fuel.
The rising cost of food is hurting the family budgets. In the United Kingdom nearly half a million children
are said to be malnourished as families struggle to control their household budgets within their means.
For India there is no escape from taking urgent steps to create alternative sources of power generation to
ensure that industry, farms and homes are freed from their dependence on oil. Cars and two wheelers
perhaps are not the culprits of this crisis as car makers have continued to produce fuel-efficient vehicles.
The simple fact is that country like India cannot manage with the price of oil rising to $200.
47
But still it can be said that with the kind of intelligent and hard working manpower that India has, the
country is capable of meeting the challenge of the energy crisis.
INDIAN SCENARIO AND ITS STRATEGY TO DEAL WITH OPEC
The Indian scenario
48
49
50
INDIAN STRATEGY TO DEAL WITH OPEC
Asking OPEC to act against speculators
India has asked oil-producing countries to move against what it called speculation pushing up prices of
crude. Indian finance minister has asked recently the energy ministers of the Opec countries in Jeddah in
Saudi Arabia that there is need for the oil industry toaffirm its leadership in price formation and not remain
a passive spectator of speculation and paper trading in oil.
India has proposed that adopting a price band mechanism would stabilize prices in the global market.
Under the mechanism, consuming countries will guarantee that oil prices will not fall below an agreed level
while producing countries will ensure that oil prices do not rise above a guaranteed level.
This can be one of the solutions to save the world from volatility and unpredictability in oil prices. In case
the global economy slowed or slipped into recession due to high oil prices the oil producer countries would
also suffer.
The current level of prices was in the interest of neither the producer nor the consuming countries.
51
International oil prices in the last 10 months have doubled from $70 a barrel in August 2007. There are
evidences that large financial institutions, pension funds, hedge funds, etc have channelised trillion of
dollars into commodity investments and commodity derivatives. These financial transactions are
unregulated and highly opaque and the demand for oil generated by these funds is purely speculative.
Asking OPEC for uniform pricing policy
India has asked OPEC to adopt a uniform pricing policy for all buyers and not charge a premium from
developing countries in Asia while offering a discount to the developed West.
Petroleum Minister Mani Shankar Aiyar told the 132nd OPEC ministerial conference in Vienna.
India is the only importer among Asian countries to have been invited for the meet to present views on
petroleum and sustainable development.
All Asian countries, barring Japan, were developing nations and accounted for two-thirds of the crude
imports from West Asia.
During 2003, Asian consumers paid about half a dollar per barrel more than US buyers and nearly two
dollars per barrel more than European consumers.
In the April-July quarter this year, Asian countries paid 36 cents per barrel more than the US and close to
three dollars per barrel more than European customers.
52
The Asian premium costs between $5-10 billion a year to Asian countries, according to the Japan's Institute
of Energy Economics.
Import dependent India estimates the premium accounts for $750 million to $1 billion of its over $18 billion
oil import bill, as per petroleum ministry official reports.
In the absence of energy efficient technology it takes India nearly three times as much oil to produce one
unit of economic output as in the OECD (Organisation for Economic Co-operation and Development)
countries.
 Asking OPEC to raise oil production
India has joined the global chorus asking members of oil exporting cartel OPEC to increase volumes to
calm global crude prices. Indian oil minister has complimented his Saudi counterpart for unilateral decision
to increase production by 300,000 bpd (barrels per day).
This action would help supply side management and would thus stabilise the current oil market
Major oil producing countries should raise their output to calm the market further and revitalize the global
economic growth.
53
Saudi Arabia is the world's largest oil exporter and has unilaterally decided to raise production by 300,000
bpd, mainly for exporting to Asian markets which are witnessing record growth in demand and are pushing
up global prices.
This is an effort at weakining the adverse impact of high oil prices on developing economies.
The Indian government has already raised prices of motor fuels and cooking gas this year to save state-
owned oil marketing companies from bankruptcy.
The current high oil prices coupled with the turmoil in the financial markets would seriously impact the
economic growth of most countries and in the longer term affect both producers and consumers," Deora
wrote.
However, experts feel that India does not have much influence in the global oil market and Saudi Arabia
had been resisting much stronger US demands for pumping more oil for almost a year before deciding to
raise its output.
India in 2007-08 spent $68 billion for its crude imports, up from $48.38 billion in 2006-07. Even after the
June 4, 2008 decision raising prices of diesel by Rs 5 a litre, petrol by Rs 3 and cooking gas cylinders by Rs
54
50, besides reducing customs and excise duties, the state-run firms continue to incur losses of Rs 13.79 a
litre on petrol, Rs 23.22 on diesel, Rs 35.98 on kerosene and Rs 302.99 on each cooking gas cylinder refill.
 Building relationship with OPEC: Indian finance minister and petroleum minister will also attend OPEC
meet
The decision to send Indian finance minister to the meeting, called by King Abdullah of Saudi Arabia to
discuss measures to stabilize the international oil market, have been taken at the highest level in view of
the rising inflationary trends and the volatility in oil market threatening to derail economic growth. All eyes
are on this high-level meeting between producers and consumer-nations.
Saudi Arabia has already announced that it will step up its daily oil output by 2,00,000 barrels to help cool
record-high crude futures. Saudi Arabia, the world’s biggest oil exporter, is believed to be the only
producer with spare output capacity. However, there are chances that production increases may still not
keep up with future demand.
Indian finance minister would interact with leading OPEC (Organisation of the Petroleum Exporting
Countries) members and seek their intervention in cooling crude prices.
55
The idea is to get a proper feedback from the oil producers in order to chart a strategy for dealing with a
situation that could emerge in future. India is a petroleum import-dependent nation and any volatility in
the crude oil market would only make things difficult for the Indian government in an election year
 OPEC rejects call for oil price band and sees crude hitting $170
Oil cartel OPEC on June 30, 2008 rejected India's call for regulating crude prices through a price band,
saying the market was the best judge and forecast prices climbing to USD 170 a barrel on summer
demand in the US.
They have said that the producing and consuming nations never agree on any price and that they never
agreed with (OPEC) price band (that operated between 2000 and 2005). Hence they did away with the
price band.
Stung by high oil prices driving inflation to 13 year high of 11.42 per cent, the Indian Finance Minister had
asked earlier the Organisation of Petroleum Exporting Countries (OPEC) to operationalize a price band
mechanism so that crude prices move within a specified range.
56
India feels that the speculative premium is USD 60 a barrel and blame speculators for the rise in crude
prices that have touched an all time high of USD 142.99 a barrel, but Western oil firms pinned it on
demand-supply mismatch.
 India should prosecute OPEC in WTO
We live in the WTO era of rule-based trade aimed at increasing competition and removing distortions. Yet
there is an absolutely huge exception to this rule called OPEC (Organization of Oil Exporting Countries).
This cartel shamelessly aims to manipulate production to deceive consumers.
Why does the world community not impose sanctions on the cartel and ensure its break-up? Clearly the
very existence of OPEC is anti-competitive. India is now a huge importer of energy, and its dependence on
imported energy will rise further in coming years. But India by itself cannot take on OPEC. Rather, it must
raise the issue within WTO, and seek multilateral action to stop the fleecing of oil consumers.
US should also help India in the process considering the improving relations between the two countries. US
anti-trust legislation makes it illegal for producers to collude to raise prices. This is why the US government
fined multinational vitamin producers and even Microsoft. Logically, it should prosecute government-
57
owned oil companies in OPEC countries, sequester OPEC assets in the US, and arrest any OPEC oil minister
who steps into the USA.
But it will not do that because it is reluctant to move against cartelizes who happen to be governments
rather than corporations. The State Department and Pentagon view many OPEC countries as valuable
allies.
The second reason for US reluctance to act is its own oil producers, notably those based in Texas, who are
major beneficiaries of cartelization. Many of them are engaged in oil exploration in OPEC countries, and
fear that anti-trust action against OPEC could jeopardize their foreign operations. So this combination of
big oil, the Pentagon and State Department has put paid to any US anti-trust initiative against OPEC.
Instead the US has used diplomatic pressure on OPEC, viewing cartelization as a diplomatic rather than
anti-trust issue.
But even governments are answerable in forums like WTO, which seeks to lower global trade barriers.
Cartelization is a far more objectionable barrier to trade than quotas or tariffs.
India needs to raise the cartelization of oil as a WTO issue, and canvass support from other oil-importing
countries. If India moves positively, the US and other western nations will find it difficult to adopt the
position that protecting Indian small scale industries is bad but looting consumers of oil is acceptable.
58
 India, Iran should sign gas pipeline deal
India has said in last week of June, 2008 that it will sign very soon an agreement with Iran and Pakistan in
connection with the transnational pipeline project involving the three countries.
the Iran-Pakistan-India (IPI) pipeline project is of $7.5 billion
There are some issues with Pakistan that has been taken care of since the Pakistan oil minister has
changed and so India will have to deal with the new minister who will be dealing with it. Very soon India
hopes to sign the agreement with Iran and Pakistan.
The project was first mooted in 1994 but has been stalled by a series of disputes over prices and transit
fees.
India's domestic gas supply meets barely half its fast growing demand, and with projected 7-8 percent
annual growth, the country has to ensure reliable supply of affordable energy. As long as natural gas is
used to move India's power turbines, Iran, geographically closest to India, will be the lowest cost supplier.
While for India the pipeline is almost a must, Pakistan can afford to kill the project and reap many
diplomatic and economic benefits without compromising its energy security. Should it decide to do so it
59
could opt for an alternative energy route such as the proposed US$2 billion Turkmenistan-Afghanistan-
Pakistan (TAP) gas pipeline which would carry gas from Daulatabad in Turkmenistan via Herat Afghanistan
to Multan. For an additional US$500 million TAP can be extended to Fazilka on the Pakistan-India border
and hence provide gas to India as well. At a later stage TAP could be expanded further to connect other
fields in Central Asia to Gwadar, turning the new port into one of the world's most important energy hubs.
From an energy security standpoint TAP could provide Pakistan with 3,350 million meters cubic feet per
day (mm cfpd) of gas, more than the 2,230 mm cfpd the IPI is planned to carry. Economically, shifting from
IPI to TAP should be of no consequence. The potential revenue of the IPI, US$700 million in transit fees
alone, would be collected too were TAP extended to India. TAP will also save Pakistan the need to depend
on Iran which has never been a good neighbour due to its role in spreading Shia militancy in the
predominantly Sunni Pakistan. Furthermore, Iran is not a reliable supplier. Last winter it failed to meet its
contractual agreements to Turkey resulting in the disruption of gas supplies to Turkey during the winter.
Running through the restive province of Balochistan, the IPI will face constant threats its reliability due to
sabotage by Baloch insurgents.
 Iran-Pakistan-India Pipeline in view of US
60
In normal times, a pipeline connecting India and Pakistan would have been welcome news in the US. There
is nothing like a multibillion dollar joint economic project to create interdependence and hence reduce
tension between India and Pakistan, two traditionally adversarial nuclear powers. But these are not normal
times and with the risk of war in South Asia greatly diminished, America's top foreign policy priority is
preventing the proliferation of terrorism, radical Islam and nuclear weapons.
The prime challenge for US is Iran, which defies the international community by developing nuclear
capabilities, supplies militias in Iraq with weapons used to kill American troops, trains and funds groups
like Hizballah and Hamas and calls for Israel to be "wiped off the map". This is why the planned US$7.5
billion Iran-Pakistan-India (IPI) natural gas pipeline, which would provide the Islamic Republic an economic
lifeline at a time when the US and its European allies are trying to weaken it economically, is not to
Washington's liking.
The proposed 2,600-kilometer pipeline which is currently moving into high gear puts both Pakistan and
India in the front line of an economic war currently taking place between Washington and Tehran.
America's strategy to weaken the Iranian regime can only succeed through a multinational effort to cut
investment in Iran's energy sector.
61
Despite its vast oil and gas reserves Iran is suffering a staggering decline in oil exports caused by lack of
investment by foreign energy companies. Sanctions originally imposed in 1995 by President Bill Clinton
and renewed by President Bush prohibit US companies and their foreign subsidiaries from conducting
business with Iran, while banning the financing of the development of the country's energy resources. In
addition, the US Iran-Libya Sanctions Act (ILSA) of 1996 imposes sanctions on non-US companies investing
more than US$20 million annually in the Iranian oil and natural gas sectors. The 2006 Iran Freedom Act
(IFSA) extended ILSA until December 2011. As a result of these sanctions, investment in Iran's energy
sector has plummeted, and Iran exports 2.34 million barrels of oil per day, about 300,000 barrels below its
OPEC quota.
According to Iranian officials, if the decline in investment continues, income from oil and gas sales could
virtually disappear within a decade. With oil and gas exports accounting for half the government's budget
and around 80-90 percent of total export earnings, this spells trouble for Iran which already faces the
worst economic crisis since the 1970s. The feeling among many in Washington is that Iran is in its worst
economic condition and by putting the economic pressure the West can eventually bring about a regime
change. That is why any attempt by Iran's neighbors and clients to give its energy industry an opportunity
to recover is viewed by US as a quasi-hostile move.
62
US giving India access to the global market for nuclear fuel and technologies for India's civil nuclear power
industry
In a clear departure from America's long standing non-proliferation regime the US Congress also approved
last year a landmark deal giving India access to the global market for nuclear fuel and technologies to
enhance India's civil nuclear power industry, as an alternative to natural gas based power. If India insists
on building the pipeline there are likely to be many calls on Capitol Hill to reconsider this dispensation. Yet
India seems to be bent on moving forward unfazed by the impact such policy might have on its bilateral
relations with the US.
The US will no doubt try to persuade Pakistan to opt for a project that does not compromise its strategic
objectives in the region and is likely to offer Islamabad handsome financial incentives above and beyond
the US$1-billion-plus yearly aid that it has been advancing to Pakistan since 2002. No doubt Pakistan and
India, both projected to face major gas shortfalls, have a great deal to gain from pursuing the IPI pipeline.
 Trading With Non-OPEC Countries
63
64
Non-OPEC countries contain less than one-fourth of the world's proven oil reserves but produce nearly 60
percent of the world's oil. They also possess most of the world's capacity for refining crude oil into
petroleum products such as gasoline and heating oil. Because non-OPEC countries have smaller reserves
which are being depleted more rapidly than in OPEC, their overall reserves-to-production ratio, which is an
indicator of how long proven reserves would last at current production rates, is much lower (about 14
years for non-OPEC and 73 years for OPEC).
The oil industries in non-OPEC countries differ from those of OPEC countries in several fundamental ways:
Markets. Whereas most OPEC oil is produced for export, many non-OPEC countries, such as the United
States, produce oil primarily to meet their domestic demand for petroleum. Nevertheless, non-OPEC
countries as a group account for about 45 percent of crude oil trade worldwide.
Industry Ownership. OPEC countries generally have state-owned and state-operated oil industries.
Although some non-OPEC countries (e.g., China, Mexico) also have state industries, most either already
have a private sector oil industry or are promoting increased private investment in their oil industries
Finding Costs. Non-OPEC oil reserves generally cost more to develop and produce than OPEC reserves.
Finding costs in the Middle East (where OPEC countries control most of the region's oil reserves) averages
just over $2/barrel compared with about $4.50/barrel in the United States and western Europe, and
$5.75/barrel in Canada
65
Excess Capacity. Non-OPEC producers typically operate close to capacity, thus they have a relatively
limited ability to boost production without significant additional investments. Nearly all of the world's
excess production capacity is in OPEC countries.
66
REFERENCES
• www.doe.gov
• www.eia.doe.gov/cabs/india.htm
• www.wikipedia.org
• www.opec.org
• Reliance Review of Energy Markets – Energy Research Group, RIL
• news.bbc.co.uk
67

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INTERNATIONAL BUSINESS :: MID TERM PROJECT

OPEC – The Organization

THE WORLD CRUDE SCENARIO

AVAILABILITY AND CONSUMPTION PATTERN

THE OPEC FACTOR

WHY ARE PRICES RISING

THE INDIAN SCENARIO & ITS STRATEGY

FUTURE ROAD MAP

OPEC – The Organization

The organization’s principal objectives are:

1960 - founded by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela

1965 - Moves from Switzerland to new headquarters in Vienna, Austria

1973 - Opec embargo causes oil price shock

1990 - Iraq's anger at Kuwaiti over-production sparks Gulf War

1998 - World oil price drops to $10 a barrel

2000 - Opec introduces $22-$28 a barrel price band

2005- Price band abandoned

2008- Indonesia decides to leave Opec

THE WORLD CRUDE SCENARIO

International Petroleum Supply and Consumption

2007 2008 2007 2008

PRODUCTION COORDINATION WITH OPEC?

PROVEN CRUDE OIL RESERVES

As of January 2005, 89 percent (73.4 million bbl/d)

THE OPEC FACTOR

The Middle East remains the biggest player in oil.

The North Sea and Canada still have substantial reserves.

That problem is exacerbated by the time delays in the system.

July 2006, San Francisco, California

September 2006 decreases

Late 2007 increases

Early 2008 increases

March 15, 2008, Redwood City, California

WHY PRICES ARE

Forecasted prices and trends

World heading for much worse oil crisis

INDIAN SCENARIO AND ITS STRATEGY TO DEAL WITH OPEC

The Indian scenario

INDIAN STRATEGY TO DEAL WITH OPEC

Asking OPEC to act against speculators

Asking OPEC for uniform pricing policy

 Asking OPEC to raise oil production

 India should prosecute OPEC in WTO

 India, Iran should sign gas pipeline deal

the Iran-Pakistan-India (IPI) pipeline project is of $7.5 billion

 Iran-Pakistan-India Pipeline in view of US

 Trading With Non-OPEC Countries

• Reliance Review of Energy Markets – Energy Research Group, RIL

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