10/04/2004

OPEC: How Far Is Too Far?

OPEC has been getting media attention lately as oil prices are on the rise. These mostly middle-eastern countries supply about 40% of the world's crude oil resources combined and many countries rely on OPEC, including the US. The OPEC website claims the organizational goal is "to bring stability and harmony to the oil market by adjusting [the] oil output to help ensure a balance between supply and demand." From the point of view of a consumer, this is the absolute opposite of what has been happening in the economy. OPEC is taking advantage of the fact that demand for oil is high by minimizing the available supply and raising prices. The balance they speak of surely is not helping Americans balance their checkbooks every month! In contrast, from a managerial point of view, oil is very inelastic and OPEC can afford to stretch the pocket books of Americans. Yes, there are alternatives to fueled cars - hybrid models, bikes, buses, walking - but no substitutes to oil. Unfortunately, we cannot put milk or coke in our engines. Realistically, driving is more convinient and comfortable; OPEC knows Americans are able and willing to pay, so they are making a desirable equilibrium point to maximize their profits. What good business organization wouldn't do this? Does the phrase, "it's not personal, it's business" ring true in this situation?

On a side note, if OPEC supplies 40% of the crude oil resources, where is the other 60%?

4 comments:

Rufio said...

It looks like OPEC has their worked cut out for them if their goal is to "to bring stability and harmony to the oil market by adjusting [the] oil output to help ensure a balance between supply and demand." If you think about it the economic model is pretty messed up. The price of fuel is going up because supply is being slowed, but the demand is going up due to growth. Equalizing that equilibrium would be difficult because nothing is ever constant.

John West said...

The OPEC member states are not naive nor new to this process of playing games with their oil reserves and our needs and wants concerning those reserves. They know that until another source of energy comes along that takes over oil, they have it made in the shade. The world needs to invest resources into trying to come up with other sources of energy that is as central to life as oil has become.

Maudi said...

Americans are like a fat kid sitting in front of a chocolate cake. When it comes to oil we just can't say no no matter the price so we need to get this overweight kid to stop eating the chocolate cake or using so much oil. If we are so dependant on the oil from other countries we could end up losing our edge.

Dr. Tufte said...

There is very little evidence that OPEC is doing anything to keep oil prices high this time around. Oil prices appear to be up due to global demand (the economy is having its best year since the early 1970s), and speculation (that the price of oil will by higher in the future).