Economics in Action OPEC NDSU Economics 201 Principles

Economics in Action: OPEC NDSU Economics 201: Principles of Microeconomics Guest Lecture December 6, 2018 David Ripplinger

A Math Problem 2

The Organization of Petroleum Exporting Countries (OPEC) is an cartel of 15 countries that “works to stabilize oil revenues. ” 3

Oligopoly Definition A market with few sellers. The interactions of individual firms can affect the others By coordinating activities they can set prices In the case of OPEC, production targets are set with prices expected to fall in line.

Collusion (agreement to limit competition) is Illegal – at least in the United States.

Who were the largest producers of petroleum in 1970 (mmbls/d)? 1. United States 9. 6 2. Soviet Union 7. 0 3. Saudi Arabia 3. 8 4. Iran 3. 8 5. Venezuela 3. 7

Who are the largest producers of petroleum in 2017 (mmbls/d)? 1970 1. United States 9. 6 2. Soviet Union 7. 0 3. Saudi Arabia* 3. 8 4. Iran* 3. 8 5. Venezuela* 3. 7 2017 1. United States 14. 9 2. Saudi Arabia* 12. 4 3. Russia# 11. 2 4. China 4. 9 5. Canada 4. 6 * OPEC Member #Russia

Herfindahl-Hirschman Index •

HHI for oil 5 in 1970 = 385 /10, 000 (not much concentration) 2017 = 569 But if OPEC was able to act as a single entity. 1970 = 2578 in 2017 ? 1308 plus Russia 2265

MMBLS/D Oil Production 120 0. 60 100 0. 50 80 0. 40 60 0. 30 40 0. 20 20 0. 10 0 0. 00 1960 1970 OPEC 1980 World 1990 ROW 2000 OPEC/World 2010

There is no honor among thieves.

A little history Late 70’s/early 80’s OPEC limited production to keep prices high Saudi Arabia cut production significantly 12

Late 70’s/Early 80’s Production Higher cost alternative sources Prices Less driving 13

Saudi Response Increase production to gain market share. Oil prices fell 2/3 rds! in 19851986 14

2014: History Repeats Itself (again) OPEC members overproducing (cheating) Shale oil/renewables Slumping demand in East Asia Saudi Arabia goes for market share 15

How low? WTI Nearby Futures $120 West Texas Intermediate fell to $100 below $40 in 2016 $80 – less than half of $60 its 2014 high of $40 $101 $20 1/2/2013 1/2/2014 1/2/2015 16

How long? A few months? A year to 18 months? Longer? 17

What about the Bakken? ND Light Sweet: $25 12/16/15 18

11/14 be 11/14 Rigs 8/15 be 8/15 Rigs Billings $56 3 $28 0 Bottineau. Renville $61 5 $85 2 Bowman-Slope $75 1 $85 2 Burke $87 2 $82 0 Divide $104 6 $81 3 Dunn $29 27 $24 11 Golden Valley $87 0 $64 0 Mc. Kenzie $30 72 $27 26 Mc. Lean $73 0 $25 0 Mountrail $45 31 $43 13 Stark $38 2 $41 1 Williams $39 39 $38 16 ND Department of Mineral Resources 19

ND Rig Count 12/15/15 -- 65 Down from 180 the last Friday of November, 2014 Oil production is steady around 1. 2 million bbls/day 20

Saudi Arabia has the lowest crude oil production costs of any nation. What is the marginal cost of producing a barrel of oil in Saudi Arabia? a. b. c. d. $3 $15 $30 $105 21

What is the marginal cost of a barrel of oil in Saudi Arabia? a. $3 22

Overproduce to Drive Down Price-to the Point of Ruin Brent Oil Spot Price $140 $120 $100 $80 $60 $40 $20 $0 January 2014 $35 July 2014 January 2015 July 2015 23

The Plan To drive prices so low and so long that - competing businesses are bankrupt - competing nations are overthrown 24

What is the break-even price of oil in Russia? a. b. c. d. $3 $10 $30 $105 25

What is the social break-even price of oil in Russia? d. $105 26

It’s a Trap Most oil producing nation’s have no choice to produce as much oil as they can, because they need the revenue ->Venezuela 27

Petard Hoisting The problem is that Saudi Arabia has social programs too. And that it is blew though its reserves faster than anyone else. 28

‘Merica! 29

ND Rig Count 1/29/16 - 44 Down from 180 the last Friday of November, 2014 Oil production is steady around 1. 2 million bbls/day 30

The most valuable oil is still in the ground. 31

Today Oil (WTI) is just above $50. Which is ‘too low’ for Saudi Arabia/OPEC. (!? !) They are now considering reducing production to increase price.

You can marry more money in five minutes that you can make in a lifetime.