Monday, September 3, 2012

The Oil Cartel In Our Ever Changing And Globalizing World

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By Nichole Cunningham

People often say that an oil cartel controls the market price of petroleum in the global market. The oil producers will argue that they have already been competing and thus, no collusion is said to exist. The activists, on the other hand, state that they have only strengthened their hold on the world's supply of this precious resource. The answer to this question should be answered, now more than ever.

The cartel must first be defined in order to further scrutinize this question. Basically, a cartel is a formal agreement among competing firms to set the prices and to pool resources to ensure their continued existed. This makes the firms effectively act as a monopoly, raking in huge profits at the cost of the consumer. This is done by suppressing supply or by dismantling smaller firms with their clout.

The Organization of the Petroleum Exporting Countries, or OPEC is the main example of the cartel's structure. Their power over oil prices was violently demonstrated in 1973, when they suppressed the oil supply for the world by reducing their quotas. This threw doubts about the real scarcity of oil in their supplies and that became the impetus for greater scrutiny of the OPEC and a greater effort to find alternate sources of petroleum.

The reason that the OPEC did this, however, was due to Cold War politics. This was seen as a reaction to the Western World's support of Israel during the Yom Kippur War. During this time, the OPEC was made up exclusively by Arab countries and by the Soviet Union. Thus, their political interests clashed with the West, particularly that of America.

With the end of the Cold War came other places where oil is supplied. This lessened the OPEC member's hold on the price. Non-OPEC members who produce oil include the United States, Canada, Mexico, Malaysia and Indonesia. Their output is also more than enough to compensate for the OPEC members' output. In addition, a newly democratized Russia's interests is already aligned with free trade.

In the local scene, however, an oligarchy is said to persist. This is very true for places where gas is still an imported product. This "single pipeline" has forced different companies to match their prices at the pump. Since there are high barriers to entry in the petroleum distribution industry, this makes collusion easier. These companies also often are vertically integrated, from pipe to pump and even beyond.

The presence of small players, on the other hand, weakens this stranglehold. Since they can undercut the oligarchs and are protected by law, they can keep the prices competitive. However, with the scarcity of oil being felt more and more, this remains to be seen. In addition, factors such as piracy and political instability in oil-producing areas can make it more difficult for people to be able to accurately control the prices.

It can be said that there are no more cartels in oil production. However, in the distribution of petroleum, the oil cartel still flourishes. This puts the control of the oil supply closer to the pump, since it is they who control the prices. Thus, refining and distribution are the names of today's game.

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