Tag Archives: interest

OPEC: Influential Oil Producing Cartel with “Diplomatic Immunity”

OPEC Cartel Logo

OPEC Cartel Logo

Fun Facts About OPEC

Members of OPEC meet

Members of OPEC meet

 

 

Current Members: Algeria, Angola, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela

Cartel: By definition, OPEC is a cartel — a group of producers which tries to restrict output in an effort to keep prices higher than the competitive level.

It no longer sets crude oil prices: OPEC admits to setting crude oil prices in the ‘70s and’ 80s — they would look ridiculous to try and deny it. However, the oil market underwent a transformation in the 1990s and today, prices for crude oil are established according to three markets: 1) The New York Mercantile Exchange; 2) The International Petroleum Exchange in London; and, 3) The Singapore International Monetary Exchange.

This isn’t to suggest that OPEC has no influence on prices; quite the contrary. Prices established by the exchanges are based on supply and demand; therefore any decision OPEC makes concerning restricting production, for example, will have some effect on prices. These decisions, however, can have a direct consequence on profit margin, so it isn’t always in their best interests.

Its practices are considered to be illegal: Simply put: Cartels are illegal in many countries. In the U.S., for example, OPEC is in direct violation of antitrust laws, such as the Sherman Antitrust Act of 1890 — the same act that broke up Standard Oil, American Tobacco and Ma Bell. Antitrust laws don’t criminalize monopolies per se, only if the monopoly is used to eliminate its competition through methods of production or price-fixing.

Ordinarily, U.S. antitrust laws explicitly prohibit dealing with cartels. What makes OPEC so special? Simple: Congress grants OPEC diplomatic immunity from prosecution and in essence treats it as though it were a sovereign nation, even though this is not remotely the case. This status was tested in 1978, when the International Association of Machinists and Aerospace Workers (IAM), a non-profit labor organization in the U.S., filed suit against OPEC under the Sherman Act. In 1981, the U.S. Ninth Circuit Court of Appeals rejected the case, claiming OPEC was protected by its sovereign immunity status.

In 2007, a pair of controversial bills were introduced in Congress designed to amend antitrust laws to include OPEC. If the measures are approved in both houses and the president doesn’t veto it, individuals harmed by OPEC in the U.S. can begin to sue the organization. If this were to happen, few expect OPEC to continue doing business with the U.S.

It isn’t the only game in town: If one only paid passing attention to the media, you might get the impression that OPEC is the only oil game in town. Granted, its member countries control anywhere from two-thirds to three-quarters of the world’s proven oil reserves and over 40% of the globe’s oil production; however, there are other sets of somewhat substantial oil-producing groups.

Originally formed as an agent of the Marshall Plan following World War II, the Organization for Economic Co-operation and Development (OECD) is a vast and all-encompassing organization with all sorts of arms and legs. Of its 30 member countries, a minority are oil producers, including the USA, Canada, Mexico, and the UK. Together they account for about 23% of the world’s oil production.

Additionally, the Russian Federation and a handful of former-Soviet states, such as Kazakhstan and Uzbekistan, are responsible for about 15% of global oil production.

OPEC Member Nations

OPEC Member Nations

It was formed to fight the “Seven Sisters”: The world’s wealthy oil barons have not always resided in the Middle East. In fact, for most of the 20th century, the member nations of OPEC were at the mercy of the so-called “Seven Sisters,” a non-organizational set of oil producers and distributors which, perhaps due to that non-organizational status, somehow eluded antitrust prosecution. The Seven Sisters was composed of Standard Oil of New Jersey, Royal Dutch Shell, Anglo-Persian Oil, Standard Oil of New York, Standard Oil of California, Gulf Oil, and Texaco.

By 1960, Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela had grown tired of exporting their oil and then having to buy it back at higher prices. They formed OPEC to assert their “legitimate rights in an international oil market,” and by the 1970s, thanks in part to strategic maneuvers such as the Arab oil embargo, began to dominate the market.

It’s “customers” see bigger oil prices than its members: Oil taxes by countries that regularly import oil from OPEC, such as the U.S., the UK, Japan, and Italy, are often as much to blame for high oil prices as OPEC. Such taxes allow some countries to see oil-related revenues that are three or four times higher than some OPEC members see from exports. In addition, the production and development of oil requires huge investments, a fact that further chips away at OPEC-member profit margins.

As gasoline prices soar, more and more attention gets paid to OPEC. In the Western press its easily vilified and is a common ”fall guy“ for every issue related to oil and oil prices — not always unjustifiably so.

More than a few people would be pleased to see OPEC’s influence reduced or even made moribund. However, proven oil reserves are defined in the industry as the amount of oil that can be recovered and produced using today’s technologies, and as of 2006, the world total was 1,195,318 million barrels of crude oil; OPEC’s share of that amount was 922,482 million barrels or 77.2% (if you accept OPEC’s figures; hardly everyone does). Thus, unless a drastic change occurs in the energy-consumption habits of much of the world’s oil-hungry population, interest in OPEC is unlikely to recede for some time.

Special thanks to www.askmen.com

1 Comment

Filed under Economics, Historical Events & Figures

The U.S. Federal Reserve: Determining Monetary Policy Since 1914

Fun Facts About the U.S. Federal Reserve


  • The 12 Federal Reserve Banks

    The 12 Federal Reserve Banks

    The U.S. Federal Reserve System began on November 16th, 1914

  • The Federal Reserve is a private institution. It is owned by the 12 regional Federal Reserve banks, which are each in turn owned by a combination of regional banks, commercial banks, foreign banks, and miscellaneous individuals who have inherited pieces passed down through generations. (Rockefellers, Rothschilds, etc.)
  • The Federal Reserve holds a monopoly on the issuance of currency in the USA. In essence, this is the power to borrow an infinite amount of money at 0%. The dollar bill in your pocket is a 0% loan to the Federal Reserve. The Federal Reserve then uses these 0% loans to purchase income-producing assets. Before 2008, the assets purchased were primarily Treasury debt, which is backed by the taxation power of the US Government. In other words, we are exchanging the property rights to our valuable assets (land, labor, entrepreneurship) for little slips of green paper to buy trinkets with. The government can then tax these valuable assets to pay for our excess. The more we spend, the more the Fed owns.
  • If all money created is debt and counts as principal, where does the money come from to pay interest on this debt? It comes from the money that gets printed in the future. This is why inflation is a natural result of our current monetary system.
  • Prior the the Emergency Economic Stabilization Act/TARP Act of September 2008, commercial banks were required to hold 10% of deposits as reserves. This placed a limit on the potential amount of money creation at around 9x the original deposit. An obscure clause in the TARP Act changed the reserve requirement to 0%, immediately making the potential money supply infinite.
  • The reason for the credit spread blowups of October/November 2008 was because in the same TARP Act the Fed was allowed to pay interest on deposits without publicly stating the interest rate. Before the TARP Act, there was around $20 billion deposited by commercial banks at the Fed. After the TARP Act, deposits immediately jumped 50x to $1 TRILLION. This resulted in a disappearance of demand for risky assets, which led to blowouts in credit spreads.
  • As a result of various acts of Congress in 2008, the Federal Reserve now has the authority to buy all sorts of assets (commercial paper, corporate bonds, mortgage loans, etc.). A cynical person would say this essentially allows the Fed to seize all valuable assets in this country directly by exchanging fancy bits of green paper for them without having to go through the intermediate step of coercing the US Government into spending more money and taking on more debt.
  • Much of the Fed’s activity is not made public because of the use of off-balance sheet vehicles.
  • There is debate over the constitutionality of the Fed’s various awesome powers.

What does this all mean? This economic crisis will not become a depression. By employing the new tools of monetary policy that the Fed has created for itself (interest on reserves and direct asset purchases), the money supply can be jerked around as if on a string. Initially, this means we will soon experience another period of easy credit and unsustainable economic growth.

However, the end result of current policies is that the Fed will be powerless to stop the next economic crisis. Assuming no outside shocks (another big war, nuclear attack, etc.), the dollar will over time lose its status as the reserve currency, and we will experience a currency crisis followed by rampant inflation at some point down the road.

Special thanks to www.seekingalpha.com 

2 Comments

Filed under Economics, Historical Events & Figures