But let's get back to the OPEC story. Why do this at all? Why? You're a country with a hell ton of oil into the ground, you can just pump it out as fast as you can and make as much money as possible. Well, that's a possibility and there are many independent states around the planet that have oil and produce it and they are not an OPEC, thank you very much, they make money on the side, but the oil exporting nations in the Middle East decided that they could project much more influence as a single organized entity, as opposed to individual states with a whole bunch of oil, otherwise, if they were all individual states, they'd be competing with each other. What does competition do to price by the way, and you don't have to be a business major to know this? But there's 12 members of OPEC and 12 members of OPEC work together, okay, to fix their prices. What happens if twelve members of OPEC were 12 individual countries who all wanted to sell oil individually? They would be competing with each other and one country might say, Well, we think oil is worth 100 bucks a barrel so we're gonna sell it for 100 and the country next door is like well we're gonna sell for 99, and the country over here is like, oh we need the money, we'll sell it for 98 and someone over here, not like Venezuela's like, we're broke, we'll sell it for 20 bucks, we don't care, we need the money. You see what that does, what competition does in the marketplace? So, these states said, ha we shouldn't compete with each other, we should work together and all collectively set a price and therefore, we all make more money in the long run, sound good, sound good, huh? Well at least the original five did back in 1960. Now, you can only pull this off if you are kind of a true cartel, meaning you have to control a big enough share of this world resource in order to make an impact. If you collectively only own 10%, nobody's going to care about you, because there're just going to get their stuff from the other 90% of producers who are competing with each other, but OPEC members control, collectively, control almost 80 percent of the world's proven reserves of oil. Eighty percent, we talked about all in the last lecture who owns what. OPEC collectively maybe up to 80 percent of proven, proven, though pet countries currently produce about forty percent of the world's crude oil on any given day. Forty for any day of the week. Forty percent of all the world's oil comes from one of these 12 members. OPEC's old exports represent 60% of the total petroleum traded internationally. Now, okay, they produce forty percent of the world's, they're the ones that are selling, of what's sold, they're selling 60 percent of that. Okay, that's more than half these guys got the majority, that is the lion's share and because of that they can and do affect the price of oil. They have the most of it. Again, most much like De Beers owns like ninety percent of the world's diamonds. You own it then you could say, well I got most of them, so I will say exactly what this is worth, and you don't want to pay it will go good luck trying to find it from the other 10%. That's the way that OPEC is. They don't own or sell all of the world's oil, of course not, but they have the biggest market share of it, which means they can set the price at any given day and everyone else falls in line and that's exactly how it's worked for basically the last 50 years. Now, if you're a non-OPEC member, you can sell your oil for cheaper and that's fine, but you're only ripping yourself off, and if you're a non-OPEC member and you want to sell your old for more. You say oh, OPEC selling there were 100 bucks a barrel, we think our oils worth 200 bucks a barrel, that's fine, nobody's going to buy it, it's too expensive, and you could say well OPEC setting the price at $100 a barrel, I'm gonna sell it for 50. That's fine, you're losing 50 bucks on every barrel you sell. So pretty much OPEC does set the world price because nobody's that foolish just to lose money or not make any money at all. Okay, how do they pull off this coordination? Now I'm going to read directly from the mission statement of OPEC, always riveting stuff reading from a mission statements. Haram, Haram, Haram, mission of OPEC abbreviated, in accordance with its statute the mission of the organization of the Petroleum Exporting Countries is to coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets in order to secure an efficient, economic. and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry. Haram, Haram, Haram, Haram, Haram. Ok, that may be straightforward enough for most of even put it into Boyer terms, here's the basic translation. Us, we OPEC member states are going to coordinate between ourselves, amongst ourselves how much oil we're going to produce every quarter or every year, whatever the time allotment is and this is not a set amount and it's not a set amount for each country. So, Saudi Arabia cause they have tons and tons of oil, maybe Saudi babies gonna produce a million barrels of all this quarter and Iran's gonna produce 750,000 barrels of oil this quarter, and maybe Venezuela will do a half a million barrels of all this quarter, and Kuwait will do 350,000. Whatever that number is, okay, they're looking at what's happening in the world and they say how much oil does the world need and then how much what's our production capacity as individual members and then we'll a lot out how much will all make. Okay? And they're doing this by predicting demand and tailoring their production as close as possible to their the perceived or predicted demand. So, we think the world's going to need this, this much is exactly how much we want to produce, you guys do that much, you guys do this much, Qatar you do that much, Venezuela you do that much. See how it works? If you produce too much, then you flood the market with too much oil, and if there's too much of a product the price goes down, it's easier to get to, it's cheaper. If you produce too little prices spike and consumer get pissed and believe it or not you really never want to piss off your customers too much. This is true and OPEC just like it is everywhere else. Poor customer service, price gets too high, you piss off people, and they're like I'm not buying your product anymore even though we're all relying on oil. If you piss off the consumer too much things will happen. We're on that in a sec. So, back to OPEC, we, as the largest shareholder of the entire world's oil market will work together to attempt to produce just the exact right amount of oil the world needs every year, so that we minimize price fluctuations. Okay? We don't want to be $100 a barrel, $50 a barrel, $100 a barrel, $50 a barrel, no, no, no, market volatility. So, we want to minimize price fluctuations, try to make it about the same all the time and at the same time maximize steady profits for ourselves and our investors, okay? Yes, we're definitely gonna make money, but we want enough money, we want the price high enough so that we make enough money, but without pissing off everybody, without pissing off our customers. Got it? Okay, now despite the popular and completely incorrect opinions of the average American, I believe, OPEC does not really want to spike prices super high or have huge price fluctuations for fear that it will piss off their customers. That is a very real worry by all of these groups or this OPEC group, and this is not a hypothetical. Again, I know a lot of Americans are like, OPEC they control all the oil and they make it $10,000 a barrel just to screw everybody, No, they wouldn't they don't want to piss you off because this is not my guess, this is not my instinct, this is not hypothetical, this is a lesson that they've actually already learned in the past because the other component of having this collective oil action that the OPEC countries do is, they discovered that not only could they use oil as an economic lever to all make themselves more money and stabilize production and demand in price, so they they said, okay, well that's cool. We have economic power, but they discover that they also had political power and that they could use oil as a political weapon and though times they've tried to use it as a political weapon in the past actually did piss everyone off and did change the story for OPEC and for our story of oil in the 20th century, and now I'm gonna get to a little history that you hopefully know already. When did this happen at OPEC infuriated the world and changed their own fate? 1973 is the year to know. The oil crisis of 1973 or the 1973-74 Oil Embargo, it was the first time that OPEC, and by the way put this caveat in here put a star in your notes. This is the first time that OPEC used their all as a political weapon and here's the thing to asterisk in your notes. It was only the Arab countries of OPEC. So, not Iran, they're Persian and not the other players, not Nigeria, not Venezuela. The Arab countries which constitute that core that have honestly the lion's share of oil within OPEC. They said we're going to use oil as a political weapon. Okay, how did they do that in 1973? Well the quick back story is that in October 17th 1973, the Arab members of OPEC promised, made a statement on international TV, promised to reduce their oil production by five percent a month until the Israelis withdrew from occupied territories. Now, we haven't gotten to this yet, but here's the lowdown. These are territories that were taken from Egypt, Syria, and Palestine as the result of Israeli success in a war called the Six Days War of 1967. So, in 1967 there was a war Israel won that war and took over Palestine, took over parts of Syria, took over parts of Egypt. Okay, then in 1973 Egypt and Syria declared war on Israel in an attempt to get their territories back. It was called the Yom Kippur War. Okay? iIt was a surprise attack in October and the result of which the United States saw this and said oh Wait a minute Israel is a huge ally of ours and they just had a surprise attack on them so the United States sent a bunch of weapons to Israel to help her defend herself uh and this infuriated all the surrounding Arab countries, the ones pumping a bunch of oil included. So, this sparked Arab outrage the US was helping Israel in this war and thus the declaration until Israel pulls out of those occupied territories that they take they've taken from Syria in Egypt, we're gonna start cutting back on oil and we're going to reduce, in the next one year, we're gonna reduce our oil output and export by 50 percent. You probably don't need to be a math major or business major to figure out what's going to happen there? They made good on their promise and they started reducing their export, producing production which was reducing their exports, and The price of oil in the world started to go up and up and up and up. By the end of the embargo in March 1974, the price went from $3, 1973 $3 a barrel, I know it's hard to imagine, $3 a barrel for oil in 1973 but by March 1974 it was $12 a barrel. That still seems like chump change to us in today's world, but dig it, that's times four. Now whenever you're watching this video, in centuries in the future, here is how you can put it in perspective, whatever the price of gas is you're paying right now, imagine two months from now, paying four times the price, four in a couple months. It made a huge big deal. It was called the first oil shock of the world because everybody is like, whoa what just happened? We're used to paying like nothing for gasoline, we've developed our whole economy based on petroleum and suddenly they're turning the spigot off and everything is costing four times as much. There was gas rationing. Ask your parents or your grandparents, maybe a great-grandparents depending on when you were born I'm old enough to remember this, you had to take turns at the gas station, you could only get gas depending on what state you're in, you can only get gas every other day depending on if your license plate ended with an even number or an odd number, uh and yet some places had gas rationing cards. You were only allowed so much to go cash them in to go to the pump. It was a huge, big deal. It affected the economies of all the rich countries because suddenly the price of energy went through the roof and that affects your factories and your transportation and everything's like ahhh, I mean huge big shock and it's at this exact point that I also want you to jot down, that the world's rich countries, the rich developed world figured out instantaneously, how screwed they were, because it had not occurred to anyone until this 1973 oil crisis, that countries even like the United States, that produce tons of oil had gone from being all producers, self-sufficient all producers, and maybe even old exporters, they had gone from that to being reliant oil importers. All the rich countries like, oh gosh, we never thought about this, we are entirely reliant on this resource that's located in other parts of the planet, and at that time other parts of the planet that were pissed off at you. This was followed soon after by a second oil shock in 1979. This one was not as manufactured, but the 1979 or second oil crisis, occurred in the United States particularly due to decreased oil output in the wake of the Iranian Revolution again, this was not intentional, Iran had a revolution. We'll talk more about that later, too. And in the middle of the revolution it was like total chaos and they were having their overthrowing the government and people didn't know what was going on and what's happening next and in all of that chaos despite the fact that it actually didn't affect world or resources that much or oil world supply, it only decreased a world oil supply by like four, three, or four percent. despite that it wasn't real, it wasn't a real threat, there was widespread panic and stock market speculators started driving up the price of all and one thing led to another now the price of all is 39 or $40. And again, $3 a barrel in 1973, second old shock price levels $40 a barrel. That's a really big deal and once again long lines at the gas stations, a card so you get gas, people are like oh my gosh it's the end of the world. This caused economic instability, worldwide really but specifically in the United States is so heavily relied on this for all aspects of life. Okay, so 1973, 1979 basically the 1970s were this kind of shock decade of whoa, this is really bad and let me even make it worse. Just as OPEC and the world was recovering from the 70s, Iran and Iraq got into a war with each other. The appropriately named iran-iraq war of 1980 to 1988. I love what they named him so easy, they're easy to remember, okay? The result of that war between two OPEC members and major oil exporters, well was that Iranian exports virtually ceased to exist for almost a decade. Full-fledged war, hundreds of thousands of casualties, really nasty war, and Iraq's export capacity was severely diminished. So, you have a whole bunch of factors going on to make oil very chaotic in the mid to late 70s and on into the 80s. So, you have people stopping oil supply, so there's not enough and then suddenly people are making too much, and then it's retracting again, so this is throwing everything higgledy-piggledy in the world oil market. Now, remember earlier when I said OPEC really doesn't what huge price spikes or huge price fluctuations or even permanently high prices, again it's just a non-fact. Anyone who thinks OPEC wants to charge a million dollars a barrel for you're wrong and they don't want all this fluctuation either, and here's why. With both of those oil shocks, OPEC actually lost a huge amount of influence. Now, they still have a lot today's world, but they used to have more. How did they lose influence because of all this stuff? Well, when the Arab producer said well, we're not selling oil to the West anymore because we're pissed off in the United States, prices start to go up. As prices spike, this encourages other businesses and other players to get in the game. For three dollars, oil exist all over the place and some of its clean, and some of its dirty, and some of its easy to get to, and some of its harder to get to, and for three dollars a barrel you may have oil in your country, but maybe it's locked up in shale or maybe it's dirty, it needs to be refined more and for three dollars a barrel, it's gonna take two dollars and 95 cents to make it market ready, it's not worth it. You're not gonna bother with it. Maybe it's offshore, maybe you can't get to it without massive investment. For $3 a barrel, it's not worth it, $4 a barrel, $10 a barrel and now wait a minute, now we might be able to turn a profit on that now. $40 a barrel? Okay hang on, we're coming, we're coming. So, what you have is these price spikes encourage lots of other countries and businesses around the world say, oh, we'll start producing oil. They the Arab countries don't want to sell it good, we'll sell ours. So, places like Mexico, started going gangbusters with oil in the 1970s, they were not a major, major oil producer before then because they're oil was offshore, and it's not as clean, and they have to process it. It wasn't worth ten bucks a barrel forty bucks a barrel, yeah we'll do that all day long. Uh other OPEC members that were the non-Arab states they said well, we need the money so we don't care. The Arabs are making a political statement, we're not. So, Venezuela and Nigeria they went gangbusters and produced even more and you had non-OPEC players like the USSR, it's now Russia, but the USSR at the time and still has hell tons of all resources. It's still a major breadwinner for the Russian government here in the 21st century. Back in 1980, the USSR was going broke so they're like, oh we have tons of oil and suddenly it's worth 40, or 50, or 60 bucks a barrel, go, go, go. It's go time. That's when Russia started to become a major producer and they haven't turned back since. Even places like Norway and the United Kingdom started to explore more and invest more in North Sea oil production, and they got into the game. Even in America, Texas had a rejuvenated industry in the 70s and 80s. We built this pipeline across Alaska. Ever heard of the Alaskan oil pipeline? That was a result of all this. Suddenly it's like, wow you could make a bunch of money in oil and more people started doing it so OPEC lost market share because so many other entities jumped in and started producing more. On top of that, it pissed off consumers so much that it kind of started to launch an era of conservation in America and other places, Europe more so than America, where people said, hey maybe we don't want to be this reliant on this product, maybe we should look for alternative energy resources, maybe we shouldn't drive our cars as much, maybe we should be public transportation, maybe we should invest in solar energy, maybe we should invest in wind energy. You see all the the tree-hugging, bunny hugging stuff and by the way I'm a fan of alternative energy resources, but do you think Saudi Arabia is? Do you think OPEC is? They don't want any of that stuff, they don't want you saving electricity, they want you to be wasteful. They don't want anybody figuring out a brand new energy source that's renewable that anybody could have, so that also affected demand. You're going to conserve more and start looking for alternatives, then we don't need as much oil which means OPEC loses more influence and finally there are increases in technology, not just alternative energy, but increases in oil technology that open other options for oil that was otherwise unobtainable, inaccessible or too costly to get to and I'm thinking particularly here of say the oil shales of Canada, that for three, or four, or five bucks of barrels like nahh, oh, but we got this new technology for 10 bucks we can even turn a profit. Yeah, so advances in technology led to deeper offshore drilling. How cool? And this thing that's happening in America here in the 21st century called fracking, brand-new technology invented by the Americans, it's hydraulic fracturing for those that really want the technical term but they can go in and figure out where small pockets of oil and gas are and inject chemicals and stuff into what forced it all out. That's all because of technological prowl that's opened up fields of oil resources that were just unobtainable before. So, if you push too hard, if the price goes too high if you piss off your customers too much, they'll figure out how to get oil from other countries, or from other sources within their country, or they'll try to get off oil all together. See how that works? So, since the sloppy 1970s of sky rocketing, then slumping oil prices, OPEC has sought to actively manage all production in its member countries by setting production targets like we talked about you guys make this much, you guys make that much, we'll make this much, which in turn means they can pick the price they all collectively sell their oil for and they are much more hesitant to use oil as a political weapon. It still happens my friends, it still happens, but nothing is as huge, as straight forward and with this huge impact of the entire world is that 1973 oil embargo.