Chapter 1: What is the main topic discussed in this episode?
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We here at Planet Money are firm believers in the saying, there's no such thing as a dumb question. Because even the most simple questions can lead to incredibly intricate answers that reveal how the economy works. So we get especially excited when y'all come to us with questions that you feel like you should already know the answers to.
Like the other day, we got a question from a listener named Valerie Brekke, who at first didn't even want us mentioning her name.
I have a lot of friends that listen to NPR, specifically Planet Money. And I think it's embarrassing when you don't know the answer to what should be a basic question every American should know, in my opinion.
That is not true at all. That's like my whole job is to not know the answers to questions and then figure them out.
I don't know.
Luckily, Valerie got over it. She told us she thought of her question while prepping for a camping trip. She has a diesel guzzling camper van and had a question related to how much it costs to fill up at the pump. So she whipped out her phone and started talking into it. Voiced a text. Pressed send. And when her email landed in our inbox, it read... Hi, planet honey.
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Chapter 2: What is OPEC and why does it exist?
I got a kick out of that.
That's not what I said. That's what voice to text said.
What did you say?
Hi, planet money. It would be so awesome if you guys could do an episode explaining OPEC to us like we're five years old.
I have an almost five-year-old who definitely has never heard of the Organization of the Petroleum Exporting Countries. Not sure she knows what gas is either. And Valerie's question gets more advanced real fast. She asked what OPEC does to make oil prices go up or down.
In general, I understand they exist to keep supply low in order to keep prices higher. But I don't understand why, what, when, how, why keep prices high.
Love it. All right, I am going to try to answer as many of those questions as possible. I will do my best. Awesome. Hello and welcome to Planet Money's maybe regularly occurring series, Everything You Wanted to Know About... but we're too afraid to ask? I'm Nick Fountain. Today on the show, we're going to track down the answers to Valerie's questions. What is OPEC? Why does it exist?
How and why does it control oil prices? And why did the United Arab Emirates just leave OPEC?
You know what else I thought would be interesting to know? What? Can you actually expect to see gas prices fall at some point in time given the UAE departure?
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Chapter 3: How did a secret meeting lead to the formation of OPEC?
That's the whole point of OPEC. And the tactic OPEC eventually figures out comes from the lesson of the Arab oil embargo. You can control prices by controlling supply. So that is what the OPEC countries started doing, all together as a bloc. Production quotas.
The quota introduced in 1982. And for all countries, there were quotas.
And if this sounds like a cartel to you, colluding to set production quotas in order to control prices, I agree. Is it a cartel?
No. No.
Come on.
No, no, no, no. It is a management. You need it.
Ibrahim says they were trying to manage supply, not set the price. Each member country was selling their oil on the open market. But regardless, starting in the early 80s, every OPEC member agreed to a quota, a limit to the amount of oil they pumped out of the ground. Except Saudi Arabia.
Saudi Arabia decided, I don't need a quota.
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Chapter 4: What role did the Seven Sisters play in the oil market?
And they said I will be the swinging producer.
Swinging producer, a.k.a. the swing producer. And this is really important. Having a swing producer, one member who's not strictly following quotas, is a way to finesse the smoothing OPEC was trying to do. Basically, if oil prices rise or drop, a swing producer can quickly ramp up or ramp down production to keep the oil price and market steady.
And Saudi Arabia was the obvious candidate to be the swing producer because they have an ungodly amount of oil. You can just kind of tap the Saudi desert floor a few times and oil gushes out. So in 1983, they agreed to smooth oil prices for the OPEC countries by swinging their production, adjusting their output to keep prices steady. And that may seem like an Enviable position?
Because when prices get too high, you get to pump more and sell it at a nice price in order to bring prices down?
In good times, it's good. In bad times, it's really worse.
Yeah, in bad times, Ibrahim says, being the swing producer really is worse. Because when prices are down, you got to pump less and you make less. So you're basically dealing with the boom and bust cycle all on your own. And then there was a bigger problem that Ibrahim says Saudi Arabia started to notice. As soon as the quotas were imposed, it became very tempting to skirt them.
All those countries sitting there with that sweet, sweet or sour, sour crude ready to pump. Selling it at that high price really looks tempting. What if we just pumped a little bit more than our quota?
Some OBIC countries were not really willing to find a joint solution.
So they were cheating on their quotas?
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