IntroductionOrigin & natureof OPEC (Organization of the Petroleum ExportingCountries)OPEC was founded in 1960 to coordinate the petroleum policies of itsmembers, and to provide member states with technical and economic aid.
OPEC isa cartel that aims to managethe supply of oil in an effort to set the price of oil on the world market, inorder to avoid fluctuations that might affect the economies of both producingand purchasing countries. As of 2016, the 14 countries accounted for anestimated 44 per cent of global oil production and 73 per centof the world’s “proven” oil reserves, giving OPEC a majorinfluence on global oil prices thatwere previously determined by American-dominated multinational oilcompanies. It is notable thatsome of the world’s largest oil producers, including Russia, China and theUnited States, are not members of OPEC and pursue their own objectives. OPEC’S Main Objectives v Stable oil market, with reasonableprices and steady supplies to consumersv OPEC was made to make sure that theprice of the oil in the world market will be properly controlled.v Their main goal is to prevent harmfulincrease in price of oil in global market and make sure that nations thatproduce oil have a fair profitOPEC MembershipAccording to itsstatutes, OPEC membership is open to any country that is a substantial exporterof oil and that shares the ideals of the organization.
Along with the fivefounding members, OPEC has 9 additional member countries, As of May 2017, OPEC’s members are Algeria, Angola, Ecuador, EquatorialGuinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia (the de facto leader), UnitedArab Emirates,and Venezuela, while Indonesia is a former member. Two-thirds of OPEC’s oil productionand reserves are in its six Middle Eastern countries that surround the oil-rich Persian Gulf.Issues Motivated for choosing the study: (Oil — Life Blood ofWorld Economy)OIL – One of the life bloods of our Worldeconomy is oil. The impact of oil in today’s economy has been witness byconsumers many times. We have seen how human spending and travel got affectedas the price of oil fluctuates. In contrast almost all energies are generatedusing oil, to mention few; Cars, Trucks, railways, Plane, use oil in order torun their engine. Therefore if oil supply disturbed for one day we can imaginehow the global economy can be affected greatly.Competitive Dynamics of OPECv Before 1970No Major Role played by OPECv During 1970Power of Price setting shifted from MNC Oil Companies to OPECv By 1973OPEC countries changed the Pricing Systemv 1975-1985Oil Production Increase from 48% to 71%v Mid 1980Survival became uncertain.
Market shares fell from 52% 30% in 1985OPEC PoliciesOPEC’s influence onthe market has been widely criticized. Because its member countries hold thevast majority of crude oilreserves (about 80%) and nearly half of natural gasreserves in the world, the organization has considerable power in thesemarkets. As a cartel, OPEC members have a strong incentive to keep oil pricesas high as possible, while maintaining their shares of the global market. OPEC BasketAweighted average of oil prices collected from various oil producing countries.This average is determined according to the production and exports of eachcountry and is used as a reference point by OPEC to monitor worldwide oilmarket conditions.
Does OPEC control the Oil Prices?Yes-, OPEC’s crude oil exports represent about 60 per cent of the crudeoil traded internationally.The price of crude oil is set bymovements on three major international petroleum exchange.v The New York Mercantile Exchangev The International Petroleum Exchange ¡n Londonv The SingaporeInternational Monetary Exchange.OPEC is trying to price the OIL inEuros rather than in Dollars- As the imports from Europe for OPEC countries isincreasing and the US dollar is becoming unstable ¡in the market.No-OPEC Member countries produce about 42 per cent of the world’s crudeoil and 18 per cent of its natural gaz.OPEC challenges1) Uncertainty in Global Demand.2) Structural shift in demand from developed world to developing world.3) Non-OPEC oil-producing nations (Russia, Norway, Canada, Mexico etc.
)often increase production when OPEC cuts it.4) Russia overtook Saudi Arabia as the world’s biggest crude supplier in 2009.5) OPEC’s share of production has gone down.6) Existence of factions within OPEC.
7) Future technological developments in areas of renewable energy sources OPEC ImportanceOPEC has beengaining steady power and influencing the global oil market since the 1970s whenOPEC had ~50% of market share in global crude oil production. High market sharehas also given OPEC the bargaining power to price oil above what prices wouldbe in a more competitive market. This means OPEC has the ability to sway crudeoil prices by increasing or decreasing production. OPEC and India India, being the fourth largest importer of crudeoil, imports 85 per cent of total oil and 95 per cent of gas from OPEC nations.Abnish Kumar, Director & research head, Amrapali Aadya Trading said decision taken by the OPEC country is likely to be taken as awake-up call for the country like India as Indian economy immensely benefitedfrom the cheaper oil prices.”Lower oil prices kept the economy on theshining path and managed to keep inflation under control.
Following the OPECdecision, there is likely to be a positive cascading impact on the country’sfiscal scene and inflation dynamics,” said Kumar. LiteratureReview1) (Carey, 2016)The solution to 2008’s dramatic and unprecedented escalation in oilprices is not WTO dispute settlement against OPEC member countries.While OPEC’spolicies likely violate the GATT Article XI prohibition on quantitative exportrestrictions, there is ample precedent for finding them permissible under theGATT Article XX(g) General Exception for measures affecting exhaustible naturalresources, such as oil. Therefore, a preferred strategy for improving andliberalizing the flow of oil in international markets is to develop a newframework for managing the energy trade within the WTO that better acknowledgesand accommodates the needs of oil producers and consumers. 2) (Colgan, 2014)Scholars have long debated the causalimpact of international institutions such as the World Trade Organization orthe International Monetary Fund.
This study investigates Organization ofPetroleum Exporting Countries OPEC). an organization that purports to havesignificant influence over the market for the world’s most importantcommodity—petroleum. Using four empirical tests, I find that OPEC has little orno impact on its members’ production levels.
These findings prompt the questionof why so many people, including scholars, believe in OPEC’s influence over theworld’s oil supply. The idea of OPEC as a cartel is a “rational myth” thatsupports the organization’s true principal function, which is to generatepolitical benefit for its members. One benefit it generates is internationalprestige. I test this idea using data on diplomatic representation and findthat OPEC membership is associated with increased international recognition byother states.
Overall, these findings help one to better understand internationalregimes and the process of ideational change in world politics. 3) (Carey, 2016)Tests of convergence (integration) and causality of variables havebeen used for 2-year period, from May 22, 2014 to July 21, 2016. The results ofthe study based on long-term relationship show that an increase of 1 per centin the logarithm of OPEC oil basket prices decreases 17.24 per cent of thelogarithm of the price of LPG. The direction of causality is from OPEC oilbasket prices to LPG.
Moreover, 1% increase in natural gas prices logarithmwill increase 26.52 per cent of the logarithm of the price of LPG. Thedirection of causality is from natural gas to LPG. Estimating the relationshipbetween short term error corrections for the logarithm of the price of LPG alsoconfirms no statistically significant error correction component. 4) (Najarzadeh, Reed, Khoshkhoo, & Gallavani, 2015)Energy, as an important input in the manufacturing sector, has aspecial role in growth and economic development.
An increase in exports will increase energyconsumption but an increase in imports will decrease energy consumption in OPECcountries. Since a large part of exports for OPEC economies is oil, the exportgrowth in these countries means an increase in extraction activities and crudeoil refinement that all require large amounts of energy. The coefficient on exportsis the largest, implying that exports are most energy intensive. The countries that aregenerally rich in energy resources usually pay less for energy. In many casesthis could cause waste.
With the finding of a negative relationship betweenenergy consumption and energy price energy waste can be reduced by allowingenergy prices to increase to its world price level. Granger causality testsshow a causality relationship from exports to energy consumption. This implies that the policy of increasing exports will increasethe demand for energy but energy reduction policies will not affect exportgrowth in OPEC countries.
We also found a feedback relationship between importsand energy consumption. Since an increase in imports requires energy,conservation policies will reduce OPEC country imports. 5) (Kisswani, 2015) OPEC production does not manipulate oil prices at thecountry-by-country and pooled levels; however, the effect is confirmedfor OPEC acting as a cohesive entity. Moreover, the results showthat OPEC production does not cause oil prices at the country-by-countryand pooled levels as well.
OPECand the world According to current estimates, 81.5% of the world’s proven crudeoil reserves are located in OPEC Member Countries, with the bulk of OPEC oilreserves in the Middle East, amounting to 65.5% of the OPEC total.OPEC Member Countries have made significant additions to their oil reserves inrecent years, for example, by adopting best practices in the industry,realizing intensive explorations and enhanced recoveries. As a result,OPEC’s proven oil reserves currently stand at 1,216.78 billion barrels. Currentsituation (time period 2010 to now)2010s oilglutThe 2010s oil glut is a considerable surplusof crude oil that started in 2014–2015 and accelerated in 2016, withmultiple causes.
They include general oversupply as US and Canadian shaleoil production reached critical volumes, geopolitical rivalriesamongst oil-producing nations, falling demand across commoditiesmarkets due to the deceleration of the Chinese economy, and possiblerestraint of long-term demand as environmental concerns steer anincreasing share of energy consumption away from fossil fuels.2011Prices were stable between 2011 andmid-2014, before a combination of speculation and oversupply caused them tofall in 2014. Trade patterns continued to shift, with demand growing further inAsian countries and generally shrinking in the OECD. 2012The world price of oil was above US$125 perbarrel in 2012, and remained relatively strong above $100 until September 2014,after which it entered a sharp downward spiral, falling below $30 by January2016. OPEC production was poised to rise further with the lifting ofinternational sanctions against Iran, at a time when markets alreadyappeared to be oversupplied by at least 2 million barrels per day.
2014–2017 oilglutDuring2014–2015, OPEC members consistently exceeded their production ceiling, andChina experienced a slowdown in economic growth. At the same time, US oil productionnearly doubled from 2008 levels and approached the world-leading “swing producer” volumesof Saudi Arabia and Russia, due to the substantial long-term improvement andspread of shale “fracking” technology in response to the years of recordoil prices. These developments led in turn to a plunge in US oil importrequirements (moving closer to energyindependence), a recordvolume of worldwide oil inventories, and acollapse in oil prices that continued into early 2016.
Inspite of global oversupply, on 27 November 2014 in Vienna, Saudi OilMinister Ali Al-Naimi blocked appeals from poorer OPEC members for production cutsto support prices. Naimi argued that the oil market should be left to rebalanceitself competitively at lower price levels, strategically rebuilding OPEC’slong-term market share by ending the profitability of high-cost US shale oilproduction as he explained in an interview. 2015A year later, when OPEC met in Vienna on 4 December 2015, theorganization had exceeded its production ceiling for 18 consecutive months, USoil production had declined only slightly from its peak, world markets appearedto be oversupplied by at least 2 million barrels per day despite war-torn Libyapumping 1 million barrels below capacity, oil producers were making majoradjustments to withstand prices as low as the $40s, Indonesia was re-joiningthe export organization, Iraqi production had surged after years of disorder,Iranian output was poised to rebound with the lifting of internationalsanctions, hundreds of world leaders at the Paris ClimateAgreement were committing to limit carbon emissions from fossil fuels,and solar technologies were becoming steadily more competitive andprevalent.2016In light of allthese market pressures, OPEC decided to set aside its ineffective productionceiling until the next ministerial conference in June 2016. By 20 January2016, the OPEC Reference Basket was down to US$22.48/bbl – less than one-fourthof its high from June 2014 ($110.48), less than one-sixth of its record fromJuly 2008 ($140.73), and back below the April 2003 starting point ($23.
27) ofits historic run-upAs 2016 continued, the oil glut was partiallytrimmed with significant production offline in the US, Canada, Libya, Nigeriaand China, and the basket price gradually rose back into the $40s. OPECregained a modest percentage of market share, saw the cancellation of manycompeting drilling projects, maintained the status quo at its June conference,and endorsed “prices at levels that are suitable for both producers andconsumers”, although many producers were still experiencing seriouseconomic difficulties2017On November 30, 2017, OPEC agreed to continuewithholding 2 per cent of global oil supply. That continues the policy itformed on November 30, 2016, when it agreed to cut production by 1.2million barrels.
Starting January 2017, it will produce 32.5 million barrelsper day. That’s still above its average 2015 level of 32.32 mbpd. Theagreement exempted Nigeria and Libya. It gave Iraq its first quotas since the1990s. Russia, not an OPEC member, voluntarily agreed to cutproduction. Lessons learnedv The global economy represented the main risk to the oil marketearly in the decade, as global macroeconomic uncertainties and heightened riskssurrounding the international financial system weighed on economies.
v While OPEC still has considerable influence in determining the price perbarrel of petroleum by restricting output, their success has greatly diminishedsince the 1970’s v Despite the overall increase in worldwide demand for petroleum, OPECnations have not received the brunt of this increased demand. Rather, it has gone to Non-OPEC nationsv As a result, over the past few years both production and revenues in theOPEC nations have declined significantlyv Successful oil production in the OPEC nations is tied to the politicaland economic status of the volatile Middle East, which serves as a deterrent topotential importers.v OPEC still has considerable influence in determining the price perbarrel of petroleum by setting quotas, but their best days are behind themv Non-OPEC nations such as Canada and Mexico have stripped the cartel ofits power to single-handedly manipulate the petroleum marketv The U.S.
has benefited from the increased production of petroleum byNon-OPEC nations and thus reduced their annual imports from the OPEC countriesin recent yearsv The United States needs to address its unacceptable energy policy bystressing efficiency and reduced demand for fossil fuelsv . OPEC continued to seek stability in the market, and looked tofurther enhance its dialogue and cooperation with consumers, and non-OPECproducers. Recommendationsfor Futurev The UnitedStates should not pursue wto dispute settlement against opec v Oil exportingnations and energy consumers should jointly develop a new multilateralframework for managing the global energy trade v The focusshould be on stabilizing energy markets, incentivizing conservation, andimproving economic development in oil exporting nations v before committing massive sums of capital to anindustry with long lead-times and paybackperiods, it require transparent,predictable, steady demand and a big reduction in uncertainty about the outlook v In today’s more carbon-constrained world, thereis a need for the development and deployment of cleaner technologies to meetthe wave of new regulations hitting the industry, and a good example of this iscarbon capture and storage. v Theindustry must make sure it is well equipped to handle such challenges.
Thisincludes manpower. The industry must make sure that it is attractive enough tobring in new, high-calibre recruits and keep them. It must invest heavily intheir training and career development.
They represent the future. ConclusionOPEC Still Exists today and still hasconsiderable influence in determining the price per barrel of petroleum bysetting quotas, but their best days are behind them. The cartel seems tounderstand that raising prices is easier in short run than in long run.
Non-OPEC nations such as Russia, Canada andMexico have stripped the cartel of its power to single-handedly manipulate the petroleummarket. The World has benefited from the increased production of petroleum byNon-OPEC nations and thus reduced their annual imports from the OPEC countriesin recent year.OPEC member nation production wasinstrumental in determining crude oil production volatility during the period from1973 to 1990. In this first sub-period, the differing levels of similarity inproduction among the OPEC members is reminiscent of the protagonists in arepeated game scenario.During the second sub-period from1991 to 2010, production data suggest that OPEC member nation production ratesare more like non-OPEC producers, with virtually all of the crude oil producingnations falling within two production clusters.OPEC cartel had much less impact onproduction decisions from 1990 to 2010 than it had in the earlier period from1973 and 1990.
References:Carey, T. (2016,januaury ). Cartel Price Controls vs. Free Trade: A Study of Proposals toChallenge OPEC’s Influence in the Oil Market Through WTO Dispute Settlement. AmericanUniversity International Law Review, 24(10), p783.Colgan, J.
D.(2014, december). The Emperor Has No Clothes: The Limits of OPEC in the GlobalOil Market. 68(7), 599-632.
Kisswani, K. M.(2015, August ). Does OPEC Influence Crude Oil Prices? Testing for Cointegrationand Causality Effect. Journal of Economic Research, 20(2), pp. 231-55.Najarzadeh, R.
,Reed, M., Khoshkhoo, A., & Gallavani, A. (2015, march). Trade and EnergyConsumption in the OPEC Countries.
Journal of Economic Cooperation andDevelopment,, 36(1), 89-102.Shiri, Z. (2017,april). Studying Short-Term and Long-Term Effects of OPEC Oil Basket Prices andNatural Gas on Liquefied Petroleum Gas (LPG) Traded on Energy Exchange of Iran.International Journal of Management, Accounting & Economics, 4(4),328-347. 20p.