OPEC wasfounded in 1960 to coordinate the petroleum policies of its members, and toprovide member states with technical and economic aid.
OPEC is a cartel thataims to manage the supply of oil in an effort to set the price of oil on theworld market, in order to avoid fluctuations that might affect the economies ofboth producing and purchasing countries.As of 2016, the 14 countries accounted for an estimated 44 %of global oil production and 73% of the world’s proven oil reserves; givingOPEC a major influence on global oil prices that were previously determined byAmerican dominated multinational oil companies. It is notable that some of theworld’s largest oil producer’s including Russia, china and the United Statesare not members of OPEC and pursue their own objectives. OPEC’s main objectivesv Its object is that there should bestable oil market with reasonable prices and steady suppliers to consumers.v 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 profit.OPEC 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’smembers are;Algeria, Angola,Ecuador, Equatorial Guinea ,Gabon ,Iran Kuwait ,Libya, Nigeria,Qatar Saudi Arabia, United Arab Emirates andVenezuela while Indonesia is a former member. Two-thirds of OPEC’s oil production and reserves are in itssix Middle Eastern countries that surround the oil-rich Persian Gulf.
IssuesMotivated for choosing the study: (Oil — Life Blood ofWorld Economy)the reason why I have chosen this topic isthat oil is very important. OIL – One of the life bloods of our World economyis oil. The impact of oil in today’s economy has been witness by consumers manytimes. We have seen how human spending and travel got affected as the price ofoil fluctuates. In contrast almost all energies are generated using oil, tomention few; Cars, Trucks, railways, Plane, use oil in order to run theirengine. Therefore if oil supply disturbed for one day we can imagine how the globaleconomy 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 is the 4th largest importer of oiland imports 85% of total oil and 95% of gas from OPEC nations .Abnish kumar saidthat decision taken by OPEC member countries are likely to be taken as wake upcall for country like India because Indian economy greatly benefited from thecheaper oil prices.
Lower oil prices kept the economy on the shiningpath and helped to keep inflation under control. Following OPEC decision, thereis likely to be a positive impact on the India’s fiscal scene and inflationdynamics. LiteratureReview1) (Carey, 2016)The solution to 2008’s dramatic and unprecedented escalation in oilprices is not WTO dispute settlement against OPEC member countries. WhileOPEC’s policies likely violate the GATT Article XI prohibition on quantitativeexport restrictions, there is ample precedent for finding them permissibleunder the GATT Article XX(g) General Exception for measures affectingexhaustible natural resources, such as oil. Therefore, a preferred strategy forimproving and liberalizing the flow of oil in international markets is todevelop a new framework for managing the energy trade within the WTO thatbetter acknowledges and accommodates the needs of oil producers and consumers. 2) (Colgan, 2014)Scholars have long debated the impact of international institutionssuch as the World Trade Organizations or the International Monetary Fund. Theaim of this study was to study the impact of OPEC, an organization that have a significantinfluence over the market for the world’s most commodity-petroleum .
it wasfound that OPEC has little or no impact on its member’s production levels. Thefindings prompt the question of why so many people, including scholars, believein OPEC’s influence over the world’s oil supply. The idea of OPEC as a cartel is a rational myth that supports theorganization’s true principle function which is to generate political benefitfor its members.One benefit it generates is international prestige.
I test this ideausing data on diplomatic representation and find that OPEC membership isassociated with increased international recognition by other states. Overall,these findings help one to better understand international regimes and theprocess 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 allowing energyprices to increase to its world price level. Granger causality tests show acausality 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 thecountry-by-country and pooled levels as well. OPECand the worldAccording to current estimates,81.
5% of the world’s proven crude oil reserves are located in OPEC MemberCountries, with the bulk of OPEC oil reserves in the Middle East, amounting to65.5% 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 2010 oil glut is a surplus of crude oil that stared in2014-2015 and increased in 2016 due to many reasons.
One of them was theoversupply of oil as the US and the Canadian shale oil production increased andthe second reason was that there was a lot of competition among the oilproducers. Also the economy of china wasdecelerating, falling demand for commodities in the market. 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, falling below $30 by January 2016.Opec production was poised to rise with increasing international sanctions onIran.2014–2017 oilglutDuring2014-2015, OPEC member nations continuously increased their production ceiling,and also china experienced a slowdown in its economic growth.
At the same time, US oil production doubled from 2008 levels and approached the world leadingswing producers- volumes of Saudi Arabia and Russia, due to long termimprovement and spread of shale fracking technology. These developments led inturn to a decrease in US oil imports and a collapse in oil prices for OPEC thatcontinued into early 2016.On27 November 2014 in Vienna, Saudi oil minister Ali Alnami blocked appeals formpoorer OPEC members for production cuts to support prices. He argued thatthe oil market shoud be left torebalance itself competitively at lower price levels, strategically rebuildingOPEC’s long term market share . 2016Because of all themarket pressures, OPEC decided to remove its ineffective production ceiling injune 2016.
By 20 January 2016, the OPEC Reference Basket was down to US$22.48/bbl– less than one-fourth of its high from June 2014 ($110.48), less thanone-sixth of its record from July 2008 ($140.73), and back below the April 2003starting point ($23.27) of its historic run-upOPEC obtained a modest percentage of marketshare, cancelled many of its competing drilling projects, and set the prices atlevels which were suitable for both producers and consumers.2017On 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 globaleconomy represented the main risks to the oil market in the past decades as theuncertainties and risks surrounding the international financial system weightedon economies.v While the OPECstill has considerable influence on the oil market, its success has greatly diminished since 1970.v In spite ofincrease in demand for oil in the market, the demand does not go to the OPECinstead it has gone to non-OPEC nations. Therefore both the production andrevenue of OPEC has diminished dramatically.
v Successful oilproduction of OPEC is depending on the political and economic status of theMiddle East which is a deterrent to the importers.v OPEC still hasgreat influence on the price of oils in the market, but their best days arebehind them.v The UnitedStates has benefited from the increase in the production of oil in non-opecnations as their import form opec has decreased.v OPEC has beentrying to increase its cooperation with consumer countries 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 and Mexicohave 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 periodfrom 1973 to 1990.
In this first sub-period, the differing levels of similarityin production 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 forCointegration and 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).
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