School Papers

Introduction leader), United Arab Emirates, and Venezuela, while

Introduction

Origin & nature
of OPEC (Organization of the Petroleum Exporting
Countries)

OPEC was
founded in 1960 to coordinate the petroleum policies of its members, and to
provide member states with technical and economic aid. OPEC is a cartel that
aims to manage the supply of oil in an effort to set the price of oil on the
world market, in order to avoid fluctuations that might affect the economies of
both 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; giving
OPEC a major influence on global oil prices that were previously determined by
American dominated multinational oil companies. It is notable that some of the
world’s largest oil producer’s including Russia, china and the United States
are not members of OPEC and pursue their own objectives.

 

OPEC’s main objectives


Its object is that there should be
stable oil market with reasonable prices and steady suppliers to consumers.


OPEC was made to make sure that the
price of the oil in the world market will be properly controlled.


Their main goal is to prevent harmful
increase in price of oil in global market and make sure that nations that
produce oil have a fair profit.

OPEC Membership

According to its
statutes, OPEC membership is open to any country that is a substantial exporter
of oil and that shares the ideals of the organization. Along with the five
founding 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), United
Arab Emirates,
and Venezuela, while Indonesia is a former member. Two-thirds of OPEC’s oil production
and reserves are in its six Middle Eastern countries that surround the oil-rich Persian Gulf.

Issues Motivated for choosing the study: (Oil — Life Blood of
World Economy)
the reason why I have chosen this topic is
that oil is very important. OIL – One of the life bloods of our World economy
is oil. The impact of oil in today’s economy has been witness by consumers many
times. We have seen how human spending and travel got affected as the price of
oil fluctuates. In contrast almost all energies are generated using oil, to
mention few; Cars, Trucks, railways, Plane, use oil in order to run their
engine. Therefore if oil supply disturbed for one day we can imagine how the global
economy can be affected greatly.

Competitive Dynamics of OPEC


Before 1970
No Major Role played by OPEC


During 1970
Power of Price setting shifted from MNC Oil Companies to OPEC


By 1973
OPEC countries changed the Pricing System


1975-1985
Oil Production Increase from 48% to 71%


Mid 1980
Survival became uncertain. Market shares fell from 52% 30% in 1985

OPEC Policies

OPEC’s influence on
the market has been widely criticized. Because its member countries hold the
vast majority of crude oil
reserves (about 80%) and nearly half of natural gas reserves
in the world, the organization has considerable power in these markets. As a
cartel, OPEC members have a strong incentive to keep oil prices as high as
possible, while maintaining their shares of the global market.

 

OPEC Basket

A
weighted average of oil prices collected from various oil producing countries.
This average is determined according to the production and exports of each
country and is used as a reference point by OPEC to monitor worldwide oil
market conditions.

Does OPEC control the Oil Prices?
Yes-, OPEC’s crude oil exports represent about 60 per cent of the crude
oil traded internationally.

The price of crude oil is set by
movements on three major international petroleum exchange.


The New York Mercantile Exchange


The International Petroleum Exchange ¡n London

v  The Singapore
International Monetary Exchange.

OPEC is trying to price the OIL in
Euros rather than in Dollars- As the imports from Europe for OPEC countries is
increasing and the US dollar is becoming unstable ¡in the market.

No-OPEC Member countries produce about 42 per cent of the world’s crude
oil and 18 per cent of its natural gaz.

OPEC challenges

1)      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 Importance

OPEC has been
gaining steady power and influencing the global oil market since the 1970s when
OPEC had ~50% of market share in global crude oil production. High market share
has also given OPEC the bargaining power to price oil above what prices would
be in a more competitive market. This means OPEC has the ability to sway crude
oil prices by increasing or decreasing production.

 

OPEC and India

India is the 4th largest importer of oil
and imports 85% of total oil and 95% of gas from OPEC nations .Abnish kumar said
that decision taken by OPEC member countries are likely to be taken as wake up
call for country like India because Indian economy greatly benefited from the
cheaper oil prices.

Lower oil prices kept the economy on the shining
path and helped to keep inflation under control. Following OPEC decision, there
is likely to be a positive impact on the India’s fiscal scene and inflation
dynamics.

 

Literature
Review

1)     
(Carey, 2016)The solution to 2008’s dramatic and unprecedented escalation in oil
prices is not WTO dispute settlement against OPEC member countries.While OPEC’s
policies likely violate the GATT Article XI prohibition on quantitative export
restrictions, there is ample precedent for finding them permissible under the
GATT Article XX(g) General Exception for measures affecting exhaustible natural
resources, such as oil. Therefore, a preferred strategy for improving and
liberalizing the flow of oil in international markets is to develop a new
framework for managing the energy trade within the WTO that better acknowledges
and accommodates the needs of oil producers and consumers.

 

2)     
(Colgan, 2014)Scholars have long debated the causal
impact of international institutions such as the World Trade Organization or
the International Monetary Fund. This study investigates Organization of
Petroleum Exporting Countries OPEC). an organization that purports to have
significant influence over the market for the world’s most important
commodity—petroleum. Using four empirical tests, I find that OPEC has little or
no impact on its members’ production levels. These findings prompt the question
of why so many people, including scholars, believe in OPEC’s influence over the
world’s oil supply. The idea of OPEC as a cartel is a “rational myth” that
supports the organization’s true principal function, which is to generate
political benefit for its members. One benefit it generates is international prestige.
I test this idea using data on diplomatic representation and find that OPEC
membership is associated with increased international recognition by other
states. Overall, these findings help one to better understand international
regimes and the process of ideational change in world politics.

 

3)      (Carey, 2016)Tests of convergence (integration) and causality of variables have
been used for 2-year period, from May 22, 2014 to July 21, 2016. The results of
the study based on long-term relationship show that an increase of 1 per cent
in the logarithm of OPEC oil basket prices decreases 17.24 per cent of the
logarithm of the price of LPG. The direction of causality is from OPEC oil
basket prices to LPG. Moreover, 1% increase in natural gas prices logarithm
will increase 26.52 per cent of the logarithm of the price of LPG. The
direction of causality is from natural gas to LPG. Estimating the relationship
between short term error corrections for the logarithm of the price of LPG also
confirms no statistically significant error correction component.

 

 

 

4)      (Najarzadeh, Reed, Khoshkhoo, &
Gallavani, 2015)Energy, as an important input in the manufacturing sector, has a
special role in growth and economic development.  An increase in exports will increase energy
consumption but an increase in imports will decrease energy consumption in OPEC
countries. Since a large part of exports for OPEC economies is oil, the export
growth in these countries means an increase in extraction activities and crude
oil refinement that all require large amounts of energy.

 

 The coefficient on exports
is the largest, implying that exports are most energy        intensive. The countries that are
generally rich in energy resources usually pay less for energy. In many cases
this could cause waste. With the finding of a negative relationship between
energy consumption and energy price energy waste can be reduced by allowing
energy prices to increase to its world price level. Granger causality tests
show a causality relationship from exports to energy consumption.

 

This implies that the policy of increasing exports will increase
the demand for energy but energy reduction policies will not affect export
growth in OPEC countries. We also found a feedback relationship between imports
and 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 the
country-by-country and pooled levels; however, the effect is confirmed
for OPEC acting as a cohesive entity. Moreover, the results show
that OPEC production does not cause oil prices at the
country-by-country and pooled levels as well.

 

OPEC
and the world

According to current estimates,
81.5% of the world’s proven crude oil reserves are located in OPEC Member
Countries, with the bulk of OPEC oil reserves in the Middle East, amounting to
65.5% of the OPEC total.
OPEC Member Countries have made significant additions to their oil reserves in
recent 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.

 

Current
situation (time period 2010 to now)

2010s oil
glut

The 2010 oil glut is a surplus of crude oil that stared in
2014-2015 and increased in 2016 due to many reasons. One of them was the
oversupply of oil as the US and the Canadian shale oil production increased and
the second reason was that there was a lot of competition among the oil
producers.  Also the economy of china was
decelerating, falling demand for commodities in the market.

2011

Prices were stable between 2011 and
mid-2014, before a combination of speculation and oversupply caused them to
fall in 2014. Trade patterns continued to shift, with demand growing further in
Asian countries and generally shrinking in the OECD.

2012

The world price of oil was above US$125 per
barrel 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 on
Iran.

2014–2017 oil
glut

During
2014-2015, 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 leading swing
producers- volumes of Saudi Arabia and Russia, due to long term improvement and
spread of shale fracking technology. These developments led in turn to a decrease
in US oil imports and a collapse in oil prices for OPEC that continued into early
2016.

In
spite of global oversupply, on 27 November 2014 in Vienna, Saudi Oil
Minister Ali Al-Naimi blocked appeals from poorer OPEC members for production cuts
to support prices. Naimi argued that the oil market should be left to rebalance
itself competitively at lower price levels, strategically rebuilding OPEC’s
long-term market share by ending the profitability of high-cost US shale oil
production as he explained in an interview.

2016

Because of all the market
pressures, OPEC decided to remove its ineffective production ceiling in june 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 than one-sixth of its
record from July 2008 ($140.73), and back below the April 2003 starting point
($23.27) of its historic run-up

OPEC obtained a modest percentage of market
share, cancelled many of its competing drilling projects, and set the prices at
levels which were suitable for both producers and consumers.

2017

On November 30, 2017, OPEC agreed to continue
withholding 2 per cent of global oil supply. That continues the policy it
formed on November 30, 2016, when it agreed to cut production by 1.2
million barrels. Starting January 2017, it will produce 32.5 million barrels
per day. That’s still above its average 2015 level of 32.32 mbpd. The
agreement exempted Nigeria and Libya. It gave Iraq its first quotas since the
1990s. Russia, not an OPEC member, voluntarily agreed to cut
production. 

 

Lessons learned

v  The global
economy represented the main risks to the oil market in the past decades as the
uncertainties and risks surrounding the international financial system weighted
on economies.

v  While the OPEC
still has considerable influence on the oil market, its  success has greatly diminished since 1970.

v  In spite of
increase in demand for oil in the market, the demand does not go to the OPEC
instead it has gone to non-OPEC nations. Therefore both the production and
revenue of OPEC has diminished dramatically.

v  Successful oil
production of OPEC is depending on the political and economic status of the
Middle East which is a deterrent to the importers.

v  OPEC still has
great influence on the price of oils in the market, but their best days are
behind them.

v  The United
States has benefited from the increase in the production of oil in non-opec
nations as their import form opec has decreased.

v  OPEC has been trying
to increase its cooperation with consumer countries and non-opec producers.Acknowledgement

 

I wish to express my sincere gratitude to
ma’am  my respected
teacher for providing me an opportunity to have a study on oil cartel (OPEC). I
sincerely thank ma’am for her guidance and encouragement for carrying out this
assignment. I also want to assure you that this project is made with my own
efforts and hard workings.

 

Recommendations
for Future

v  The United
States should not pursue WTO dispute settlement against OPEC.

 

v  Oil exporting
nations and energy consumers should jointly develop a new multilateral
framework for managing the global energy trade

 

v  The focus
should be on stabilizing energy markets, incentivizing conservation, and
improving economic development in oil exporting nations

 

v  before committing massive sums of capital to an
industry with long lead-times and  payback
periods, it  require transparent,
predictable, steady demand and a big reduction in uncertainty about the outlook

 

v  In today’s more carbon-constrained world, there
is a need for the development and deployment of cleaner technologies to meet
the wave of new regulations hitting the industry, and a good example of this is
carbon capture and storage.

 

v  The
industry must make sure it is well equipped to handle such challenges. This
includes manpower. The industry must make sure that it is attractive enough to
bring in new, high-calibre recruits and keep them. It must invest heavily in
their training and career development. They represent the future.

 

 

 

 

 

Introduction

Motive
for  choosing this topic

Competitive dynamics of OPEC

OPEC Policies ,
basket

OPEC challenges,  importance , OPEC and  India

Literature review

Opec
and the world

Current situation
( form 2010 to now)

Lessons learned

Recommendations

Conclusions

References

Conclusion
OPEC Still Exists today and still has
considerable influence in determining the price per barrel of petroleum by
setting quotas, but their best days are behind them. The cartel seems to
understand that raising prices is easier in short run than in long run.

 Non-OPEC nations such as Russia, Canada and
Mexico have stripped the cartel of its power to single-handedly manipulate the petroleum
market. The World has benefited from the increased production of petroleum by
Non-OPEC nations and thus reduced their annual imports from the OPEC countries
in recent year.

OPEC member nation production was
instrumental in determining crude oil production volatility during the period
from 1973 to 1990. In this first sub-period, the differing levels of similarity
in production among the OPEC members is reminiscent of the protagonists in a repeated
game scenario.

During the second sub-period from
1991 to 2010, production data suggest that OPEC member nation production rates
are more like non-OPEC producers, with virtually all of the crude oil producing
nations falling within two production clusters.

OPEC cartel had much less impact on
production decisions from 1990 to 2010 than it had in the earlier period from
1973 and 1990.

References:

Carey, T. (2016,
januaury ). Cartel Price Controls vs. Free Trade: A Study of Proposals to
Challenge OPEC’s Influence in the Oil Market Through WTO Dispute Settlement. American
University International Law Review, 24(10), p783.

Colgan, J. D.
(2014, december). The Emperor Has No Clothes: The Limits of OPEC in the Global
Oil Market. 68(7), 599-632.

Kisswani, K. M.
(2015, August ). Does OPEC Influence Crude Oil Prices? Testing for
Cointegration and Causality Effect. Journal of Economic Research, 20(2),
pp. 231-55.

Najarzadeh, R.,
Reed, M., Khoshkhoo, A., & Gallavani, A. (2015, march). Trade and Energy
Consumption in the OPEC Countries. Journal of Economic Cooperation and
Development,, 36(1), 89-102.

Shiri, Z. (2017,
april). Studying Short-Term and Long-Term Effects of OPEC Oil Basket Prices and
Natural Gas on Liquefied Petroleum Gas (LPG) Traded on Energy Exchange of Iran.
International Journal of Management, Accounting & Economics, 4(4),
328-347. 20p.