Introduction oil in order to run their engine.

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


Stable oil market, with reasonable
prices and steady supplies 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)

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, being the fourth largest importer of crude
oil, imports 85 per cent of total oil and 95 per cent of gas from OPEC nations.
Abnish Kumar, Director & research head, Amrapali Aadya Trading &
Investment said decision taken by the OPEC country is likely to be taken as a
wake-up call for the country like India as Indian economy immensely benefited
from the cheaper oil prices.

“Lower oil prices kept the economy on the
shining path and managed to keep inflation under control. Following the OPEC
decision, there is likely to be a positive cascading impact on the country’s
fiscal scene and inflation dynamics,” said Kumar.

 

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 2010s oil glut is a considerable surplus
of crude oil that started in 2014–2015 and accelerated in 2016, with
multiple causes. They include general oversupply as US and Canadian shale
oil production reached critical volumes, geopolitical rivalries
amongst oil-producing nations, falling demand across commodities
markets due to the deceleration of the Chinese economy, and possible
restraint of long-term demand as environmental concerns steer an
increasing share of energy consumption away from fossil fuels.

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 spiral, falling below $30 by January
2016. OPEC production was poised to rise further with the lifting of
international sanctions against Iran, at a time when markets already
appeared to be oversupplied by at least 2 million barrels per day.

 

2014–2017 oil
glut

During
2014–2015, OPEC members consistently exceeded their production ceiling, and
China experienced a slowdown in economic growth. At the same time, US oil production
nearly doubled from 2008 levels and approached the world-leading “swing producer” volumes
of Saudi Arabia and Russia, due to the substantial long-term improvement and
spread of shale “fracking” technology in response to the years of record
oil prices. These developments led in turn to a plunge in US oil import
requirements (moving closer to energy
independence), a record
volume of worldwide oil inventories, and a
collapse in oil prices 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.

2015

A year later, when OPEC met in Vienna on 4 December 2015, the
organization had exceeded its production ceiling for 18 consecutive months, US
oil production had declined only slightly from its peak, world markets appeared
to be oversupplied by at least 2 million barrels per day despite war-torn Libya
pumping 1 million barrels below capacity, oil producers were making major
adjustments to withstand prices as low as the $40s, Indonesia was re-joining
the export organization, Iraqi production had surged after years of disorder,
Iranian output was poised to rebound with the lifting of international
sanctions, hundreds of world leaders at the Paris Climate
Agreement were committing to limit carbon emissions from fossil fuels,
and solar technologies were becoming steadily more competitive and
prevalent.

2016

In light of all
these market pressures, OPEC decided to set aside its ineffective production
ceiling until the next ministerial conference 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

As 2016 continued, the oil glut was partially
trimmed with significant production offline in the US, Canada, Libya, Nigeria
and China, and the basket price gradually rose back into the $40s. OPEC
regained a modest percentage of market share, saw the cancellation of many
competing drilling projects, maintained the status quo at its June conference,
and endorsed “prices at levels that are suitable for both producers and
consumers”, although many producers were still experiencing serious
economic difficulties

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 risk to the oil market
early in the decade, as global macroeconomic uncertainties and heightened risks
surrounding the international financial system weighed on economies.

v  While OPEC still has considerable influence in determining the price per
barrel of petroleum by restricting output, their success has greatly diminished
since the 1970’s

v  Despite the overall increase in worldwide demand for petroleum, OPEC
nations have not received the brunt of this increased demand.  Rather, it has gone to Non-OPEC nations

v  As a result, over the past few years both production and revenues in the
OPEC nations have declined significantly

v  Successful oil production in the OPEC nations is tied to the political
and economic status of the volatile Middle East, which serves as a deterrent to
potential importers.

v  OPEC still has considerable influence in determining the price per
barrel of petroleum by setting quotas, but their best days are behind them

v  Non-OPEC nations such as Canada and Mexico have stripped the cartel of
its power to single-handedly manipulate the petroleum market

v  The U.S. has benefited from the increased production of petroleum by
Non-OPEC nations and thus reduced their annual imports from the OPEC countries
in recent years

v  The United States needs to address its unacceptable energy policy by
stressing efficiency and reduced demand for fossil fuels

v  . OPEC continued to seek stability in the market, and looked to
further enhance its dialogue and cooperation with consumers, and non-OPEC
producers.

 

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.

 

 

 

 

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.