Issues
Motivated for choosing the study

I chose to study on
oil cartels because it is one of the most vital commodities which are used by
the people all over the world. Oil is a very versatile liquid which can take
many different forms and it can be filtered and treated as per the product
which is needed. Oil is used for manufacturing, transport, to produce energy
etc. Crude oil can be obtained through filtering oil rich sand which is mostly
found in the Middle East.

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The amount of
functions which oil plays in our lives pushed me to choose this topic and I was
motivated to study about the Oil Cartels which influence the global prices of
oil significantly.

Origin
& nature

Cartel is a formal agreement among companies to fix
prices and dictate sales rules which are bluntly illegal.

But the world’s largest cartel – OPEC, the
Organization of Petroleum Exporting Countries representing 14 major oil
producing nations — is not only recognized as a legal entity, it’s protected by
U.S. foreign trade laws.

What is a ‘Cartel’?

A cartel is an organization
created from a formal agreement between groups of producers of a good or
service to regulate supply in an effort to regulate or manipulate prices. In
other words, a cartel is a collection of otherwise independent businesses or
countries that act together as if they were a single producer and thus are able
to fix prices for the goods they produce and the services they render without
competition.

The World’s Biggest Cartel

The Organization of Petroleum Exporting Countries
(OPEC) is the world’s largest cartel. It is a grouping of 14 oil-producing
countries whose mission is to coordinate and unify the petroleum policies of
its member countries and ensure the stabilization of oil markets. OPEC’s
activities are legal because it is protected by U.S. foreign trade laws.

Amid controversy in the mid-2000s, concerns over
retaliation and potential negative effects on U.S. businesses led to the
blocking of the U.S. Congress attempt to penalize OPEC as an illegal
cartel. Despite the fact that OPEC is considered by most to be a cartel,
members of OPEC have maintained it is not a cartel at all but rather an
international organization with a legal, permanent and necessary mission.

OPEC, which describes itself as a permanent
intergovernmental organization, was created in Baghdad in Sept. 1960 by
its founding members: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The
headquarters of the organization are in Vienna, Austria, where the OPEC
Secretariat, its executive organ, carries out OPEC’s day-to-day business.

The Chief Executive Officer of OPEC is its
Secretary General. As of August 2016, Mohammed Sanusi Barkindo of
Nigeria holds the position. 

 

Review of Literature

1)      A.F. Alhajji and David Huettner wrote a research paper named OPEC and
World Crude Oil Markets from 1973 to 1994: Cartel, Oligopoly, or Competitive? This
study investigated the existence of a adominant producer in world crude oil
market for the period 1973 to 1994. Contrary to the literature, the results
show that neither OPEC nor the core of OPEC can be characterized as a dominant
producer. Using statistical tests, we also investigate whether OPEC, the OPEC
core or Saudi Arabia fit the competitive model or the Cournot model. The
statistical results reject all models except the dominant firm model for Saudi
Arabia. New user cost estimates are introduced and included in the models. An
alternative explanation of high OPEC profits in the 1973-82 period is also
developed as a part of a statistical test of the effect of the US oil price
regulation on world oil demand and supply. An estimate of the wealth transfer
from price regulation is also calculated.

2)      Vincent
Bremond, Emmanuel Hache and Valerie Mignon conducted a study named Does OPEC
still exists as a cartel? The aim of this paper is to
determine if OPEC acts as a cartel by testing whether the production decisions
of the different countries are coordinated and if they have an influence on oil
prices. Relying on co integration and causality tests in both time series and panel
settings, findings show that the OPEC influence has evolved through time,
following the changes in the oil pricing system. While the influence of OPEC is
found to be important just after the counter-oil shock,  results show that OPEC is a price taker on
the majority of the considered sub-periods. Finally, by dividing OPEC between
savers and spenders, it is seen that it acts as a cartel mainly with a subgroup
of its members.

 

3)      Hai Ying
Zhang, Qiang Ji and Ying Fan wrote a research paper named Competition, transmission
and pattern evolution: A network analysis of global oil trade. This paper
studies the competition among oil importers using complex network theory,
combined with several alternative measures of competition intensity, to analyze
the evolution of the pattern and transmission of oil-trading competition. The
results indicate that oil trade has formed a global competition pattern and
that the role played by the Asian-Pacific region in the evolution of this
competition pattern is becoming increasingly prominent. In addition, global
competition intensity has continued to rise, and non-OECD countries have become
the main driving force for this increase in global competition intensity.
Finally, a “5C” (changeability, contestability, cooperation, commitment and
circumstances) policy framework is put forward to maintain the stability of oil
trade and improve the energy security of oil importers in various aspects.

 

4)      Douglas B.
Reynolds, Michael Pippenger did a research named OPEC and Venezuelan oil production:
Evidence against a cartel. This study revisits the OPEC
cartel hypothesis using a case study. A test is conducted to see if Venezuela
has its production Granger cause its OPEC quota or whether the OPEC quota for
Venezuela Granger causes Venezuelan production. The results show both occur at
different times. In the short run, OPEC’s oil production quota for Venezuela
Granger causes Venezuelan production. However, shortly after cuts, Venezuela
cheats on agreements, suggesting a tit-for-tat oligopoly game, which is not
anti-competitive. In the long run, we show that Venezuelan oil production
Granger causes OPEC’s quota for Venezuela, but not vice versa. Having
Venezuelan oil production Granger cause OPEC quotas for Venezuela in the long
run suggests OPEC does not coordinate outputs as much as it reacts to them. The
evidence suggests Venezuela is not a part of an OPEC anti-competitive syndicate
even though we show that Venezuelan oil production is low. An alternative
explanation for why Venezuela and possibly other OPEC members have low oil
production outputs is that institutions and risk aversion, not cartel
participation, is the cause.

 

5)      Thomas C.
Lowinger, Clas Wihlborg and Elliott S. Willman conducted a research named OPEC in world financial
markets: Oil prices and interest rates. This article examines the
relationship between the real rate of interest in world financial markets and
the price of oil. If OPEC cannot be viewed as a ‘small’ participant in world
financial markets, and should its savings and portfolio behaviour differ from
that of the rest of the world, then wealth shifts to or from OPEC would affect
world interest rates. Subsequently, this paper examines the magnitude of oil
price changes required to elicit a significant interest rate change.

 

Current Situation

Production dispute in 2008

The differing economic needs of OPEC member states often
affect the internal debates behind OPEC production quotas. Poorer members have
pushed for production cuts from fellow members, to increase the price of oil
and thus their own revenues. These proposals conflict with Saudi Arabia’s
stated long-term strategy of being a partner with the world’s economic powers
to ensure a steady flow of oil that would support economic expansion. Part
of the basis for this policy is the Saudi concern that overly expensive oil or
unreliable supply will drive industrial nations to conserve energy and develop
alternative fuels, curtailing the worldwide demand for oil and eventually
leaving unneeded barrels in the ground. On 10 September 2008, with oil prices
still near US$100/bbl, a production dispute occurred when the Saudis reportedly
walked out of a negotiating session where rival members voted to reduce OPEC
output. Although Saudi delegates officially endorsed the new quotas, they
stated anonymously that they would not observe them. Over the next few months,
oil prices plummeted into the $30s, and did not return to $100 until the Libyan
Civil War in 2011.

Oil Glut – 2014-17

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.

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 rejoining 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. In light of all these market pressures, OPEC decided to set aside
its ineffective production ceiling until the next ministerial conference in
June 2016.

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.

Production cut 2017-18

As OPEC members grew weary of a multi-year
supply contest with diminishing returns and
shrinking financial reserves, the organization finally attempted its first
production cut since 2008. Despite many political obstacles, a September 2016
decision to trim approximately 1 million barrels per day was codified by a new
quota agreement at the November 2016 OPEC conference. The agreement (which
exempted disruption-ridden members Libya and Nigeria) covered the first half of
2017 – alongside promised reductions from Russia and ten other non-members,
offset by expected increases in the US shale sector, Libya, Nigeria, spare
capacity, and surging late-2016 OPEC production
before the cuts took effect.  Long-time oil analyst Daniel
Yergin “described the relationship
between OPEC and shale as ‘mutual coexistence’, with both sides learning to
live with prices that are lower than they would like.

In December 2017, Russia and OPEC agreed to
extend the production cut of 1.8 million barrels/day until the end of 2018.

Lessons Learned

By studying the Oil markets all over the world
and especially OPEC (Organisation of Petroleum Exporting Countries) it is
observed that the crude oil market is very dynamic and it’s the price
fluctuation effects the whole world. The major players in crude oil production
are OPEC (Consisting 14 Countries) Russia and United States. These countries
have different views on controlling the supply of the oil and setting prices.
They have now learned to settle with the price lower than they would like. OPEC
leaders have a view that it is not a cartel but just an organisation which
promotes free trade practices of oil and the well fair of its members. But at
its heart, it really is a cartel which influences the production and price of crude
oil in the global market. Coming to the research papers, it covered Oil
cartels, price fluctuations and other important factors and it had detailed
analysis of global oil markets over several years.

 

References

(Huettner, OPEC and World
Crude oil markets from 1973 to 1994: Cartel, Oligopoly, or Competitive?, 2000)

 

 

 

 

 

 

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