ISSUES MOTIVATED FOR CHOOSING THE STUDY

 

Petroleum is not distributed evenly around the world. More
than half of the world’s proven oil reserves are located in the Middle East
(including Iran but not North Africa); that is to say, the Middle East contains
more oil than the rest of the world combined. Following the Middle East are
Canada and the United States, Latin America, Africa, and the region occupied by
the former Soviet Union. Each of those regions contains less than 15 percent of
the world’s proven reserves. (Reserves are identified quantities of “in-place”
petroleum that are considered recoverable under current economic and
technological conditions. Estimated by petroleum engineers and geologists using
drilling and production data along with other subsurface information, the
figures are revised to include projected field growth as development
progresses.)

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The amount of oil a given region produces is not always
proportionate to the size of its proven reserves. For example, the Middle East
contains more than 50 percent of the world’s proven reserves but accounts for
only about 30 percent of global oil production (though this figure is still
higher than in any other region). The United States, by contrast, lays claim to
less than 2 percent of the world’s proven reserves but produces about 10
percent of the world’s oil.

Most countries are significantly affected by developments in
the oil market, either as producers, consumers, or both. In 2014, oil provided
about 38 % of the world’s energy needs, and in the future, oil is expected to
continue to provide a leading component of the world’s energy mix. Today Oil is
one of the most important raw materials we have. Every day we use hundreds of
things that are made from oil or gas. The Oil Industry started off more than
five thousand years back leading to the formation of the world’s biggest Oil
Cartel – OPEC.

 

 

 

 

 

 

 

 

ORIGIN AND NATURE

The Organization of the Petroleum Exporting Countries (OPEC)
is a permanent, intergovernmental Organization, created at the Baghdad
Conference on September 10–14, 1960, by Iran, Iraq, Kuwait, Saudi Arabia and
Venezuela. The five Founding Members were later joined by ten other Members:
Qatar (1961); Indonesia (1962) – suspended its membership in January 2009,
reactivated it in January 2016, but decided to suspend it again in November
2016; Libya (1962); United Arab Emirates (1967); Algeria (1969); Nigeria
(1971); Ecuador (1973) – suspended its membership in December 1992, but
reactivated it in October 2007; Angola (2007); Gabon (1975) – terminated its
membership in January 1995 but rejoined in July 2016; and Equatorial Guinea
(2017). OPEC had its headquarters in Geneva, Switzerland, in the first five
years of its existence. This was moved to Vienna, Austria, on September 1,
1965.

The 1960s

OPEC’s formation by five oil-producing developing countries
in Baghdad in September 1960 occurred at a time of transition in the
international economic and political landscape, with extensive decolonisation
and the birth of many new independent states in the developing world. The
international oil market was dominated by the “Seven Sisters” multinational
companies and was largely separate from that of the former Soviet Union (FSU)
and other centrally planned economies (CPEs). OPEC developed its collective
vision, set up its objectives and established its Secretariat, first in Geneva
and then, in 1965, in Vienna. It adopted a ‘Declaratory Statement of Petroleum
Policy in Member Countries’ in 1968, which emphasised the inalienable right of
all countries to exercise permanent sovereignty over their natural resources in
the interest of their national development. Membership grew to ten by 1969.

The 1970s

OPEC rose to international prominence during this decade, as
its Member Countries took control of their domestic petroleum industries and
acquired a major say in the pricing of crude oil on world markets. On two
occasions, oil prices rose steeply in a volatile market, triggered by the Arab
oil embargo in 1973 and the outbreak of the Iranian Revolution in 1979. OPEC
broadened its mandate with the first Summit of Heads of State and Government in
Algiers in 1975, which addressed the plight of the poorer nations and called
for a new era of cooperation in international relations, in the interests of
world economic development and stability.

 

 

 

 

This led to the establishment of the OPEC Fund for
International Development in 1976. Member Countries embarked on ambitious
socio-economic development schemes. Membership grew to 13 by 1975.

The 1980s

After reaching record levels early in the decade, prices
began to weaken, before crashing in 1986, responding to a big oil glut and
consumer shift away from this hydrocarbon. OPEC’s share of the smaller oil
market fell heavily and its total petroleum revenue dropped below a third of
earlier peaks, causing severe economic hardship for many Member Countries.
Prices rallied in the final part of the decade, but to around half the levels
of the early part, and OPEC’s share of newly growing world output began to recover.
This was supported by OPEC introducing a group production ceiling divided among
Member Countries and a Reference Basket for pricing, as well as significant
progress with OPEC/non-OPEC dialogue and cooperation, seen as essential for
market stability and reasonable prices. Environmental issues emerged on the
international energy agenda.

The 1990s

Prices moved less dramatically than in the 1970s and 1980s,
and timely OPEC action reduced the market impact of Middle East hostilities in
1990–91. But excessive volatility and general price weakness dominated the
decade, and the South-East Asian economic downturn and mild Northern Hemisphere
winter of 1998–99 saw prices back at 1986 levels. However, a solid recovery
followed in a more integrated oil market, which was adjusting to the
post-Soviet world, greater regionalism, globalisation, the communications
revolution and other high-tech trends. Breakthroughs in producer-consumer
dialogue matched continued advances in OPEC/non-OPEC relations. As the United Nations-sponsored
climate change negotiations gathered momentum, after the Earth Summit of 1992,
OPEC sought fairness, balance and realism in the treatment of oil supply. One
country left OPEC, while another suspended its Membership.

The 2000s

An innovative OPEC oil price band mechanism helped
strengthen and stabilise crude prices in the early years of the decade. But a
combination of market forces, speculation and other factors transformed the
situation in 2004, pushing up prices and increasing volatility in a
well-supplied crude market. Oil was used increasingly as an asset class. Prices
soared to record levels in mid-2008, before collapsing in the emerging global
financial turmoil and economic recession.

 

 

 

 

OPEC became prominent in supporting the oil sector, as part
of global efforts to address the economic crisis. OPEC’s second and third
summits in Caracas and Riyadh in 2000 and 2007 established stable energy
markets, sustainable development and the environment as three guiding themes,
and it adopted a comprehensive long-term strategy in 2005. One country joined
OPEC, another reactivated its Membership and a third suspended it.

OBJECTIVE: OPEC’s objective is to co-ordinate and unify
petroleum policies among Member Countries, in order to secure fair and stable
prices for petroleum producers; an efficient, economic and regular supply of
petroleum to consuming nations; and a fair return on capital to those investing
in the industry.

 

LITERATURE REVIEW

 

(smith, 2009)Many observers regard the world oil market as a
puzzle. Why are oil prices so volatile? Why did prices spike in the summer of
2008, and what role did speculators play? How important is OPEC? Where are oil
prices headed in the long run? Is “peak oil” a genuine concern? Any
attempt to answer these questions must be informed and disciplined by
economics. The paper examines the evidence on each of these issues and provides
an interpretation of developments in the world oil market from the perspective
of economic theory.

(VincentBrémonda, EmmanuelHacheb, & ValérieMignonc,
2012) 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, the 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, the 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 shows that it acts as a cartel mainly with a subgroup of its
member.

(Behar & Robert, 2016)In November 2014, OPEC announced a
new strategy geared towards improving its market share. Oil-market analysts
interpreted this as an attempt to squeeze higher-cost producers including US
shale oil out of the market. Over the next year, crude oil prices crashed, with
large repercussions for the global economy.

 

 

 

 

 It explains the
fundamental market factors that can rationalize such a “regime
switch” by OPEC. These include: (i) the growth of US shale oil production;
(ii) the slowdown of global oil demand; (iii) reduced cohesiveness of the OPEC
cartel; (iv)  production ramp-ups in
other non-OPEC countries. It shows that these qualitative predictions are
broadly consistent with oil market developments during 2014-15. The model is
calibrated to oil market data; it predicts accommodation up to 2014 and a
market-share strategy thereafter, and explains large oil-price swings as well
as realistically high levels of OPEC output.

(Wirl & Azra, 2004)This paper investigates how far OPEC
influences world oil markets. We ask the question: What is the impact of the
decisions of the OPEC Conference, the supreme authority of the Organization of
Petroleum Exporting Countries, on world oil prices? Extracting the Conference’s
decisions from the communiques °f fifty meetings from 1984-2001, these decisions
were compared with the subsequent market developments. The result is that this
impact is weak at best, and if at all then restricted to meetings recommending
a price increase. However, the opposite claim (found in the literature) – the
Conference is simply following the market – was also not supported either.
Another interesting observation is the little autocorrelation between the
decisions of the Conference. This suggests that the ministers’ decisions
accommodate quickly and efficiently recent events.

(Fattouh, 2007)Although there is plenty of room for OPEC to
influence the oil price in the current oil pricing system, this influence is
not unconstrained. In this paper, they have argued that the recent changes in
the international oil pricing system have diminished OPEC pricing power,
especially when compared to the previous administered oil pricing system. They
have also emphasized that OPEC pricing power is not constant and varies
according to oil market conditions. Finally, they have questioned  the proposition that OPEC in general and the
Middle East in particular are bound to have a greater influence on the oil
market as they develop their reserves and gain a greater share of the market.
Although the paper’s focus has been on economic factors, it is important to
stress that OPEC does not operate in a political vacuum. It has been argued
elsewhere that pricing systems in the past reflected the balance of power at
those times and this present system  is
no exception. For many, the balance of political power can have an impact on
OPEC behaviour. For instance, Doran (1980) hypothesizes that there are limits
on how much Saudi Arabia can increase its oil price because very high oil
prices can be “damaging to their own interest because of the danger to the
world economy and to their larger commercial involvements and because of the
incentive to outside military pressure by distraught consumer governments” He
also argues that ‘political and cultural similarity’ has facilitated Saudi
Arabia’s role in forming coalitions regarding price preferences.

 

 

 

 

Others have attributed important episodes in oil history to
political factors. For instance, some argue that the decline in oil prices in
1986 might have been orchestrated between Saudi Arabia and the USA to undermine
the financial position of the USSR. There is no harm in incorporating some (but
not all) of these ideas into the analysis of OPEC pricing power.

 

CURRENT SITUATION

2010 until now

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. Escalating social unrest in many parts of the world affected both
supply and demand throughout the first half of the decade, although the market
remained relatively balanced. 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. The world’s focus on
multilateral environmental matters began to sharpen, with expectations for a
new UN-led climate change agreement. OPEC continued to seek stability in the
market, and looked to further enhance its dialogue and cooperation with
consumers, and non-OPEC producers.

 

 

The graph above illustrates the inter-country variations in
the average price of one litre of oil across G7 countries as well as the OECD
average during 2016.

 

 

 

It is important to note that these price variations are
mainly due to the widely varying levels of taxes (in red) imposed by major oil
consuming nations. These can range from relatively modest levels – like in the
USA – to very high levels in Europe and Asia/Pacific   For example, in the UK the government in
2016 earned about 69% of the price charged for every litre of pump fuel sold to
consumers. On the other hand, oil producing countries (including OPEC) earned
about 19.3% of the total pump fuel price.

 

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.

 

LESSONS LEARNED

 

Most scholars and policymakers believe OPEC to be a powerful
institution which can and does influence the global price of oil. According to
this view, OPEC operates as a cartel, manipulating the price of oil principally
by restricting supply. In doing so, OPEC generates huge excess profits for its
member states. Since oil is a vital commodity in the modern economy,
oil-importing states must constantly monitor OPEC as an organization, and be wary
of the power that it wields.

 

 

 

Most of the conventional wisdom about OPEC is wrong. OPEC
does not operate effectively as a cartel. It rarely if ever influences the oil
production rate in its member states. And OPEC has almost no lasting impact on
world prices, except under very rare conditions. In reality, the price of oil
is largely set by market fundamentals like the rate of investment in production
capacity, the impact of major wars, and the growth of demand, which has been
especially strong in Asia in recent years. It is possible that speculators also
play a role in creating short-term price bubbles. But at least since OPEC first
began to operate as a formal cartel in 1982, its role in affecting world oil
prices as a cartel has been minimal.

There was one occasion on which OPEC did have a significant
impact on world oil prices, namely the 1973 oil crisis. Yet OPEC’s role in the
crisis has been greatly misunderstood. The circumstances of the crisis were
highly exceptional, making it unlikely that the organization could ever have a
similar impact on world oil prices again. While OPEC did take actions that
contributed to the dramatic increase in world oil prices in 1973, those actions
had little to do with restricting oil supply. In fact, OPEC production hardly
declined at all.

The 1973 oil crisis had multiple causes, but probably the
most important was the decision by OPEC to dramatically increase the “posted
price” of its oil, thereby raising the tax and royalty payments that the major
international oil companies had to pay OPEC governments. As I explain below,
such posted prices no longer exist (taxes are now typically indexed to market
prices), meaning that OPEC could not raise prices in this way again.

 I argue that OPEC is
dysfunctional as a cartel, as it has little or no causal impact on its members’
choices about production levels or investment in production capacity. I make no
claim about whether OPEC could affect its members’ oil production; I simply
argue that it does not do so in practice. I show that cheating in OPEC – i.e.,
oil production by member states in excess of their stipulated market
allocations – is endemic: its nine core members cheat on their aggregate quota
96 percent of the time. Perhaps even more significantly, the quotas themselves
often appear to be post-hoc justifications of production decisions made by
individual states

 

RECOMMENDATIONS FOR FUTURE

 

The Organization of the Petroleum Exporting Countries (OPEC)
will host the 7th OPEC International Seminar at the Imperial Hofburg Palace in
Vienna, Austria, on 20?21 June 2018 under the theme, ‘Petroleum – cooperation
for a sustainable future’.

 

 

 

The Seminar will provide fresh impetus to key petroleum
industry issues and challenges, helping to enhance existing avenues of dialogue
and cooperation, while stimulating new ones. 
The Seminar will feature presentations by officials from energy and oil
ministries, executives from oil companies and financial firms, and other
representatives from international organizations and research institutions.

The 2018 OPEC International Seminar will seek to reinforce
OPEC’s longstanding commitment to strive towards a secure and stable market in
support of a healthy global economy.  It
will also highlight the need for continuing promotion of cooperation and
dialogue with all oil industry stakeholders, including producers and consumers.

Some of the topics to be discussed at the Seminar will
include global energy cooperation, technological breakthroughs, energy
transition, industry investments, as well as the world economy and the future
outlook for the oil industry.

OPEC’s International Seminar is today recognized as one of
the most important industry events on the global energy calendar.  The event is outstanding both for the calibre
of participants and the high level of discussions that take place on all the
leading issues affecting the energy sector.

OPEC has held seminars since 1969.  However, its first high-level International
Seminar was held in 2001, followed by subsequent editions of the event in 2004,
2006, 2009, 2012 and 2015.

The 6th OPEC International Seminar, also held at the
Imperial Hofburg Palace in Vienna, was held on 3?4 June 2015.  Its theme was ‘Petroleum: An Engine for
Global Development’.  It attracted a
record 800 participants and featured over 30 presentations.

 

REFERENCES

•             Behar,
A., & R. A. (2016). An analysis of OPEC’s strategic actions, US shale
growth and the 2014 oil price crash. IMF Working paper .

•             Fattouh,
B. (2007). OPEC Pricing Power. Oxford institute for energgy studies .

•             smith, j.
.. (2009). World Oil: Market or Mayhem? Journal of Economic Perspectives— , 23
(3), 145-164.

 

 

 

 

•             VincentBrémonda,
EmmanuelHacheb, & ValérieMignonc. (2012). Does OPEC still exist as a
cartel? An empirical investigation. energey economics , 34 (1).

•             Wirl, F.,
& A. K. (2004). The Impact of OPEC Conference Outcomes on World Oil Prices
1984-2001. The Energy Journal , 25 (1).

 

PLAGIARISM REPORT