Introduction:OPEC stands for ‘Organization of the Petroleum Exporting Countries’ which started from five countries that are Iraq, Kuwait, Iran, Saudi Arabia and Venezuela.
Later, more countries have joined the organization (OPEC, 2017). OPEC had recently held a meeting with its members and have decided to cut oil production in a bid to increase oil prices that will stabilize the demand and supply of oil (Resnick, 2017). However, instead of this decision benefiting the OPEC members, it is not doing any good for them. The two main members that are affected negatively are Venezuela and Saudi Arabia. Nigeria and Libya have exempted from this decision and are digging oil at their own benefit.
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U.S. is not a member of OPEC but is benefiting from this decision. US is taking the opportunity to recover their American drilling which threatens to spoil the oil market by an oversupply of oil.
(Christopher, 2017). OPEC is concerned about the oversupply of oil within the oil market by non OPEC countries as well as Nigeria and Libya as they are not following the decision just to earn profits. Macroeconomic Status: OPEC Members vs USAOPEC includes several members such as Saudi Arabia and partially Venezuela due to the heavy dependence on oil export for their economy.
Certain macroeconomic factors depict the negative effect Saudi Arabia and Venezuela are facing with the cut in production but shows US having a positive impact. The macroeconomic status can be analysed by the GDP, economy growth, inflation rate, and unemployment rate. Saudi Arabia’s GDP shrank by 1% while the economy growth contracted by 0.5% in the first three months of 2017. Due to OPEC’s high prices (See appendix –) and reducing output of oil, the kingdom’s oil GDP shrank 1.8% in the second quarter which weighs the overall activity (Khraiche, 2017).
Venezuela’s real GDP growth was -9% in 2017 which has contributed to the economy going in crisis (OPEC, 2017). Whereas, USA’s real GDP grew by 3.3% in the second quarter and the American Petroleum Institute accounted for 7.
6% of the GDP in 2017 (TBP, 2017). Saudi Arabia’s main source of income is from oil but with US getting higher profitability rates with drilling oil, the inflation rate has rose to 0.1%. With the lower revenues earned (oil being a huge part), 2017’s inflation rate was about an average of 3.4%. Venezuela inflation is above 700% and GDP is more than a third below 2013 levels with collapsed living standards (Gokay, 2017).
While USA’s inflation rate only rose by 0.4% as there was a 2.4% decrease in oil prices (Amadeo, 2017). Accordingly, Saudi Arabia and Venezuela are facing a cost push inflation as the drilling price is higher and have to store their inventory when compared to US. Lastly, the unemployment rate for Saudi Arabia in 2017 rose to 12.
7% after OPEC’s plan and the chief economist said “The data shows the economy is not creating enough jobs for the new entrants into the labour market. Job creation is going to be the main challenge for the reform programme” (Aljazeera, 2017). Venezuela’s unemployment rate rose steeply by 25% while US unemployment rate within oil and gas industry decreased by 4.8% in 2017 as they need more jobs for drilling (Gokay, 2017).
Affected OPEC Members Fiscal and Monetary Policies:Saudi Arabia and Venezuela are part of OPEC and have to cooperate to help the oil production and prices for all the members within the organization. Saudi Arabia is aiming to reduce the fiscal deficit by 7.7% from the GDP and increasing taxes and fees by using the restrictive fiscal policy. The 2017 budget is built on the expectation that the oil revenue will increase to $128 billion if they stick to OPEC’s agreement of 10 million barrels a day and $55 per barrel. Unfortunately, Saudi Arabia has not lived up to the policy for 2017 with factors affecting the disruption as it cannot control the international oil markets as US is getting profitable due to OPEC’s decision of production cut with higher prices (Young, 2017).
Whereas, for the restrictive monetary policy for Saudi Arabia, the currency is pegged to USD. Food and housing/rental costs covers up over 40% of the total weight of the CPI basket. The SAMA is trying to adjust the reserve requirements with respect to affecting various types of bank credit availability within the economy. SAMA does not worry about exchange rates as the price is dominated by oil whose prices are set in the global market. The interest rates are running through stress tests after OPEC’s decision to see how the banks would react to a higher interest rate. Banks are resilient to a drop in oil prices as it would survive for at least one working week even if there was a run on their deposits (SAMA, 2017). Venezuela’s expansionary fiscal policy has got the economy to a halt with the overreliance imports they cannot keep up. The economy was too dependent on oil exports and not domestic production, therefore after OPEC’s decision of decreasing production output for oil, Venezuela’s economy went into crisis (Aleem, 2017).
The expansionary monetary policy for Venezuela, the Central Bank is paying bondholders instead of feeding and aiding its population. Venezuela owes $60 billion to bondholders but only have $9.6 billion left within its bank (See appendix –). Whereas, US is proposing a lower tax price of just 23.6% which goes with the expansionary fiscal policy and lower exchange rates within the expansionary monetary policy (Charles, 2017). Therefore, Saudi Arabia and Venezuela are having a difficult time with their policies regarding OPEC’s decision as their economy is heavily dependent on oil production and prices.OPEC Members International Trade (Advantages, Restrictions, Agreements):International trade leads to specific gains that can benefit countries.
OPEC members like Saudi Arabia and Venezuela in this case are heavily dependent on their exports for oil. Saudi Arabia and Venezuela have plentiful oil resources and can generate oil at a cheap cost. As Saudi Arabia and other OPEC members oil production is cheap, it holds a comparative advantage in oil and it exports oil to finance its purchases for imports (Encyclopedia, 2017). Saudi Arabia were one of the country’s to agree to OPEC’s decision in the second quarter, so the shipments will fall by 120,000 barrels in December 2017 by a 10% decrease month to month (Smith, 2017). Same goes with Venezuela as it is part of OPEC’s agreement resulting in a comparative advantage in crude oil. Venezuelan crude exports fell to just under 1.
7 million bpd in the second quarter of 2017, down 160,000 bpd year-on-year (y/y), according to the IEA (Miller, 2017). Accordingly, Saudi Arabia’s balance of payments are negative with the outflow of more than $28.3B from the kingdom through the current and financial accounts last month (See appendix –). Venezuela relies heavily on oil as well, but with the production cut by OPEC, the country is facing a negative value in their current account of $2.97B (See appendix –). Accordingly, a negative value in their capital and finance account of $5.734B. The Saudi Arabia and Venezuela currencies are pegged to the US dollar.
Saudi Arabia is a part of the WTO and implies a 12% tariff on 207 products to protect the kingdom’s local industries. According to WTO, Venezuela have an average tariff of 15% on agricultural goods and 12.1% on non-agricultural goods (WTO, 2017). OPEC has imposed a quota of reducing its global production of 4.5% with the agreement of balancing the global supply of oil. Saudi Arabia and Venezuela are the most affected members with this rule as US accelerates the production of oil as their cost production sale has decreased. OPEC’s agreement (See appendix –), has done no good as they have to deal with the rising threat of more supply from the US at a lower drilling cost following the 1st quarter of 2018 (See appendix –).
OPEC’s Globalization:OPEC was created to give power to the individual states that produce oil but most importantly to work with other oil rich countries to increase their power within the international system. Unfortunately, OPEC’s global relationship is not doing well as the members are driven with their own economic and public interests to benefit the nation’s economy. The members are have signed the agreement of a unified oil production policy but cannot meet it. After OPEC’s decision of cutting down the production line and increase the prices for oil in order to stabilize the supply and demand of the industry, two members backed out (Witherspoon, 2017). Nigeria and Libya are members of OPEC but have not agreed to the statement and therefore oversupplying oil to benefit their own individual economy that has concerned a major concern for OPEC. Saudi Arabia has their own foreign policy when it comes to oil. For instance, Saudi Arabia not only is trying to limit their competition in North America, but also wants to reduce oil supply along with another OPEC member which is Iran. Saudi Arabia is trying to keep the prices low which will weaken Iran and are comfortable with it.
(Witherspoon, 2017). If Iran becomes stronger with more oil revenue, this will concern Saudi Arabia. The global level of relations within the oil industry is not the best as there is more individual gain objectives performed rather than working with OPEC’s agreement of stabilizing the whole global market of oil. Moreover, OPEC used to have a strong hand of prince control in the global market between 2001 to 2014 resulting in $110 per barrel due to geopolitical tensions and increased demand with tight supply. With the elevated price, it has benefited North America where innovation for oil production techniques developed with more effective drilling techniques. Due to oversupply, the prices fell down to $40-50 per barrel resulting in North America being more profitable. Accordingly, most affected OPEC members such as Saudi Arabia and Venezuela leading into crisis with low oil revenue (Investopedia, 2017).
OPEC has forecasted that US shale will dominate the market with increased global production in the future years (See appendix –). According to CNBC, “OPEC now sees demand reaching 102.3 million barrels a day in 2022, up from 95.4 million barrels a day in 2017.” (Christopher, 2017). Therefore, the global relations are in crisis amongst OPEC members but North America will out take OPEC in the future with oversupply of oil and will dominate the global market.
This will result in creating new international relations with revenue generating countries like China and Russia. Possible Economic Solution:By researching about the consequences OPEC’s decision has made to major members like Saudi Arabia and Venezuela, an action has to be taken. At this point of time, OPEC cannot overtake North America in their oil stance. Due to international trade, Saudi Arabia and Venezuela’s economy are not diversified and heavily dependent on oil which is not the best option for a growing economy. Saudi Arabia can diversify their economy by shifting to other resources like solar as they are already aiming to install 9.5 gigawatts in the next six years (Hobbs, 2017). When compared to China’s installations of solar power, Saudi is already efficient with its solar plans even while just starting the plan. Accordingly, the Kingdom should adjust upward to the declining costs and local skills that are building up.
Saudi can invest in Uber, as public transportation is not the best which will reshape the mobility in the Kingdom and around the world. Venezuela has a tougher time for its economy and products are not doing the best (Macoff, 2017). Accordingly, IMF (International Monetary Fund) was protective of international banking interests. Regarding private debt, Venezuela and the IMF would share a common interest in a board of successful debt operation which will help conserve the national cash and support social and economic stabilization. Conclusion:OPEC has made many strategies but has impacted negatively for OPEC members, especially Saudi Arabia and Venezuela. The decision of cutting oil production to regulate the oversupply of the market has signified Saudi Arabia to lower down its GDP, revenue and increase the inflation rate.
Venezuela’s economy is in crisis with negative economy growth and GDP, high amounts of inflation as the economy was too dependent on oil resulting in an economy crisis after oil prices going low. OPEC initially predicted that the price would rise, but with North America becoming profitable, the country is oversupplying oil resulting in lower prices. Saudi Arabia’s restrictive fiscal and monetary policy aims to reduce the federal deficit but have failed to do so with less control on the international oil market. The SMI is running stress tests to increase the interest rate for banks. Venezuela’s expansionary policies are not effective as there is a larger debt than the total amount of money within the country. International trade for Saudi and Venezuela have decreased their trade due to OPEC production cut agreement which have affected globalization regarding their international relationships.
Saudi should diversify their economy and Venezuela should rely on IMF to improve the country’s status.