The Organization of Petroleum Exporting Countries(OPEC) is a group consisting of 12 of the world’s major oil-exporting nations.OPEC was founded in 1960 to coordinate the petroleum policiesof its members, and to provide member states with technical and economic aid.OPEC is a cartel thataims to manage the supply of oil in an effort to set the price of oil on theworld market, in order to avoid fluctuations that might affect the economies ofboth producing and purchasing countries 5.OPEC’s objective is toco-ordinate and unify petroleum policies among Member Countries, in order tosecure fair and stable prices for petroleum producers; an efficient, economicand regular supply of petroleum to consuming nations; and a fair return oncapital to those investing in the. Issues Motivated for choosing the studyOPEChas been gaining steady power and influencing the global oil market since the1970s when OPEC had ~50% of market share in global crude oil production. Highmarket share has also given OPEC the bargaining power to price oil above whatprices would be in a more competitive market.
This means OPEC has the abilityto sway crude oil prices by increasing or decreasing production. Because of the role the Organization ofPetroleum Exporting Countries (OPEC) plays in oil production levels and theinfluence it has over pricing, OPEC affects industries of all sorts throughoutthe world. OPEC has a strong role in the economy of the world, and becausemoney is deeply entwined with power, OPEC also has influence in the arenas ofpolitics and public policy.LITERATURE REVIEW Deneckere (1983), Majerus (1988),Rothchild (1992) and Lambertini and Schultz (2003) arguethat, as long as the produced goodsare substitutes for each other, a quantity-setter cartel ismore stable than a price-setter. Giventhat crude oil extracted in any particular country is aperfect substitute for crude oil extractedDeneckere, R., 1983. Duopoly supergames with productdi§erentiation. EconomicsLetters 11, 37ñ42.
Aguiar-Conraria and Wen (2008) argued that dependence onforeign oil raises the like-lihood of equilibrium indeterminacy (economic instability)for oil importing countries. Weargue that this relation is more subtle. The endogenouschoices of prices and quantities bya cartel of oil exporters, such as the OPEC, can a§ect thedirections of the changes in thelikelihood of equilibrium indeterminacy. expectations under oil shocks are easier to occur if thecartel sets the price of oil, but the re-sult is reversed if the cartel sets the quantity ofproduction.
These results Offer a potentiallyinteresting explanation for the decline in economicvolatility (i.e., the Great Moderation)in oil importing countries since the mid-1980s when the OPECcartel changed its marketstrategies from setting prices to setting quantities,despite the fact that oil prices are farmore volatile today than they were 30 years ago.Aguiar-Conraria, L., Wen, Y., 2008. A Note on Oil Dependenceand Economic In-stability. Macroeconomic Dynamics 12, 717-723.
The conventional wisdom among scholars and policymakers isthat OPEC is a powerful market actor and has the capability to significantly influenceworld oil prices, even if it cannot control them perfectly. Further, most people believe that OPEC does thisby way of operating as a cartel does, by consciously producing less oil than it could to drive up itsprice.Adelman, 1995; Alt et al.
, 1988; Bentzen, 2007; Blaydes,2004; Claes, 2001; Doran, 1980; Krasner, 1974; Kaufmann et al., 2004, 2008; Ikenberry, 1988; Osborne, 1976;Seymour, 1980; Shaffer, 2009; Smith, 2008, 2009; Sovacool, 2011 Perhaps surprisingly, those who have investigated theeffectiveness of OPEC as a cartel have had difficulty finding conclusive evidence. Alhajji and Huettnerfind that neither OPEC nor the OPEC core can be characterized as a dominant producer in the world crudeoil market, 1973-1994. Alhajji and Huettner,2000.
(The “OPEC core” is a subset of OPEC member states which are especiallyoil-rich, including Saudi Arabia.) The oil-growth nexus is studied in a panel of Organizationof the Petroleum Exporting Countries (OPECs), for a long time span (1960-2011),controlling for the specific context of oil production. Their membership in thecartel put them under a common guidance, which originates phenomena ofcross-section dependence/contemporaneous correlation in the panel.Jose Alberto Fuinhas, Antonio Cardoso Marques, Tânia NoéliaQuaresma, (2015) “Does oil consumption promote economic growth in oilproducers?: Evidence from OPEC countries”, International Journal of EnergySector Management, Vol. 9 Issue: 3, pp.
323-333 OPECis a cartel, which is an association of manufacturers or suppliers with thepurpose of maintaining prices at a high level and restricting competition. Atthe end of 2014, OPEC reported reserves of 1.206 trillion barrels of oil, whichis 81% of total world reserves. Of those reserves, Saudi Arabia, Iran, Iraq,Kuwait, the United Arab Emirates, Qatar and Libya have 67.6% within theirborders. Between the period of June 2014 and July 2015, crude oil was in a bearmarket — the price of the energy commodity moved from over $100 per barrel tounder $50 based on the active month NYMEX oil futures contract. OPEC’s missionis to “..
.ensure the stabilization of oil markets in order to secure anefficient, economic and regular supply of petroleum to customers, a steadyincome to producers and a fair return on capital to those investing in thepetroleum industry.”As crude oil priceshave moved lower, the oil cartel did not cut production even though it is inthe cartel’s interest to maintain prices at a high level.
Instead,the cartel has let the price fall in order to allow higher cost production tobecome uneconomic. OPEC maintained their production ceiling at 30 millionbarrels per day. However, as prices moved lower many members of the cartelsuffered economic hardship as they received less revenue for their oilproduction .When it comes to commodity or raw material markets, oil isone of the most political staple commodities that trade. This is because demandfor crude oil is ubiquitous while suppliesare concentrated in some of the most turbulent political regions in the world. Atthe end of 2014, OPEC reported reserves of 1.206 trillion barrels of oil, whichis 81% of total world reserves.
Of those reserves, Saudi Arabia, Iran, Iraq,Kuwait, the United Arab Emirates, Qatar and Libya have 67.6% within theirborders. Between the period of June 2014 and July 2015, crude oil was in a bearmarket — the price of the energy commodity moved from over $100 per barrel tounder $50 based on the active month NYMEX oil futures contract. As crude oil prices have moved lower, the oilcartel did not cut production even though it is in the cartel’s interest tomaintain prices at a high level.Instead, the cartel has let theprice fall in order to allow higher cost production to become uneconomic.
OPECmaintained their production ceiling at 30 million barrels per day. However, asprices moved lower many members of the cartel suffered economic hardship as theyreceived less revenue for their oil production.Many have attempted to sellmore oil to make up for the financial shortfall. In July 2015, OPEC wasproducing and selling around 32 million barrels of crude per day, which isabove the stated ceiling level. The price of oil moved lower for a collectionof reasons including a slowdown in the global economy, a strong U.
S. dollar and increasingproduction from non-OPEC members.s. OPEC and 11 other leading producers includingRussia agreed in December to cut their combined output by almost 1.8 millionbarrels per day (bpd) in the first half of the year.
The original deal was tolast six months, with the possibility of a six-month extension.TheInternational Energy Agency reports that oil production from Africa’s OPECmembers Algeria, Angola, Libya and Nigeria has stagnated over the last fiveyears at 7.12m barrels a day, posting virtually zero growth from 2012 to 2017.the Arab spring of 2011 looked like a blip as production recovered quickly fromthe war in Libya, but the losses for OPEC’s African members continued on theback of higher security risks in the wake of the Arab spring, uncompetitivefiscal terms, challenging local content requirements and contract sanctityconcerns.
On November 30, 2017, OPEC agreed to continue withholding 2percent of global oil supply. That continues the policy it formed on November30, 2016, when it agreed to cut production by1.2 million barrels. Starting January 2017, it will produce 32.5 millionbarrels per day. That’s still above its average 2015 level of 32.
32mbpd. The agreement exempted Nigeria and Libya. It gave Iraq its firstquotas since the 1990s. Russia,not an OPEC member, voluntarily agreed to cut production. Thenext joint committee meeting of OPEC and non-OPEC producers will be held inVienna on Sept.
22. All options, including extending supply cuts beyond Q1 of2018, are “left open to ensure that all efforts are made to rebalance themarket,” according to an OPEC statement. The group also confirmed that its dealachieved a conformity level of 75 percent as of July.There is reason to believe that, after the end of Q1 2018, OPECwill again be inclined to renew the agreement on limiting oil production.Global oil market trends indicate the low probability of a new wave of pricecuts in the market until the end of the current year.Lessons learnt Recently, the market has been questioning whether OPEC andnon-OPEC would continue with their production cuts. Both of the main actors,Saudi Arabia and Russia, are heavily incentivized to continue with theirstrategic economic partnership.
SaudiArabia’s recent visit to Russia further cemented that relationship, andthe recent courting of othernon-OPEC countries to joinmeansthat the parties have every intention to continue the production cut partyU.S. shale productioninitially rose in response to high global crude oil prices in the last decaderather than an embargo by major producers.And the initial reaction to a global supply glut by theOrganization of the Petroleum Exporting Countries was to try to steal backmarket share from higher-cost producers in the U.S.
shale plays and elsewhereby pumping furiously, contributing to a crash that took the U.S. crudebenchmark from more than $100 a barrel in mid-2014 to a 13-year low below $27 abarrel in early 2016.Recommendations OPEC’s deal faces potential setbacks from Iraq’s call for it tobe exempt and from countries including Iran, Libya and Nigeria whose output hasbeen hit by sanctions or conflict and want to increase supply.The reality, especially if prices exceed the $70 mark, isthat the fundamental supply-demand balance does not support Opec’s optimism.Even if it did, transitioning away from supply cuts is not going to be smooth,with growth in demand likely to weaken throughout 2018.
Opec sees supply growthof 1 million barrels per day this year, of which 720,000 would be from the US.The International Energy Agency (IEA) is calling for 1.6 million, with the UScontributing 870,000. But if prices remain elevated, the IEA’s forecast looksconservative.
Consultancy Rystad Energy estimates as much as 1.9 million barrelsper day of growth, with 1.6 million coming from the US. Higher oil prices todayare allowing shale producers to hedge and lock in drilling programmes. Costswill inevitably rise as activity gears up, and there is much talk of a newcapital discipline, but prices above $60 per barrel offer a win-win of profitsand growth.