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 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 5.

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.      

 

Issues Motivated for choosing the study

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. Because of the role the Organization of
Petroleum Exporting Countries (OPEC) plays in oil production levels and the
influence it has over pricing, OPEC affects industries of all sorts throughout
the world. OPEC has a strong role in the economy of the world, and because
money is deeply entwined with power, OPEC also has influence in the arenas of
politics and public policy.

LITERATURE REVIEW

Deneckere (1983), Majerus (1988),

Rothchild (1992) and Lambertini and Schultz (2003) argue
that, as long as the produced goods

are substitutes for each other, a quantity-setter cartel is
more stable than a price-setter. Given

that crude oil extracted in any particular country is a
perfect substitute for crude oil extracted

Deneckere, R., 1983. Duopoly supergames with product
di§erentiation. Economics

Letters 11, 37ñ42.

 

Aguiar-Conraria and Wen (2008) argued that dependence on
foreign oil raises the like-

lihood of equilibrium indeterminacy (economic instability)
for oil importing countries. We

argue that this relation is more subtle. The endogenous
choices of prices and quantities by

a cartel of oil exporters, such as the OPEC, can a§ect the
directions of the changes in the

likelihood of equilibrium indeterminacy.

expectations under oil shocks are easier to occur if the
cartel sets the price of oil, but the re-

sult is reversed if the cartel sets the quantity of
production. These results Offer a potentially

interesting explanation for the decline in economic
volatility (i.e., the Great Moderation)

in oil importing countries since the mid-1980s when the OPEC
cartel changed its market

strategies from setting prices to setting quantities,
despite the fact that oil prices are far

more volatile today than they were 30 years ago.

Aguiar-Conraria, L., Wen, Y., 2008. A Note on Oil Dependence
and Economic In-

stability. Macroeconomic Dynamics 12, 717-723.

 

The conventional wisdom among scholars and policymakers is
that OPEC is a powerful market

actor and has the capability to significantly influence
world oil prices, even if it cannot control them

perfectly. Further, most people believe that OPEC does this
by way of operating as a cartel does, by

consciously producing less oil than it could to drive up its
price.

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 the
effectiveness of OPEC as a cartel have had

difficulty finding conclusive evidence. Alhajji and Huettner
find that neither OPEC nor the OPEC core can

be characterized as a dominant producer in the world crude
oil market, 1973-1994.

 Alhajji and Huettner,
2000. (The “OPEC core” is a subset of OPEC member states which are especially
oil-rich,

including Saudi Arabia.)

 

The oil-growth nexus is studied in a panel of Organization
of the Petroleum Exporting Countries (OPECs), for a long time span (1960-2011),
controlling for the specific context of oil production. Their membership in the
cartel put them under a common guidance, which originates phenomena of
cross-section dependence/contemporaneous correlation in the panel.

Jose Alberto Fuinhas, Antonio Cardoso Marques, Tânia Noélia
Quaresma, (2015) “Does oil consumption promote economic growth in oil
producers?: Evidence from OPEC countries”, International Journal of Energy
Sector Management, Vol. 9 Issue: 3, pp.323-333

 

 

 

OPEC
is a cartel, which is an association of manufacturers or suppliers with the
purpose of maintaining prices at a high level and restricting competition. At
the end of 2014, OPEC reported reserves of 1.206 trillion barrels of oil, which
is 81% of total world reserves. Of those reserves, Saudi Arabia, Iran, Iraq,
Kuwait, the United Arab Emirates, Qatar and Libya have 67.6% within their
borders. Between the period of June 2014 and July 2015, crude oil was in a bear
market — the price of the energy commodity moved from over $100 per barrel to
under $50 based on the active month NYMEX oil futures contract. OPEC’s mission
is to “…ensure the stabilization of oil markets in order to secure an
efficient, economic and regular supply of petroleum to customers, a steady
income to producers and a fair return on capital to those investing in the
petroleum industry.”

As crude oil prices
have moved lower, the oil cartel did not cut production even though it is in
the 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 to
become uneconomic. OPEC maintained their production ceiling at 30 million
barrels per day. However, as prices moved lower many members of the cartel
suffered economic hardship as they received less revenue for their oil
production .When it comes to commodity or raw material markets, oil is
one of the most political staple commodities that trade. This is because demand
for crude oil is ubiquitous while supplies
are concentrated in some of the most turbulent political regions in the world. At
the end of 2014, OPEC reported reserves of 1.206 trillion barrels of oil, which
is 81% of total world reserves. Of those reserves, Saudi Arabia, Iran, Iraq,
Kuwait, the United Arab Emirates, Qatar and Libya have 67.6% within their
borders. Between the period of June 2014 and July 2015, crude oil was in a bear
market — the price of the energy commodity moved from over $100 per barrel to
under $50 based on the active month NYMEX oil futures contract.

As crude oil prices have moved lower, the oil
cartel did not cut production even though it is in the 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 to become uneconomic. OPEC
maintained their production ceiling at 30 million barrels per day. However, as
prices moved lower many members of the cartel suffered economic hardship as they
received less revenue for their oil production.

Many have attempted to sell
more oil to make up for the financial shortfall. In July 2015, OPEC was
producing and selling around 32 million barrels of crude per day, which is
above the stated ceiling level. The price of oil moved lower for a collection
of reasons including a slowdown in the global economy, a strong U.S. dollar and increasing
production from non-OPEC members.

s. OPEC and 11 other leading producers including
Russia agreed in December to cut their combined output by almost 1.8 million
barrels per day (bpd) in the first half of the year. The original deal was to
last six months, with the possibility of a six-month extension.The
International Energy Agency reports that oil production from Africa’s OPEC
members Algeria, Angola, Libya and Nigeria has stagnated over the last five
years 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 from
the war in Libya, but the losses for OPEC’s African members continued on the
back of higher security risks in the wake of the Arab spring, uncompetitive
fiscal terms, challenging local content requirements and contract sanctity
concerns. On November 30, 2017, OPEC agreed to continue withholding 2
percent 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. The
next joint committee meeting of OPEC and non-OPEC producers will be held in
Vienna on Sept. 22. All options, including extending supply cuts beyond Q1 of
2018, are “left open to ensure that all efforts are made to rebalance the
market,” according to an OPEC statement. The group also confirmed that its deal
achieved a conformity level of 75 percent as of July.

There is reason to believe that, after the end of Q1 2018, OPEC
will again be inclined to renew the agreement on limiting oil production.
Global oil market trends indicate the low probability of a new wave of price
cuts in the market until the end of the current year.

Lessons learnt

 

Recently, the market has been questioning whether OPEC and
non-OPEC would continue with their production cuts. Both of the main actors,
Saudi Arabia and Russia, are heavily incentivized to continue with their
strategic economic partnership. 

Saudi
Arabia’s recent visit to Russia further cemented that relationship, and
the recent courting of other
non-OPEC countries to joinmeans
that the parties have every intention to continue the production cut partyU.S. shale production
initially rose in response to high global crude oil prices in the last decade
rather than an embargo by major producers.

And the initial reaction to a global supply glut by the
Organization of the Petroleum Exporting Countries was to try to steal back
market share from higher-cost producers in the U.S. shale plays and elsewhere
by pumping furiously, contributing to a crash that took the U.S. crude
benchmark from more than $100 a barrel in mid-2014 to a 13-year low below $27 a
barrel in early 2016.

Recommendations

OPEC’s deal faces potential setbacks from Iraq’s call for it to
be exempt and from countries including Iran, Libya and Nigeria whose output has
been hit by sanctions or conflict and want to increase supply.

The reality, especially if prices exceed the $70 mark, is
that 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 growth
of 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 US
contributing 870,000. But if prices remain elevated, the IEA’s forecast looks
conservative. Consultancy Rystad Energy estimates as much as 1.9 million barrels
per day of growth, with 1.6 million coming from the US. Higher oil prices today
are allowing shale producers to hedge and lock in drilling programmes. Costs
will inevitably rise as activity gears up, and there is much talk of a new
capital discipline, but prices above $60 per barrel offer a win-win of profits
and growth.

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