ISSUES (2007); Gabon (1975) – terminated its membership

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.)

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