Introduction Middle Eastern countries that surround the

Introduction

Origin & nature
of OPEC (Organization of the Petroleum Exporting
Countries)

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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.

As of 2016, the 14 countries accounted for an estimated 44 %
of global oil production and 73% of the world’s proven oil reserves; giving
OPEC a major influence on global oil prices that were previously determined by
American dominated multinational oil companies. It is notable that some of the
world’s largest oil producer’s including Russia, china and the United States
are not members of OPEC and pursue their own objectives.

 

OPEC’s main objectives


Its object is that there should be
stable oil market with reasonable prices and steady suppliers to consumers.


OPEC was made to make sure that the
price of the oil in the world market will be properly controlled.


Their main goal is to prevent harmful
increase in price of oil in global market and make sure that nations that
produce oil have a fair profit.

OPEC Membership

According to its
statutes, OPEC membership is open to any country that is a substantial exporter
of oil and that shares the ideals of the organization. Along with the five
founding members, OPEC has 9 additional member countries, As of May 2017, OPEC’s members are Algeria, Angola, Ecuador, EquatorialGuinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia (the de facto leader), United
Arab Emirates,
and Venezuela, while Indonesia is a former member. Two-thirds of OPEC’s oil production
and reserves are in its six Middle Eastern countries that surround the oil-rich Persian Gulf.

Issues Motivated for choosing the study: (Oil — Life Blood of
World Economy)
the reason why I have chosen this topic is
that oil is very important. OIL – One of the life bloods of our World economy
is oil. The impact of oil in today’s economy has been witness by consumers many
times. We have seen how human spending and travel got affected as the price of
oil fluctuates. In contrast almost all energies are generated using oil, to
mention few; Cars, Trucks, railways, Plane, use oil in order to run their
engine. Therefore if oil supply disturbed for one day we can imagine how the global
economy can be affected greatly.

Competitive Dynamics of OPEC


Before 1970
No Major Role played by OPEC


During 1970
Power of Price setting shifted from MNC Oil Companies to OPEC


By 1973
OPEC countries changed the Pricing System


1975-1985
Oil Production Increase from 48% to 71%


Mid 1980
Survival became uncertain. Market shares fell from 52% 30% in 1985

OPEC Policies

OPEC’s influence on
the market has been widely criticized. Because its member countries hold the
vast majority of crude oil
reserves (about 80%) and nearly half of natural gas reserves
in the world, the organization has considerable power in these markets. As a
cartel, OPEC members have a strong incentive to keep oil prices as high as
possible, while maintaining their shares of the global market.

 

OPEC Basket

A
weighted average of oil prices collected from various oil producing countries.
This average is determined according to the production and exports of each
country and is used as a reference point by OPEC to monitor worldwide oil
market conditions.

Does OPEC control the Oil Prices?
Yes-, OPEC’s crude oil exports represent about 60 per cent of the crude
oil traded internationally.

The price of crude oil is set by
movements on three major international petroleum exchange.


The New York Mercantile Exchange


The International Petroleum Exchange ¡n London

v  The Singapore
International Monetary Exchange.

OPEC is trying to price the OIL in
Euros rather than in Dollars- As the imports from Europe for OPEC countries is
increasing and the US dollar is becoming unstable ¡in the market.

No-OPEC Member countries produce about 42 per cent of the world’s crude
oil and 18 per cent of its natural gaz.

OPEC challenges

1)      Uncertainty in Global Demand.

2)      Structural shift in demand from developed world to developing world.

3)      Non-OPEC oil-producing nations (Russia, Norway, Canada, Mexico etc.)
often increase production when OPEC cuts it.

4)      Russia overtook Saudi Arabia as the world’s biggest crude supplier in 2009.

5)      OPEC’s share of production has gone down.

6)      Existence of factions within OPEC.

7)      Future technological developments in areas of renewable energy sources

OPEC Importance

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.

 

OPEC and India

India is the 4th largest importer of oil
and imports 85% of total oil and 95% of gas from OPEC nations .Abnish kumar said
that decision taken by OPEC member countries are likely to be taken as wake up
call for country like India because Indian economy greatly benefited from the
cheaper oil prices.

Lower oil prices kept the economy on the shining
path and helped to keep inflation under control. Following OPEC decision, there
is likely to be a positive impact on the India’s fiscal scene and inflation
dynamics.

 

Literature
Review

1)     
(Carey, 2016)The solution to 2008’s dramatic and unprecedented escalation in oil
prices is not WTO dispute settlement against OPEC member countries.While OPEC’s
policies likely violate the GATT Article XI prohibition on quantitative export
restrictions, there is ample precedent for finding them permissible under the
GATT Article XX(g) General Exception for measures affecting exhaustible natural
resources, such as oil. Therefore, a preferred strategy for improving and
liberalizing the flow of oil in international markets is to develop a new
framework for managing the energy trade within the WTO that better acknowledges
and accommodates the needs of oil producers and consumers.

 

2)     
(Colgan, 2014)Scholars have long debated the causal
impact of international institutions such as the World Trade Organization or
the International Monetary Fund. This study investigates Organization of
Petroleum Exporting Countries OPEC). an organization that purports to have
significant influence over the market for the world’s most important
commodity—petroleum. Using four empirical tests, I find that OPEC has little or
no impact on its members’ production levels. These findings prompt the question
of why so many people, including scholars, believe in OPEC’s influence over the
world’s oil supply. The idea of OPEC as a cartel is a “rational myth” that
supports the organization’s true principal function, which is to generate
political benefit for its members. One benefit it generates is international prestige.
I test this idea using data on diplomatic representation and find that OPEC
membership is associated with increased international recognition by other
states. Overall, these findings help one to better understand international
regimes and the process of ideational change in world politics.

 

3)      (Carey, 2016)Tests of convergence (integration) and causality of variables have
been used for 2-year period, from May 22, 2014 to July 21, 2016. The results of
the study based on long-term relationship show that an increase of 1 per cent
in the logarithm of OPEC oil basket prices decreases 17.24 per cent of the
logarithm of the price of LPG. The direction of causality is from OPEC oil
basket prices to LPG. Moreover, 1% increase in natural gas prices logarithm
will increase 26.52 per cent of the logarithm of the price of LPG. The
direction of causality is from natural gas to LPG. Estimating the relationship
between short term error corrections for the logarithm of the price of LPG also
confirms no statistically significant error correction component.

 

 

 

4)      (Najarzadeh, Reed, Khoshkhoo, &
Gallavani, 2015)Energy, as an important input in the manufacturing sector, has a
special role in growth and economic development.  An increase in exports will increase energy
consumption but an increase in imports will decrease energy consumption in OPEC
countries. Since a large part of exports for OPEC economies is oil, the export
growth in these countries means an increase in extraction activities and crude
oil refinement that all require large amounts of energy.

 

 The coefficient on exports
is the largest, implying that exports are most energy        intensive. The countries that are
generally rich in energy resources usually pay less for energy. In many cases
this could cause waste. With the finding of a negative relationship between
energy consumption and energy price energy waste can be reduced by allowing
energy prices to increase to its world price level. Granger causality tests
show a causality relationship from exports to energy consumption.