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Question:

Provided a Historical Account of OPEC and Its Power in Controlling the Global Petroleum Supply.

 

Answer:

The Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental organization and was created in Baghdad at the Baghdad conference on 10th to 14th September, 1960 by 5 countries Iraq, Iran, Kuwait, Venezuela and Saudi Arabia (Carbaugh, 2017). Later on, ten other countries Qatar, Indonesia, Algeria, United Arab Emirates, Gabon, Ecuador, Libya, Angola, Nigeria and Algeria joined them; however, the membership of both Ecuador and Gabon had been suspended by their own request in the year 1992 and 1994, respectively (Griffin &  Teece, 2016). Out of this context, the essay discusses about one of the member countries Saudi Arabia and investigates the dynamics that OPEC economy has faced over the last ten years and also analyzes its effects in terms of Saudi Arabia’s jurisdiction. OPEC has its own headquarters in Geneva, Switzerland; however, after a few years, they had moved it to Vienna, Austria. This organization’s main objectives is to build up an uniform and well coordinated petroleum policy in order to secure stable prices for the oil producing member countries and also provide an efficient oil supply to the other nations.

Like prices of other goods, oil prices have also experienced a tremendous price swings over a decade based on the changes in demand and supply of crude oil especially after the American involvement with Iraq and rapidly increasing oil demand from China. This combination has led to a drastic rise in the oil price to US$147/bbl in 2003-2008 (Kilian & Hicks, 2013). Meanwhile, in May 2008, Indonesia had been withdrew its name from the OPEC list for the reason of which OPEC could not be able to fulfill their net production quota (Kilian & Hicks, 2013). Eventually, poorer nations have started pressurizing to cut down the production in order to maintain the earlier revenue. However, Saudi Arabia did not support this proposal as their strategy was to be partnered with the most world’s most powerful economic nations to ensure a steady and rapid flow of crude oil. In fact, Oil Minister of Saudi Arabia, Ahmed Yamani had warned the other economies that high oil prices can lead to a reduction in oil demand. On the other hand, Saudi’s major concerned was that unreliable and expensive supply of crude oil can lead other nations to develop alternative fuels and thus gradually slower their demand for the crude oil which will eventually led to the downfall of the OPEC economy (Yousef, 2013). During 2014-2015, when China saw a rapid downfall in their economic growth, US oil production was nearly doubled as compared to the 2008 quota (Yousef, 2013). In this scenario, Saudi Oil Minister, Ali Al-Niami stated to rebalance the OPEC’s long-term market share with the profitability of America’s shale oil production. In the next year in 2015, Indonesia rejoined the export organization; and as per the Paris Climate Agreement thousands of world leaders were agreed to lower the carbon emission. In this market pressure, OPEC Reference Basket was down to US$22.48/bbl as compared to 2014 (Kilian & Hicks, 2013). In 2016, oil glut was slightly lower and that helped OPEC to further increase their oil price to $40 and thus regained their market share globally (Kilian & Hicks, 2013).

 


Saudi Arabia, the country which is heavily dependent upon the oil production has been tremendously suffering from the oil crash since 2014 (Venn, 2016). Even in recent days, the country is trying hard to expand its economy by producing other commodity, however, still focused on raising the oil price in order to restore their major source of income. Since that time, the Kingdom had tried to increase the oil demand by slashing its production; however this plan is totally dropped when US started producing doubly the amount (Painter, 2012). Higher demand on crude oil prices, winter weather in the United States and Saudi’s promises to work hard toward the price stabilization had sent West Texas Intermediate to produce at the $42 and Brent Crude at the rate $44 (Painter, 2012). Oil prices were drastically fallen to $43/bbl until when OPEC announced their plan to handle the oversupply that led to a gradual increase in oil revenue (Painter, 2012). This rise in revenue helped to ease Saudi’s budget deficit from 366 billion riyals in 2015 to 297 billion riyals in 2016, 44% below the expected rate (Venn, 2016).

In recent times, OPEC cannot be operated as cartel and literally has no power to curb the oil production. It is only Saudi Arabia who has the power on its own. However, unlike the oil market, Saudi does not have the similar market for the rest of the commodities. On the other hand, in order to fulfill the gap between net revenue and spending, the Kingdom had been trapped by the international investors thereby slower the economic growth rate. Therefore, Saudi government is trying to find out ways to recover their economy. The government is currently trying to maintain finances to be more transparent and also trying to maintain budget deficit by 2020. Moreover, oil-importing countries should stop being fearful of OPEC. Various legislations especially “NOPEC” bills in the US may be useful for marking political points; however, it has a small implication in the global oil markets.

 

References:

Al Yousef, N. (2013). Demand for oil products in OPEC countries: A panel Cointegration Analysis. International Journal of Energy Economics and Policy, 3(2), 168.

Carbaugh, R. J. (2017). International Economics. 14. Aufl., South-Western (Cengage Learning).

Griffin, J. M., & Teece, D. J. (2016). OPEC behaviour and world oil prices. Routledge  99(1), 24-39.

Kilian, L., & Hicks, B. (2013). Did unexpectedly strong economic growth cause the oil price shock of 2003–2008?. Journal of Forecasting, 32(5), 385-394.

Painter, D. S. (2012). Oil and the American century. The Journal of American History

Venn, F. (2016). The oil crisis. Routledge.     

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