Topic: BusinessIndustry

Last updated: September 24, 2019

ISSUES MOTIVATED FOR CHOOSING THE STUDY Petroleum is not distributed evenly around the world. Morethan 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 containsmore oil than the rest of the world combined.

Following the Middle East areCanada and the United States, Latin America, Africa, and the region occupied bythe former Soviet Union. Each of those regions contains less than 15 percent ofthe world’s proven reserves. (Reserves are identified quantities of “in-place”petroleum that are considered recoverable under current economic andtechnological conditions.

Estimated by petroleum engineers and geologists usingdrilling and production data along with other subsurface information, thefigures are revised to include projected field growth as developmentprogresses.)The amount of oil a given region produces is not alwaysproportionate to the size of its proven reserves. For example, the Middle Eastcontains more than 50 percent of the world’s proven reserves but accounts foronly about 30 percent of global oil production (though this figure is stillhigher than in any other region). The United States, by contrast, lays claim toless than 2 percent of the world’s proven reserves but produces about 10percent of the world’s oil.Most countries are significantly affected by developments inthe oil market, either as producers, consumers, or both. In 2014, oil providedabout 38 % of the world’s energy needs, and in the future, oil is expected tocontinue to provide a leading component of the world’s energy mix. Today Oil isone of the most important raw materials we have. Every day we use hundreds ofthings that are made from oil or gas.

The Oil Industry started off more thanfive thousand years back leading to the formation of the world’s biggest OilCartel – OPEC.        ORIGIN AND NATUREThe Organization of the Petroleum Exporting Countries (OPEC)is a permanent, intergovernmental Organization, created at the BaghdadConference on September 10–14, 1960, by Iran, Iraq, Kuwait, Saudi Arabia andVenezuela. 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 November2016; Libya (1962); United Arab Emirates (1967); Algeria (1969); Nigeria(1971); Ecuador (1973) – suspended its membership in December 1992, butreactivated it in October 2007; Angola (2007); Gabon (1975) – terminated itsmembership in January 1995 but rejoined in July 2016; and Equatorial Guinea(2017). OPEC had its headquarters in Geneva, Switzerland, in the first fiveyears of its existence. This was moved to Vienna, Austria, on September 1,1965.

The 1960sOPEC’s formation by five oil-producing developing countriesin Baghdad in September 1960 occurred at a time of transition in theinternational economic and political landscape, with extensive decolonisationand the birth of many new independent states in the developing world. Theinternational oil market was dominated by the “Seven Sisters” multinationalcompanies and was largely separate from that of the former Soviet Union (FSU)and other centrally planned economies (CPEs). OPEC developed its collectivevision, set up its objectives and established its Secretariat, first in Genevaand then, in 1965, in Vienna.

It adopted a ‘Declaratory Statement of PetroleumPolicy in Member Countries’ in 1968, which emphasised the inalienable right ofall countries to exercise permanent sovereignty over their natural resources inthe interest of their national development. Membership grew to ten by 1969.The 1970sOPEC rose to international prominence during this decade, asits Member Countries took control of their domestic petroleum industries andacquired a major say in the pricing of crude oil on world markets.

On twooccasions, oil prices rose steeply in a volatile market, triggered by the Araboil embargo in 1973 and the outbreak of the Iranian Revolution in 1979. OPECbroadened its mandate with the first Summit of Heads of State and Government inAlgiers in 1975, which addressed the plight of the poorer nations and calledfor a new era of cooperation in international relations, in the interests ofworld economic development and stability.     This led to the establishment of the OPEC Fund forInternational Development in 1976. Member Countries embarked on ambitioussocio-economic development schemes.

Membership grew to 13 by 1975.The 1980sAfter reaching record levels early in the decade, pricesbegan to weaken, before crashing in 1986, responding to a big oil glut andconsumer shift away from this hydrocarbon. OPEC’s share of the smaller oilmarket fell heavily and its total petroleum revenue dropped below a third ofearlier peaks, causing severe economic hardship for many Member Countries.Prices rallied in the final part of the decade, but to around half the levelsof 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 amongMember Countries and a Reference Basket for pricing, as well as significantprogress with OPEC/non-OPEC dialogue and cooperation, seen as essential formarket stability and reasonable prices. Environmental issues emerged on theinternational energy agenda.The 1990sPrices moved less dramatically than in the 1970s and 1980s,and timely OPEC action reduced the market impact of Middle East hostilities in1990–91.

But excessive volatility and general price weakness dominated thedecade, and the South-East Asian economic downturn and mild Northern Hemispherewinter of 1998–99 saw prices back at 1986 levels. However, a solid recoveryfollowed in a more integrated oil market, which was adjusting to thepost-Soviet world, greater regionalism, globalisation, the communicationsrevolution and other high-tech trends. Breakthroughs in producer-consumerdialogue matched continued advances in OPEC/non-OPEC relations. As the United Nations-sponsoredclimate change negotiations gathered momentum, after the Earth Summit of 1992,OPEC sought fairness, balance and realism in the treatment of oil supply. Onecountry left OPEC, while another suspended its Membership.The 2000sAn innovative OPEC oil price band mechanism helpedstrengthen and stabilise crude prices in the early years of the decade. But acombination of market forces, speculation and other factors transformed thesituation in 2004, pushing up prices and increasing volatility in awell-supplied crude market.

Oil was used increasingly as an asset class. Pricessoared to record levels in mid-2008, before collapsing in the emerging globalfinancial turmoil and economic recession.     OPEC became prominent in supporting the oil sector, as partof global efforts to address the economic crisis. OPEC’s second and thirdsummits in Caracas and Riyadh in 2000 and 2007 established stable energymarkets, sustainable development and the environment as three guiding themes,and it adopted a comprehensive long-term strategy in 2005. One country joinedOPEC, another reactivated its Membership and a third suspended it.OBJECTIVE: OPEC’s objective is to co-ordinate and unifypetroleum policies among Member Countries, in order to secure fair and stableprices for petroleum producers; an efficient, economic and regular supply ofpetroleum to consuming nations; and a fair return on capital to those investingin the industry.

 LITERATURE REVIEW (smith, 2009)Many observers regard the world oil market as apuzzle. Why are oil prices so volatile? Why did prices spike in the summer of2008, and what role did speculators play? How important is OPEC? Where are oilprices headed in the long run? Is “peak oil” a genuine concern? Anyattempt to answer these questions must be informed and disciplined byeconomics. The paper examines the evidence on each of these issues and providesan interpretation of developments in the world oil market from the perspectiveof economic theory.(VincentBrémonda, EmmanuelHacheb, & ValérieMignonc,2012) The aim of this paper is to determine if OPEC acts as a cartel by testingwhether the production decisions of the different countries are coordinated andif they have an influence on oil prices. Relying on co-integration and causalitytests in both time series and panel settings, the findings show that the OPECinfluence has evolved through time, following the changes in the oil pricingsystem. While the influence of OPEC is found to be important just after thecounter-oil shock, the results show that OPEC is a price taker on the majorityof the considered sub-periods. Finally, by dividing OPEC between savers andspenders, it shows that it acts as a cartel mainly with a subgroup of itsmember.

(Behar & Robert, 2016)In November 2014, OPEC announced anew strategy geared towards improving its market share. Oil-market analystsinterpreted this as an attempt to squeeze higher-cost producers including USshale oil out of the market. Over the next year, crude oil prices crashed, withlarge repercussions for the global economy.

     It explains thefundamental market factors that can rationalize such a “regimeswitch” by OPEC. These include: (i) the growth of US shale oil production;(ii) the slowdown of global oil demand; (iii) reduced cohesiveness of the OPECcartel; (iv)  production ramp-ups inother non-OPEC countries. It shows that these qualitative predictions arebroadly consistent with oil market developments during 2014-15. The model iscalibrated to oil market data; it predicts accommodation up to 2014 and amarket-share strategy thereafter, and explains large oil-price swings as wellas realistically high levels of OPEC output.(Wirl & Azra, 2004)This paper investigates how far OPECinfluences world oil markets. We ask the question: What is the impact of thedecisions of the OPEC Conference, the supreme authority of the Organization ofPetroleum Exporting Countries, on world oil prices? Extracting the Conference’sdecisions from the communiques °f fifty meetings from 1984-2001, these decisionswere compared with the subsequent market developments. The result is that thisimpact is weak at best, and if at all then restricted to meetings recommendinga price increase.

However, the opposite claim (found in the literature) – theConference is simply following the market – was also not supported either.Another interesting observation is the little autocorrelation between thedecisions of the Conference. This suggests that the ministers’ decisionsaccommodate quickly and efficiently recent events.(Fattouh, 2007)Although there is plenty of room for OPEC toinfluence the oil price in the current oil pricing system, this influence isnot unconstrained.

In this paper, they have argued that the recent changes inthe international oil pricing system have diminished OPEC pricing power,especially when compared to the previous administered oil pricing system. Theyhave also emphasized that OPEC pricing power is not constant and variesaccording to oil market conditions. Finally, they have questioned  the proposition that OPEC in general and theMiddle East in particular are bound to have a greater influence on the oilmarket 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 tostress that OPEC does not operate in a political vacuum. It has been arguedelsewhere that pricing systems in the past reflected the balance of power atthose times and this present system  isno exception. For many, the balance of political power can have an impact onOPEC behaviour. For instance, Doran (1980) hypothesizes that there are limitson how much Saudi Arabia can increase its oil price because very high oilprices can be “damaging to their own interest because of the danger to theworld economy and to their larger commercial involvements and because of theincentive to outside military pressure by distraught consumer governments” Healso argues that ‘political and cultural similarity’ has facilitated SaudiArabia’s role in forming coalitions regarding price preferences.     Others have attributed important episodes in oil history topolitical factors.

For instance, some argue that the decline in oil prices in1986 might have been orchestrated between Saudi Arabia and the USA to underminethe financial position of the USSR. There is no harm in incorporating some (butnot all) of these ideas into the analysis of OPEC pricing power. CURRENT SITUATION2010 until nowThe global economy represented the main risk to the oilmarket early in the decade, as global macroeconomic uncertainties andheightened risks surrounding the international financial system weighed oneconomies. Escalating social unrest in many parts of the world affected bothsupply and demand throughout the first half of the decade, although the marketremained 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 Asiancountries and generally shrinking in the OECD. The world’s focus onmultilateral environmental matters began to sharpen, with expectations for anew UN-led climate change agreement.

OPEC continued to seek stability in themarket, and looked to further enhance its dialogue and cooperation withconsumers, and non-OPEC producers.  The graph above illustrates the inter-country variations inthe average price of one litre of oil across G7 countries as well as the OECDaverage during 2016.    It is important to note that these price variations aremainly due to the widely varying levels of taxes (in red) imposed by major oilconsuming nations. These can range from relatively modest levels – like in theUSA – to very high levels in Europe and Asia/Pacific   For example, in the UK the government in2016 earned about 69% of the price charged for every litre of pump fuel sold toconsumers. On the other hand, oil producing countries (including OPEC) earnedabout 19.3% of the total pump fuel price.

 According to current estimates, 81.5% of the world’s provencrude oil reserves are located in OPEC Member Countries, with the bulk of OPECoil reserves in the Middle East, amounting to 65.5% of the OPEC total.OPEC Member Countries have made significant additions totheir oil reserves in recent years, for example, by adopting best practices inthe industry, realizing intensive explorations and  enhanced recoveries. As a result, OPEC’sproven oil reserves currently stand at 1,216.78 billion barrels.

 LESSONS LEARNED Most scholars and policymakers believe OPEC to be a powerfulinstitution which can and does influence the global price of oil. According tothis view, OPEC operates as a cartel, manipulating the price of oil principallyby restricting supply. In doing so, OPEC generates huge excess profits for itsmember states.

Since oil is a vital commodity in the modern economy,oil-importing states must constantly monitor OPEC as an organization, and be waryof the power that it wields.    Most of the conventional wisdom about OPEC is wrong. OPECdoes not operate effectively as a cartel. It rarely if ever influences the oilproduction rate in its member states. And OPEC has almost no lasting impact onworld prices, except under very rare conditions.

In reality, the price of oilis largely set by market fundamentals like the rate of investment in productioncapacity, the impact of major wars, and the growth of demand, which has beenespecially strong in Asia in recent years. It is possible that speculators alsoplay a role in creating short-term price bubbles. But at least since OPEC firstbegan to operate as a formal cartel in 1982, its role in affecting world oilprices as a cartel has been minimal.

There was one occasion on which OPEC did have a significantimpact on world oil prices, namely the 1973 oil crisis. Yet OPEC’s role in thecrisis has been greatly misunderstood. The circumstances of the crisis werehighly exceptional, making it unlikely that the organization could ever have asimilar impact on world oil prices again. While OPEC did take actions thatcontributed to the dramatic increase in world oil prices in 1973, those actionshad little to do with restricting oil supply.

In fact, OPEC production hardlydeclined at all. The 1973 oil crisis had multiple causes, but probably themost important was the decision by OPEC to dramatically increase the “postedprice” of its oil, thereby raising the tax and royalty payments that the majorinternational oil companies had to pay OPEC governments. As I explain below,such posted prices no longer exist (taxes are now typically indexed to marketprices), meaning that OPEC could not raise prices in this way again. I argue that OPEC isdysfunctional 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 noclaim about whether OPEC could affect its members’ oil production; I simplyargue 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 marketallocations – is endemic: its nine core members cheat on their aggregate quota96 percent of the time. Perhaps even more significantly, the quotas themselvesoften appear to be post-hoc justifications of production decisions made byindividual states RECOMMENDATIONS FOR FUTURE The Organization of the Petroleum Exporting Countries (OPEC)will host the 7th OPEC International Seminar at the Imperial Hofburg Palace inVienna, Austria, on 20?21 June 2018 under the theme, ‘Petroleum – cooperationfor a sustainable future’.

   The Seminar will provide fresh impetus to key petroleumindustry issues and challenges, helping to enhance existing avenues of dialogueand cooperation, while stimulating new ones. The Seminar will feature presentations by officials from energy and oilministries, executives from oil companies and financial firms, and otherrepresentatives from international organizations and research institutions. The 2018 OPEC International Seminar will seek to reinforceOPEC’s longstanding commitment to strive towards a secure and stable market insupport of a healthy global economy.  Itwill also highlight the need for continuing promotion of cooperation anddialogue with all oil industry stakeholders, including producers and consumers.Some of the topics to be discussed at the Seminar willinclude global energy cooperation, technological breakthroughs, energytransition, industry investments, as well as the world economy and the futureoutlook for the oil industry.

OPEC’s International Seminar is today recognized as one ofthe most important industry events on the global energy calendar.  The event is outstanding both for the calibreof participants and the high level of discussions that take place on all theleading issues affecting the energy sector.OPEC has held seminars since 1969.  However, its first high-level InternationalSeminar 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 theImperial Hofburg Palace in Vienna, was held on 3?4 June 2015.  Its theme was ‘Petroleum: An Engine forGlobal Development’.

  It attracted arecord 800 participants and featured over 30 presentations.  REFERENCES•             Behar,A., & R. A. (2016).

An analysis of OPEC’s strategic actions, US shalegrowth 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 acartel? An empirical investigation. energey economics , 34 (1).

•             Wirl, F.,& A. K. (2004).

The Impact of OPEC Conference Outcomes on World Oil Prices1984-2001. The Energy Journal , 25 (1). PLAGIARISM REPORT

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