Submitted crude oil reserves it only produces about

 

Submitted to Prof.
Sharmila Devi

 

Prepared by Mahima
Malani: 3147 (SY C)

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Date of submission: 24th
January, 2018

Table of contents:

 

Sr.
No.

Topic

Pg.
No.

a.      

Issues
Motivated for choosing the study

2

b.      

Origin
& nature

3

c.      

Existing
scholarly work – Literature Review

4

d.      

Current
situation (time period 2010 to now)

8

e.      

Lessons
learned

9

f.       

Recommendations
for Future

12

g.      

Reference

14

 

 

 

 

Issues Motivated for
choosing the study:

 

Problems
of OPEC:

 

Although
OPEC has the structure and intent of a cartel, it fails to function properly to
achieve its objective of influencing global oil supply. There are a series
of problems that plague OPEC and make it inefficient as a cartel structure:

 

·     
Market
Share: The first
problem that OPEC suffers from is that they do not control the majority of oil
supply in the world, that is they don’t have the market power.
The share of the global oil supply that OPEC controls has fluctuated over time,
while it has 81% (1213.4 billion barrels, 2015) of the world’s proven crude oil reserves
it only produces about 40% of crude oil today (this number has fluctuated since
its creation). Without the control of the market, OPEC has to compete with
non-OPEC nations such as Canada, U.S, Norway, Mexico, Brazil and others. This
means that OPEC countries have to compete with other global players who are
free to operate in the market as they please, whereas OPEC nations have to
coordinate with each other.

 

·     
Cooperation
& Coordination:

o  
Since
its inception, OPEC has had problems dealing with the inherent problem of
coordinating their policies. The nature of a cartel depends on the members
agreeing and coordinating their policies to ensure and equal share of the
market and to discourage competition. Many of the OPEC countries inhabit an
area that is prone to geopolitical strife and conflict. There is an extensive
list of events that affected OPEC and its cooperation since its existence such
as numerous wars, assassinations, ongoing political conflicts, terrorism etc.

o  
OPEC,
like all cartels, has to overcome the urge to compete with other members within
the cartel. Quotas are one method that OPEC uses to limit competition and
output in order to raise prices. OPEC countries often, if not always, agree to
these quotas then break them by ramping up production in an attempt to capture
more of the market for themselves. This practice both disrupts the cohesion of
the cartel and reduces the amount of trust between the member nations.
Essentially, member nations ‘cheat’ to make more money. Proof of this is the
defections of Ecuador and Gabon which both suspended their membership in OPEC
for periods of time (1992-2007 and 1995-2016 respectively) seeking a release
form the terms of the cartel. Both sought to increase their production levels
free from quotas.

o  
Each
member of OPEC has its own political and economic conditions that are unique to
it. The combination of all these problems make coordination difficult as the
interests on one country may run contrary to another or the organization
itself. 

 

·      
Effect
on Non-OPEC Producers: Cartels are normally considered to be a negative aspect
of a market, they discourage competition, restrict supply and raise prices for
consumers. In the Case of OPEC, non-OPEC producers do not necessarily oppose
the cartel activities. Because OPEC attempts to keep the price of oil
artificially high, the non-OPEC producers benefit as well as they can sell
their oil at the same price. While there are different grades of crude oil,
when crude hits the market it is essentially the same and they are all sold for
more or less the same price. Some crude is more expensive to refine for market
sale such as Canadian crude from the Alberta  oil sands and
some is cheaper however, the grade makes it to the market is undifferentiated
from different crude of different origins.

Origin & nature:

 

The Organization
of Petroleum Exporting Countries is an example of an international cartel. The organization was
created at a conference in Baghdad, Iraq on September 10th-14th, 1960. The
founding members which include Iran, Iraq, Kuwait, Saudi Arabia and Venezuela
agreed to create an organization that could bring some degree of stability to
the world oil market. OPEC agreed to coordinate
energy policies to ensure a fair price for their exported oil and a
steady supplyto the market.
The governments of the OPEC countries agreed to coordinate with petroleum firms
(both state owned and private) in order to manipulate the worldwide oil supply and
therefore the price of oil.

 

When
firms agree to collude, that is they agree to a certain price and quantity
for a good or service, they create a cartel. A cartel is a type of oligopoly.
As cartels are formed and operate in secret, it is up to the members of the
cartel to keep their agreement in tact. The firms must trust each other not to
drop their price to undercut the others or increase their output. This is
difficult to ensure as firms may have different production costs and therefore
require more of the profit to meet their costs. Because of this, there is less
control over the market than there would be under a monopoly
structure.

 

OPEC
Reserves

The
map below shows the sizes of the oil reserves held
by the OPEC member nations (Selected are member nations: Algeria, Angola,
Ecuador, Gabon, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi
Arabia, United Arab Emirates, Venezuela)

Existing scholarly work
– Literature Review (5 related literatures with proper in text citation and
references)

 

     
I.        
Introduction:

Since the 1973 oil price shock, the
history, behaviour, and pricing power of the Organization of Petroleum
Exporting Countries (OPEC) have all received considerable attention in the
academic literature. One view which prevails is that although OPEC has survived
for more than 50 years, it has had little effect on either the oil price or oil
market dynamics. Rather, for some, the oil price is seen as being determined in
a globally competitive market. An alternative view is that OPEC has been
successful in cartelizing the oil market and in using its power to raise the
oil price above competitive levels by restricting output. On the other hand,
there is the view that OPEC pricing power is not constant, and tends to
fluctuate depending on the interaction among OPEC members and on oil market
conditions.2 The swing in pricing power became very apparent in the events that
surrounded the oil price collapse in 1998, which saw the Dubai price, the
benchmark for exports to Asia, decline from around $20 per barrel in early
November 1997 to less than $12 per barrel in March 1998 and averaging around
$10 per barrel in December 1998. At that time, OPEC seemed to have lost its
ability to defend oil prices, and many analysts predicted its demise. This view
of an ineffective OPEC was, however, reversed only a few months later, and many
observers consequently regarded the events of 1998 to have ushered in a new era
of cooperation among its members. During March 1998 and March 1999, OPEC
embarked on two production cuts in an attempt to put an end to the slide in the
oil price. These production cuts were implemented with a high level of
cohesiveness among members, contradicting the view that OPEC was not able to
collude. By the end of 1999, the Dubai price had risen to $23 per barrel.

The divergent views about OPEC pricing
power have resulted in a wide range of OPEC models. These range from classic
textbook cartel, to wealth-maximizing monopolist (Pindyck, 1978a), to
three-block cartel (Eckbo, 1976), to two-block cartel (Hnyilicza and Pindyck,
1976), to clumsy cartel (Adelman, 1980), to dominant firm (Salant, 1976; Mabro,
1991), to loosely co-operating oligopoly (Griffin, 1985), to residual firm
monopolist (Adelman, 1982), to bureaucratic cartel (Smith, 2005), to
competitive models (MacAvoy, 1982; Cre?mer and Salehi-Esfahani, 1989, 1991).
Many of these models were developed to explain key historical events, and in
response to changes in key producers’ behaviour. The OPEC price war in 1985–6
resulted in many of the 1970s models – those that considered OPEC as a rational
wealth-maximizing monopolist or as a monolithic group – being revised. The
models of the 1980s and 1990s had to incorporate new elements such as the
interaction between OPEC members, price wars, output sharing, the issues of
cheating and coordination, the conditions under which OPEC members can collude,
and the special role of Saudi Arabia within OPEC.3 In the 2000s, the entry of
financial players in massive numbers, and the increasing role of futures
markets in the price formation process, prompted some studies to consider the
signalling role of OPEC.