Introduction on global oil prices that were previously determined


Origin & nature
of OPEC (Organization of the Petroleum Exporting

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now

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

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

Stable oil market, with reasonable
prices and steady supplies 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)

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

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

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, being the fourth largest importer of crude
oil, imports 85 per cent of total oil and 95 per cent of gas from OPEC nations.
Abnish Kumar, Director & research head, Amrapali Aadya Trading &
Investment said decision taken by the OPEC country is likely to be taken as a
wake-up call for the country like India as Indian economy immensely benefited
from the cheaper oil prices.

“Lower oil prices kept the economy on the
shining path and managed to keep inflation under control. Following the OPEC
decision, there is likely to be a positive cascading impact on the country’s
fiscal scene and inflation dynamics,” said Kumar.