ISSUESMOTIVATED FOR CHOOSING THE STUDY Petroleum is not distributed evenly around the world. More than half ofthe world’s proven oil reserves are located in the Middle East (including Iran but not North Africa); that isto say, the Middle East contains more oil than the rest of the world combined.

Following the Middle East are Canada and the United States, Latin America, Africa, and the region occupied by theformer Soviet Union.Each of those regions contains less than 15 percent of the world’s provenreserves. (Reserves are identified quantities of “in-place” petroleum that areconsidered recoverable under current economic and technological conditions.Estimated by petroleum engineers and geologists using drilling and productiondata along with other subsurface information, the figures are revised toinclude projected field growth as development progresses.)The amount of oil a given regionproduces is not always proportionate to the size of its proven reserves. Forexample, the Middle East contains more than 50 percent of the world’s provenreserves but accounts for only about 30 percent of global oil production(though this figure is still higher than in any other region). The UnitedStates, by contrast, lays claim to less than 2 percent of the world’s provenreserves but produces about 10 percent of the world’s oil.

Most countries aresignificantly affected by developments in the oil market, either as producers,consumers, or both. In 2014, oil provided about 38 % of the world’s energyneeds, and in the future, oil is expected to continue to provide a leadingcomponent of the world’s energy mix. Today Oil is one of the most important rawmaterials we have. Every day we use hundreds of things that are made from oilor gas. The Oil Industry started off more than five thousand years back leadingto the formation of the world’s biggest Oil Cartel – OPEC.        ORIGIN AND NATUREThe Organization of the Petroleum ExportingCountries (OPEC) is a permanent, intergovernmental Organization, created at theBaghdad Conference on September 10–14, 1960, by Iran, Iraq, Kuwait, Saudi Arabiaand Venezuela. The five Founding Members were later joined by ten otherMembers: Qatar (1961); Indonesia (1962) – suspended its membership in January2009, reactivated it in January 2016, but decided to suspend it again inNovember 2016; 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.The1960sOPEC’s formation by five oil-producingdeveloping countries in Baghdad in September 1960 occurred at a time oftransition in the international economic and political landscape, withextensive decolonisation and the birth of many new independent states in thedeveloping world. The international oil market was dominated by the “SevenSisters” multinational companies and was largely separate from that of theformer Soviet Union (FSU) and other centrally planned economies (CPEs). OPECdeveloped its collective vision, set up its objectives and established itsSecretariat, first in Geneva and then, in 1965, in Vienna.

It adopted a’Declaratory Statement of Petroleum Policy in Member Countries’ in 1968, whichemphasised the inalienable right of all countries to exercise permanentsovereignty over their natural resources in the interest of their nationaldevelopment. Membership grew to ten by 1969.The1970sOPEC rose to international prominence duringthis decade, as its Member Countries took control of their domestic petroleumindustries and acquired a major say in the pricing of crude oil on worldmarkets.

On two occasions, oil prices rose steeply in a volatile market,triggered by the Arab oil embargo in 1973 and the outbreak of the IranianRevolution in 1979. OPEC broadened its mandate with the first Summit of Headsof State and Government in Algiers in 1975, which addressed the plight of thepoorer nations and called for a new era of cooperation in internationalrelations, in the interests of world economic development and stability.     This led to the establishment of the OPECFund for International Development in 1976.

Member Countries embarked onambitious socio-economic development schemes. Membership grew to 13 by 1975.The1980sAfter reaching record levels early in thedecade, prices began to weaken, before crashing in 1986, responding to a bigoil glut and consumer shift away from this hydrocarbon. OPEC’s share of thesmaller oil market fell heavily and its total petroleum revenue dropped below athird of earlier 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 torecover. This was supported by OPEC introducing a group production ceilingdivided among Member Countries and a Reference Basket for pricing, as well assignificant progress with OPEC/non-OPEC dialogue and cooperation, seen asessential for market stability and reasonable prices. Environmental issuesemerged on the international energy agenda.

The1990sPrices moved less dramatically than in the1970s and 1980s, and timely OPEC action reduced the market impact of MiddleEast hostilities in 1990–91. But excessive volatility and general priceweakness dominated the decade, and the South-East Asian economic downturn andmild Northern Hemisphere winter of 1998–99 saw prices back at 1986 levels.However, a solid recovery followed in a more integrated oil market, which wasadjusting to the post-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 UnitedNations-sponsored climate change negotiations gathered momentum, after theEarth Summit of 1992, OPEC sought fairness, balance and realism in thetreatment of oil supply.

One country left OPEC, while another suspended itsMembership.The2000sAn innovative OPEC oil price band mechanismhelped strengthen and stabilise crude prices in the early years of the decade.But a combination of market forces, speculation and other factors transformedthe situation 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 oilsector, as part of global efforts to address the economic crisis. OPEC’s secondand third summits in Caracas and Riyadh in 2000 and 2007 established stableenergy markets, sustainable development and the environment as three guidingthemes, and it adopted a comprehensive long-term strategy in 2005.

One countryjoined OPEC, another reactivated its Membership and a third suspended it.OBJECTIVE: OPEC’s objectiveis to co-ordinate and unify petroleum policies among Member Countries, in orderto secure fair and stable prices for petroleum producers; an efficient,economic and regular supply of petroleum to consuming nations; and a fairreturn on capital to those investing in the industry. LITERATURE REVIEW (smith, 2009)Manyobservers regard the world oil market as a puzzle.

Why are oil prices sovolatile? Why did prices spike in the summer of 2008, and what role didspeculators play? How important is OPEC? Where are oil prices headed in thelong run? Is “peak oil” a genuine concern? Any attempt to answerthese questions must be informed and disciplined by economics. The paper examinesthe evidence on each of these issues and provides an interpretation ofdevelopments in the world oil market from the perspective of economic theory.(VincentBrémonda, EmmanuelHacheb, & ValérieMignonc, 2012) The aim of this paper is to determineif OPEC acts as a cartel by testing whether the production decisions of thedifferent countries are coordinated and if they have an influence on oilprices.

Relying on co-integration and causality tests in both time series and panelsettings, the findings show that the OPEC influence has evolved through time,following the changes in the oil pricing system. While the influence of OPEC isfound to be important just after the counter-oil shock, the results show thatOPEC is a price taker on the majority of the considered sub-periods. Finally,by dividing OPEC between savers and spenders, it shows that it acts as a cartelmainly with a subgroup of its member.(Behar & Robert, 2016)In November 2014,OPEC announced a new strategy geared towards improving its market share.

Oil-market analysts interpreted this as an attempt to squeeze higher-costproducers including US shale oil out of the market. Over the next year, crudeoil prices crashed, with large repercussions for the global economy.     It explains the fundamental market factorsthat can rationalize such a “regime switch” by OPEC.

These include:(i) the growth of US shale oil production; (ii) the slowdown of global oildemand; (iii) reduced cohesiveness of the OPEC cartel; (iv)  production ramp-ups in other non-OPECcountries. It shows that these qualitative predictions are broadly consistentwith oil market developments during 2014-15. The model is calibrated to oilmarket data; it predicts accommodation up to 2014 and a market-share strategythereafter, and explains large oil-price swings as well as realistically highlevels of OPEC output.(Wirl & Azra, 2004)This paperinvestigates how far OPEC influences world oil markets. We ask the question:What is the impact of the decisions of the OPEC Conference, the supremeauthority of the Organization of Petroleum Exporting Countries, on world oilprices? Extracting the Conference’s decisions from the communiques °f fiftymeetings from 1984-2001, these decisions were compared with the subsequentmarket developments. The result is that this impact is weak at best, and if atall then restricted to meetings recommending a price increase. However, theopposite claim (found in the literature) – the Conference is simply followingthe market – was also not supported either.

Another interesting observation isthe little autocorrelation between the decisions of the Conference. Thissuggests that the ministers’ decisions accommodate quickly and efficientlyrecent events.(Fattouh, 2007)Although there is plentyof room for OPEC to influence the oil price in the current oil pricing system,this influence is not unconstrained. In this paper, they have argued that therecent changes in the international oil pricing system have diminished OPEC pricing power, especiallywhen compared to the previous administered oil pricing system. They have alsoemphasized that OPEC pricing power is notconstant and varies according to oil market conditions. Finally, they havequestioned  the proposition that OPEC ingeneral and the Middle East in particular are bound to have a greater influenceon the oil market as they develop their reserves and gain a greater share ofthe market.

Although the paper’s focus has been on economic factors, it isimportant to stress that OPEC does notoperate in a political vacuum. It has been argued elsewhere that pricingsystems in the past reflected the balance of power at those times and thispresent system  is no exception. Formany, the balance of political power can have an impact on OPEC behaviour. Forinstance, Doran (1980) hypothesizes that there are limits on how much SaudiArabia can increase its oil price because very high oil prices can be “damagingto their own interest because of the danger to the world economy and to theirlarger commercial involvements and because of the incentive to outside militarypressure by distraught consumer governments” He also argues that ‘political andcultural similarity’ has facilitated Saudi Arabia’s role in forming coalitionsregarding price preferences.     Othershave attributed important episodes in oil history to political factors. Forinstance, some argue that the decline in oil prices in 1986 might have beenorchestrated between Saudi Arabia and the USA to undermine the financialposition of the USSR. There is no harm in incorporating some (but not all) ofthese ideas into the analysis of OPEC pricing power.

 CURRENT SITUATION2010until nowThe global economy represented the main riskto the oil market early in the decade, as global macroeconomic uncertaintiesand heightened 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-countryvariations in the average price of one litre of oil across G7 countries as wellas the OECD average during 2016.    It is important to note that these pricevariations are mainly due to the widely varying levels of taxes (in red)imposed by major oil consuming nations.

These can range from relatively modestlevels – like in the USA – to very high levels in Europe and Asia/Pacific   Forexample, in the UK the government in 2016 earned about 69% of the price chargedfor every litre of pump fuel sold to consumers. On the other hand, oilproducing countries (including OPEC) earned about 19.3% of the total pump fuelprice.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’s proven oil reserves currently stand at 1,216.78 billionbarrels. LESSONS LEARNED Most scholars andpolicymakers believe OPEC to be a powerful institution which can and doesinfluence the global price of oil. According to this view, OPEC operates as acartel, manipulating the price of oil principally by restricting supply.

In doingso, OPEC generates huge excess profits for its member states. Since oil is avital commodity in the modern economy, oil-importing states must constantlymonitor OPEC as an organization, and be wary of the power that it wields.    Most of the conventionalwisdom about OPEC is wrong. OPEC does not operate effectively as a cartel.

It rarely if ever influences the oil production rate in its member states. AndOPEC has almost no lasting impact onworld prices, except under very rare conditions. In reality, the price ofoil is largely set by market fundamentals like the rate of investment inproduction capacity, the impact of major wars, and the growth of demand, whichhas been especially strong in Asia in recent years. It is possible thatspeculators also play a role in creating short-term price bubbles. But at leastsince OPEC first began to operate as a formal cartel in 1982, its role inaffecting world oil prices as a cartel has been minimal. There was one occasionon which OPEC did have a significant impact on world oil prices, namely the1973 oil crisis. Yet OPEC’s role in the crisis has been greatly misunderstood. The circumstances of the crisis were highlyexceptional, making it unlikely that the organization could ever have a similarimpact on world oil prices again.

While OPEC did take actions that contributedto the dramatic increase in world oil prices in 1973, those actions had littleto do with restricting oil supply. In fact, OPEC production hardly declined atall. The 1973 oil crisis hadmultiple causes, but probably the most important was the decision by OPEC todramatically increase the “posted price” of its oil, thereby raising the taxand royalty payments that the major international oil companies had to pay OPECgovernments. As I explain below, such posted prices no longer exist (taxes arenow typically indexed to market prices), meaning that OPEC could not raiseprices in this way again.

 I argue that OPEC is dysfunctional as a cartel, as it has little or no causalimpact on its members’ choices about production levels or investment inproduction capacity. I make no claim about whether OPEC could affect itsmembers’ oil production; I simply argue that it does not do so in practice. Ishow that cheating in OPEC – i.e., oil production by member states in excess oftheir stipulated market allocations – is endemic: its nine core members cheaton their aggregate quota 96 percent of the time. Perhaps even moresignificantly, the quotas themselves often appear to be post-hoc justificationsof production decisions made by individual states RECOMMENDATIONS FOR FUTURE The Organization of the Petroleum ExportingCountries (OPEC) will host the 7th OPEC International Seminar at the ImperialHofburg Palace in Vienna, Austria, on 20?21 June 2018 under the theme, ‘Petroleum – cooperation for a sustainablefuture’.   The Seminar will provide fresh impetus to keypetroleum industry issues and challenges, helping to enhance existing avenuesof dialogue and cooperation, while stimulating new ones.  The Seminar will feature presentations byofficials from energy and oil ministries, executives from oil companies andfinancial firms, and other representatives from international organizations andresearch institutions.

The 2018 OPEC International Seminar will seekto reinforce OPEC’s longstanding commitment to strive towards a secure andstable market in support of a healthy global economy.  It will also highlight the need forcontinuing promotion of cooperation and dialogue with all oil industrystakeholders, including producers and consumers.Some of the topics to be discussed at theSeminar will include global energy cooperation, technological breakthroughs,energy transition, industry investments, as well as the world economy and thefuture outlook for the oil industry.OPEC’s International Seminar is todayrecognized as one of the most important industry events on the global energycalendar.  The event is outstanding bothfor the calibre of participants and the high level of discussions that takeplace on all the leading 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 heldat the Imperial 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 shale growth 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 a cartel? An empirical investigation. energey economics , 34 (1). ·         Wirl, F.

, & A. K. (2004). The Impact of OPEC Conference Outcomes on World Oil Prices 1984-2001. The Energy Journal , 25 (1).

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