ORIGINS otherwise independent businesses or countries that act

ORIGINS AND NATURE

A cartel is an
organization created from a formal agreement between a group of producers of a
good or service to regulate supply in an effort to regulate or manipulate
prices. In other words, a cartel is a collection of otherwise independent
businesses or countries that act together as if they were a single producer and
thus are able to fix prices for the goods they produce and the services they
render without competition.

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The Seven Sisters was
the organization pre-dating the current regime OPEC (Organization of the Petroleum
Exporting Countries),
and included 7 companies:

·       
Anglo-Iranian
Oil Company

·       
Gulf
Oil

·       
Royal
Dutch Shell

·       
Standard
Oil Company of California

·       
Standard
Oil Company of New Jersey

·       
Standard
Oil Company of New York

·       
Texaco

 

OPEC was born at the Baghdad Conference in September, 1960
in order to do away with Seven Sister’s notion of an imperialist regime and to
establish a seemingly transparent functioning cartel. This move was widely
advocated, as the oil and gas companies had massive leverage and power over
political and fiscal stability of a nation. Early members were Iran, Iraq,
Kuwait, Saudi Arabia, and Venezuela with Qatar, Indonesia, Socialist People’s
Libyan Arab Jamahiriya, United Arab Emirates, Algeria, Nigeria, Ecuador, and
Gabon joining later.

The objective of OPEC was clear: reduce the influence and curb the power of oil
giants through a regulatory oligopoly.

 

 

MOTIVATION FOR CHOOSING THE STUDY

 

The term ‘OPEC’ rings with a not so positive connotation in
people’s minds due to the dependency of oil in today’s volatile economies;
combined with the fact of a dearth of information available on the exact nature
of its running. With renewable energy rapidly evolving, and the technology
being widely available- it’d be interesting to see how exactly the cartel adapts
and grows in the coming times.

Thus, the motive of this study is to paint a picture on the functioning and
future of OPEC.

 

 

 

LITERATURE REVIEW

 

 

Supply
chain risk in an uncertain global supply chain environment

Citation-
Jack Barry, (2004) “Supply chain risk in an uncertain global
supply chain environment”, International Journal of Physical
Distribution & Logistics Management, Vol. 34 Issue: 9, pp.695-697, https://doi.org/10.1108/09600030410567469

Abstract-
The breadth and scope of supply chain risks have
broadened significantly in recent years. Even prior to the 2001 terrorist attacks,
the creep of risks and uncertainties were widening with increased
globalization, widening political reach by leading countries, and the rise of
market producing and consuming economies. This article raises some essential
supply chain questions as well as some that have impact on the field from
outside of it.

 

 

 

Not
all demand oil shocks are alike: disentangling demand oil shocks in the crude
oil market

Citation – Zhuo Li, Hui Zhao, (2011) “Not all
demand oil shocks are alike: disentangling demand oil shocks in the crude oil
market”, Journal of Chinese Economic and Foreign Trade Studies, Vol. 4
Issue: 1, pp.28-44, https://doi.org/10.1108/17544401111106798

Abstract – The purpose of this paper is to re?examine
the structural origins of international crude oil price fluctuation.

 

 

 

Oil
prices and the future of OPEC: the political economy of tension and stability
in the Organization of Petroleum Exporting Countries

Citation-
Moran, T.H. 1978. Oil Prices and the Future of OPEC: The Political
Economy of Tension and Stability in the Organization of Petroleum Exporting
Countries. United States: Resources for the Future,Washington, DC.

Abstract-
The assumption embodied in the conventional
approach to modeling OPEC behavior is that the question of the internal
distribution of the OPEC market will not cause tension among the members
because most of the largest potential exporters do not need the revenues and is
justified for some level of earnings from oil exports. Above some threshold of
petroleum income, Saudi Arabia, Abu Dhabi, Kuwait, Libya (even Iraq and Iran)
will be indifferent as to whether they have to forego some added increment of
revenue. In OPEC, though, some range of lower revenues means giving up some
item (a desalination plant, a fertilizer project, etc.) that constitutes a
sacrifice. A schematic is shown to represent this problem.

 

The effect of OPEC policy decisions on
oil and stock prices

Citation-
Guidi, M. G.D., Russell, A. and Tarbert, H. (2006),
The effect of OPEC policy decisions on oil and stock prices. OPEC Review, 30:
1–18. doi:10.1111/j.1468-0076.2006.00157.x

Abstract-
This paper presents evidence of the effects of OPEC policy decisions on the US
and UK stock markets, as well as on oil prices, during periods of conflict and
non-conflict from 1986 to 2004. The outcomes of this study are potentially
valuable in assessing future strategies for OPEC policy decisions on oil production
targets for its Members. This paper also adds to the strong body of evidence
supporting the hypothesis that market returns are influenced by factors that
affect business conditions, such as oil price shocks. The key findings are that
there are asymmetric reactions to OPEC policy decisions during conflict periods
for the US and UK stock markets. During conflict periods, oil markets require
time to incorporate OPEC decisions. Conversely, in non-conflict periods the
evidence suggests that the oil markets incorporate OPEC decisions efficiently.

Does oil consumption promote economic growth in oil producers? Evidence from
OPEC countries

Citation – Jose Alberto Fuinhas, Antonio Cardoso
Marques, Tânia Noélia Quaresma, (2015) “Does oil consumption promote
economic growth in oil producers?: Evidence from OPEC countries”,
International Journal of Energy Sector Management, Vol. 9 Issue: 3, pp.323-335,
https://doi.org/10.1108/IJESM-03-2014-0003

Abstract – The oil-growth nexus is studied in a
panel of Organization of the Petroleum Exporting Countries (OPECs), for a long
time span (1960-2011), controlling for the specific context of oil production.
Their membership in the cartel put them under a common guidance, which
originates phenomena of cross-section dependence/contemporaneous correlation in
the panel.

Design/methodology/approach – Recent panel data
estimators and co-integration analyses are both pursued and discussed, namely,
dealing with the heterogeneity of panels and the countries’ specific effects.
The Driscoll–Kraay estimator proves to be appropriate in handling the panel
properties.

 

CURRENT SCENARIO

The global oil prices have been extremely volatile ever since the
‘Arab Spring’ of 2011.

The oil barrels – costing just a few dollars to produce – command a
higher price due to the broader government budget which engulfs even issues
such as the rebellion. Increased
violence by Islamist extremists and militants, against a backdrop of political
instability across much of northern and west Africa since the Arab spring, has
changed the equation for acceptable risks for international oil companies.
Thus, the oil producers of the Middle East have driven up their spending drastically!

The UAE can produce oil for about $11.59 per barrel, but
requires $66.7 as the cost of production per barrel to balance its sheets – and
which is a price higher than the global commanding price of oil. WSJ, 2013

Further, the technology changes in the renewable energy
world have made drastic leaps- compelling people look into a more environment
friendly way of meeting their energy resources; thus putting pressure on OPEC
again.

LESSONS LEARNED

 

The OPEC was formed with the intention to have control over the prices
of oil in the world; giving those with the means of production – to seize the
markets. However, it is clear that OPEC does not regulate the prices of oil
barrels in the world, and has very little influence over the same. The credit
markets, major banks, and direct capital flows have leverage over the price of
oil barrels globally. The political situation in the Middle East has also
factored in the move to destabilize the control of OPEC over the regulatory
prices.

 

 

 

 

 

FUTURE RECOMMENDATIONS

 

The energy prices will be an interesting index to watch over the
coming few years, as it is imperative that the major credit houses influence
the price of oil in global markets. The banks could very well topple the
industry like with that of the subprime lending crisis of 2008- but at this
point are more worried about meeting individual firm targets and loan
recoveries – and would rather continue the same, than set up an oligopoly.