Figure 1: Illustration of Three Firm Cartel
The market works in a manner that higher cost manufacturers sell all they can bring forth, while low-priced manufacturers satisfy the balance of the demand at current monetary values and cut back production if needed. Econometric grounds on Saudi Arabia confirms the asymmetric behavior of the low-priced crude oil providers. The state restricts production in reaction to negative demand dazes but does non spread out production in response to positive 1s, in order to prolong high monetary values. The oligopolistic construction of the oil market or the dominant function of Saudi Arabia is supported in a figure of other empirical surveies.
Oil demand is dependent on wide macroeconomic conditions every bit good as seasonal influences. While demand is related to the degree of planetary economic activity, the nature of this relationship has changed over clip, peculiarly after the oil dazes of the 1970s and 1980s ( e.g. OPEC members decided non to sell oil to USA as it sided with Israel in the Arab-Israeli War in 1967 ) . With respect to seasonal influences, demand for rough oil tends to be higher in the 4th one-fourth of each twelvemonth, relative to the other quarters, because of cold conditions in the northern hemisphere every bit good as stock edifice. Demand tends to be lowest in the first one-fourth as heater conditions ensues.
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Global oil demand has risen significantly over the past two decennaries. The International Energy Agency ( IEA ) estimates that between 1980 and 2006 universe oil ingestion rose by 33.4 per cent, from 63.1 million barrels to 84.2 million barrels per twenty-four hours. The bulk of this addition came from the US, China and other emerging economic systems.
Who are the major demand side participants?
Top 10 Consumers ( Demand side ) of Oil ( 2005 )
Entire oil ingestion
( Millions of barrels per twenty-four hours )
1. United States
8. South Korea
Beginning: Energy Information Administration
Besides holding the largest oil ingestion, USA was the largest importer in 2006, purchasing 60 per cent of its oil, or 12.22 million barrels per twenty-four hours. This shows that US is still dependent on foreign states to provide them with oil even though they themselves produce oil.
Who are the major supply side participants?
Top 10 Oil Producers ( Supply Side ) ( 2005 )
Entire oil production
( Millions of barrels per twenty-four hours )
1. Saudi Arabia^
3. United States
10. United Arab Emirates^
Beginning: Energy Information Administration
^ a OPEC members
Middle East is the largest oil-producing part where Saudi Arabia holds the bulk of ascertained resources.
Discuss the function OPEC plays ( How do they interact? How has they behaved in the past? )
How do they interact?
There are presently 12 member ‘s states in OPEC: Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Qatar, Libya, Ecuador, the United Arab Emirates, Algeria, Nigeria and Angola.
OPEC members interact by directing its representative to run into at OPEC conferences. The intent of this conference is by and large to co-ordinate oil policies with the ends of advancing a certain sum of stableness in the oil market and protecting each member state ‘s oil gross.
During the twice-yearly meetings, the members of OPEC review the current market for crude oil and the prognosiss for future demand and supply. After looking through the information, they will make up one’s mind whether to increase or diminish production. Member states are expected to stay by the production quotas as set for them by OPEC. But the quotas are non inactive as they are sporadically reviewed as markets change and events in the bring forthing state or elsewhere in the universe alteration.
Productions quotas help lend to the ability of OPEC to organize its response to the crude oil market. When there is alterations in the market, OPEC can set oil production. If there was an increased demand for oil due to an event that prevented some oil-producing state from keeping its end product, OPEC can increase production elsewhere to forestall the sudden rise in monetary value that would follow the existent or perceived deficit in supply. ( e.g. 1979 Iran Islamic Revolution which saw the export of oil to be ceased and caused other OPEC states to compensate the break by hiking on their end product ) If there is an extra supply of oil in the market due to the winter that is mild and less oil is required for heating places. This would do monetary values of oil to bead and OPEC will response by diminishing their production.
OPEC determinations are non adhering on non-OPEC members who produce oil as OPEC ‘s oil exports has a important per centum of the oil traded in the universe that create an impact on the oil market.
Figure 2: Possible Demand Curves for an Oligopolist
How has they behaved in the yesteryear?
There are many incidents in the yesteryear on they had trade with, but will concentrate one of the more outstanding and impactful incident which is the 1973 Oil Crisis.
1973 Oil Crisis
This peculiar determination made by OPEC created an impact on the monetary values of international oil. It happened due to the Yon-Kippur War or Six Day War where both Syria and Egypt launched a surprise onslaught on Israel to derive back on lost districts in the 1967 war. This caused the US to assist Israel by supplying them with military assistance, proficient aid every bit good as general fiscal aid. It caused Arab states to advert that oil might be used as a arm in the brewing struggle if the USA did non take fleet stairss to retreat its support for Israeli policies. OPEC called a meeting with oil companies by bespeaking a new trade as market monetary values for oil were traveling up, and OPEC states wanted a greater portion of those net incomes. With the Arabs early advantage in the war, OPEC states demanded for more which would make a dramatic impact on the economic systems of the oil-consuming states, peculiarly on consumers as they would experience the effects of such a big monetary value addition. However, the oil company felt that the monetary value addition was excessively big and could non be agreed to. This caused the Arab states to cut production by five per centum from the old month ‘s degrees, and so maintain cutting by five percent each month until their aims were met. Merely “friendly states” would go on receive oil at the old degrees while the US was to be subjected to the most terrible cuts.
However on October 16 1973, OPEC delegates announced their determination to raise the monetary value of oil by 70 per cent to $ 5.11 a barrel. This became a historic turning point that reshaped OPEC ‘s function in the planetary economic system. It was non the oil companies puting the monetary value of oil or through dialogue to find the monetary value but the control over the monetary value of oil was now steadfastly in the custodies of oil manufacturers. The degree of production was now a affair of international political relations and non industry pattern as oil can be used as a wages and penalty.
On October 19 and 20 1973, Libya and Arab provinces placed an oil trade stoppage on the US as a penalty as a penalty for its determination to resupply Israel during the Six Day War. It triggered a worldwide gas crisis where production and supply to US were drastically reduced, go forthing many citizens desperate for gas as it became expensive and scarce.
In November 1988, OPEC officially dropped the fixed-price system where members were no longer forced to sell oil at a peculiar monetary value which will be based on the market of supply and demand but quotas were still in topographic point and slackly enforced.
Whether authorities should step in ( What should “we” make about OPEC and oil monetary values? )
I felt that the authorities should step in in times when the oil monetary value goes volatile ( e.g. on June 11 2008, oil monetary values went up to a record high of US $ 147.27/barrel ) where demand exceeds production capacity, monetary value will lift aggressively due to demand and provide being inelastic in the short tally as users might be daze of this result and may take clip to set due to their committednesss and wonts.
For oil-producing states, the authorities can promote on the addition of the production of oil Fieldss to counter the demand. The authorities can enforce monetary value controls to decrease the impact and users are still able to buy them at an low-cost rate. However, they should ration on the sum of oil to forestall people purchasing in majority and sell them in the black market at a higher rate.
The authorities can research on other energy options like solar and weave energy whichever that are executable and cut down the trust of oil.
They can implement jurisprudence on increasing the fuel efficiency ordinances for autos, implementing car-pooling system and promoting the populace to take the public conveyance when going about. With that, users like us need to take actions besides merely trusting on the authorities.
However, I felt that the authorities should non step in by utilizing oil as a bargaining bit when it comes to political issues ( e.g. Yom – Kippur War that was mentioned before ) in order to decide the issues. All of this was done due to the involvement of the state but it may ensue the other party of non compromising and farther endanger with other issues which may ensue in a deadlock and menace in the society. This may ache on the universe economic state of affairs by doing the monetary value of oil to be volatile. The 1 who are enduring are the consumers as they might hold to pay a high monetary value for it.
hypertext transfer protocol: //en.wikipedia.org/wiki/Oil_prices
hypertext transfer protocol: //en.wikipedia.org/wiki/OPEC
The International Oil Market: An Application of the Three-Agent Model / Kamilah Williams
The Organization of the Petroleum Exporting Countries / Heather Lehr Wagner.
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