THE ROLE OF OPEC AND NON-OPEC COUNTRIES IN

STABILIZING OIL PRICES

By: Bezhar Aras

Instructor: Mr. Muhammad Ali
30/10/2016
 Abstract
Falling oil prices over the last decade, accompanied by over-production by some
OPEC members and the growth of non-OPEC supply, warrant further empirical
investigation of the competitive model to ascertain production behavior. The OPEC
results do not support the competitive hypothesis; instead, a negative and significant
price elasticity of supply is obtained. This result offers partial support for the target
revenue theory. The governments in Baghdad, and Kurdistan will all have to make
do with less, and that will challenge their political skills. It will make the fight against
the Islamic State harder for Mosel, as there will be less money with which to entice
Sunni Arabs to the governments side. Oil might never see 100 again as we are in
the middle of a fundamental shift and those things are by definition unpredictable in
their results. Suppose the oil price stays low either around its present level of $40
a barrel, or even lower what are the consequences? The question is worth asking
because there is a tacit assumption that the halving of the oil price at the end of last
year is not sustainable and that prices will gradually recover, perhaps to around $80
a barrel, though this may take several years. That at least is the OPEC position, but
there is no consensus on this, for some forecasters have argued that prices will stay
low for longer.

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 The Role of OPEC and Non-OPEC Countries in Stabilizing Oil Prices

Organization of petroleum exporting country (OPEC) is to coordinate and unify

the petroleum policies of it is member countries and ensure the stabilization of oil
markets in order to secure an efficient, economic and regular supply of petroleum to
consumers, a steady income to producers and a fair return on capital for those
investing in petroleum industry. Falling oil prices over the last decade, accompanied
by over-production by some OPEC members and the growth of non-OPEC supply,
warrant further empirical investigation of the competitive model to ascertain
production behavior. A supply function, based on a modification of Griffin's model,
is estimated using data from 19731997. The sample period, unlike Griffin's,
however, includes phases of PRICE increase (1970s) and price decrease (1980s
1990s), thus providing a better framework for examining production behavior using
the competitive model. The OPEC results do not support the competitive hypothesis;
instead, a negative and significant price elasticity of supply is obtained. This result
offers partial support for the target revenue theory. For most of the non-OPEC
members, the estimates support the competitive model. OPEC's loss of market share
and the drop in the share of oil-based energy should signal adjustments in price and
quantity based on a competitive world market for crude oil.

Using a newly developed measure of global real economic activity, a structural

decomposition of the real price of crude oil in four components is proposed: oil
supply shocks driven by political events in OPEC countries; other oil supply shocks;
aggregate shocks to the demand for industrial commodities; and demand shocks that
are specific to the crude oil market. The latter shock is designed to capture shifts in
the price of oil driven by higher precautionary demand associated with concerns
about the availability of future oil supplies. The paper quantifies the magnitude and
timing of these shocks, their dynamic effects on the real price of oil and their relative

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importance in determining the real price of oil during 1975-2005. The analysis also
sheds light on the origins of the major oil price shocks since 1979. Distinguishing
between the sources of higher oil prices is shown to be crucial for assessing the effect
of higher oil prices on U.S. real GDP and CPI inflation. It is shown that policies
aimed at dealing with higher oil prices must take careful account of the origins of
higher oil prices. The paper also quantifies the extent to which the macroeconomic
performance of the U.S. since the mid-1970s has been determined by the external
economic shocks driving the real price of oil as opposed to domestic economic
factors and policies.

As of July 2016, OPEC has 14 member countries: six in the Middle East
(Western Asia), one in Southeast Asia, five in Africa, and two in South America.
According to the US Energy Information Administration, OPEC's combined rate of
oil production (including gas condensate) represented 43 percent of the world's total
in 2015, and OPEC accounted for 73 percent of the world's "proven" oil reserves,
including 48 percent from just the six Middle Eastern members:

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 The recent fall in world oil prices cannot but have an impact on the politics of the
Middle East. Many of its states, including two of the major players in the current
struggle for regional influenceIran and Saudi Arabiarely heavily on oil to found
their governments and to float their economies more generally. Russia, trying tore-
establish its regional influence after a two decade hiatus following the collapse of
the Soviet Union, is also highly reliant on oil. Ata minimum, declining revenues
highlight the costs of an aggressive regional policy, whether it is Iranian support for
clients like the Bashar al-Assad regime in Syria and Hezbollah in Lebanon or the
billions that Saudi Arabia and other Gulf monarchies have committed to the Sisi
government in Egypt. Falling prices also present domestic political challenges to the
oil states, all of which have built patronage regimes that require ever-increasing
revenue to meet the demands of growing populations. This is not to argue that the
collapse in oil prices will not affect politics in the three capital-short Middle Eastern
producers. The governments in Baghdad, and Kurdistan will all have to make do
with less, and that will challenge their political skills. It will make the fight against
the Islamic State harder for Mosel, as there will be less money with which to entice
Sunni Arabs to the governments side. It will challenge the Kurdistan political, The
Geopolitics of Falling Oil Prices time when President Mam Jalal bad health keeps
him from actively governing the country. It is simply to say that it is unlikely that
the current fall in oil prices is going to lead to regime change in these countries, or
anywhere else in Iraq maybe.

For the moment we seem to be headed southwards and we cannot see what should
push the oil price 100 again in the mid-term. The world is still fundamentally
oversupplied and the current price is as high as it gets under those circumstances.

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Oil producers made the most classical, the most well-known and well-studied and
most archetypal of all mistakes. And this mistake has been made since man lives in
an organized community. They have thought that the party of high prices will last
forever and that consumers would never look after alternatives or that those
alternatives would remain impossible forever. Now they learn the hard way that the
old laws of business are still holding true. Oil might never see 100 again as we are
in the middle of a fundamental shift and those things are by definition unpredictable
in their results. Suppose the oil price stays low either around its present level of
$40 a barrel, or even lower what are the consequences? The question is worth
asking because there is a tacit assumption that the halving of the oil price at the end
of last year is not sustainable and that prices will gradually recover, perhaps to
around $80 a barrel, though this may take several years. That at least is the OPEC
position, but there is no consensus on this, for some forecasters have argued that
prices will stay low for longer. Goldman Sachs is among the bears, predicting that
prices will remain low for 15 years, while Barclays mid-range estimate is $85 a
barrel by 2020, with a top range at $100. The truth is, of course, that no one can
know, just as hardly anyone spotted the collapse of the price last year ahead of the
event.

Beyond the macroeconomic impact are a mass of other issues. Most are obvious.
There will be less direct financial pressure on energy conservation, though the
environmental case will be as strong as ever. Transport everywhere will benefit, and
industries that are sensitive to transport costs will benefit too. Tourism will boom.
Less obviously construction does well, partly because it is energy intensive but also
because cheap oil is likely to be associated with cheap money. And that is perhaps
the most interesting, and less explored, consequence of a long period of cheap
energy. There is the one-off impact of the fall in the oil price. We have had that. But

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there is also the lasting effect of low inflation on interest rates. Just as the oil shocks
of the past heralded a surge in interest rates, so oil stability reduces the need for
higher rates. That, at least, is the current conventional view, which sometimes is
proved right.

In conclusion, the fall in oil prices since mid-2014 has profoundly changed the
prospects for national oil companies If, as seems likely, prices remain low for a
number of years, investors will be far more cautious, international oil companies
will see reduced cash flows, and many exploration projects will be put on hold or
cancelled. National oil companies, and the oil and gas industry as a whole, must
reconsider their strategies. This will have an impact on the ambitious plans that
some emerging producers had nurtured for national participation in the petroleum
sector, forcing them to refocus on an affordable strategy for developing upstream
capabilities.

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References:

1. https://www.chathamhouse.org/publication/cost-emerging-national-oil-
company?gclid=CPe7zNXz_88CFVTnGwodBnEILA
2. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=975262
3. https://www.quora.com/When-will-oil-prices-go-up-to-60-70-or-back-to-
normal-1
4. http://www.independent.co.uk/news/business/comment/hamish-mcrae/what-
happens-if-the-global-oil-price-doesn-t-bounce-back-a6703666.html