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The Role of OPEC in Determining Oil Price across the Globe

Introduction

The fluctuation of oil prices and their effects has been a continuous debate globally

due to the massiveness of the impacts. In the last four decades, there have been several oil

crises that cause the level of economic development across the globe to change. However, the

situations have been different due to the dependency of the various countries on oil, the

policies of the diff states and the level of development. About the oil-producing countries and

the oil consuming countries, in the different circumstances, the effects are the reverse. The

main producing countries are in an intergovernmental organization known as the

Organization of Petroleum Exporting Countries (OPEC). Despite the different individual

regulations and policies of the oil-producing countries, the group coordinates all the

activities. Due to the significance of oil in the globe and the dependency of all the other

sectors of oil, all the countries globally have to adjust their plans depending on the OPEC's

influence.

OPEC was established through the influence of the major oil-producing countries to

enable them to have a significant influence over the world and to avoid the misuse of

resources and the instability of the oil prices across the globe. Therefore, after the

establishment, the roles and functions were defined and uniform policies enhanced since then

for the regulation of the oil supply across the globe and the stabilization of the oil prices as

well as the distribution of wealth accordingly considering the contribution of the different

investors. The changes in the oil prices in the last few decades are influenced by OPEC's

different decisions depending on the supply and the factors underlying the economy.

Although sometimes the organization loses the power to determine the fuel prices, it is the

primary contributor of the price fluctuations in the various eras. The paper will contend how
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OPEC influences the oil supply and hence the prices of oil across the globe and the factors

that the cartel considers in the determination of the fuel prices.

Roles and Objectives of OPEC

In the establishment of OPEC, after the consideration of the issues that were

disturbing the individual countries, OPEC decided to take control through setting the

objectives. In the review of the different policies and operations of the countries, OPEC

objected to formulate common policies favoring all oil producing countries (Bentzen 1375).

Also, the cartel aimed to stabilize the prices of oil across the globe to prevent random

fluctuations which affect the growth and development of the world's economy. Moreover, the

organization saw the need to regulate the supply of oil in the market to ensure a stable

equilibrium between the demand and provision of oil in the market. Furthermore, by

recognizing the importance of the foreign investments that helped in the maintenance of the

energy sector, the organization focused on ensuring that the investors received their equitable

and fair share (Fombona 68).

The History of OPEC

In the 1950s, the oil producing countries were operating on different governance

under various cartels and hence had different decisions which apparently in the oil monopoly

market, failed to work accordingly. Since the oil-producing countries were developing

countries, the developed countries which were carried out investments in the producing

countries exploited the resources as they were in control of the minerals (Hossein, Yazdan

and Ehsan 272). Moreover, due to the inability to operate the fuel and maintain as a result of

the inferior technology, the investors made the major decisions and were the influencers of

the prices of oil. The producing countries were operating differently and hence here was a
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collision whereby there were different prices for oil making the international oil market

stagnant and unstable. During this period, the exploration of the oil was mainly in Iran, Iraq,

Kuwait, Venezuela and Saudi Arabia. Venezuela which discovered the severity of the

conditions approached the government of the other four countries which then agreed to

connect for a proper coordination of policies. After close negotiations, the five countries

agreed to form OPEC which established in September 1960 in Baghdad (Fombona 70).

After 1960, Algeria, Angola, Ecuador, Libya, Nigeria, Qatar and the United Arab

Emirates joined the organization. OPEC defined the roles, functions, responsibilities, and

policies to operate under to ensure a smooth operation across the globe.  Since the origin of

the cartel, OPEC decided to control the world prices in effect to the growth and development

of the individual countries. In 1974, OPEC influenced all the different countries to increase

the fuel prices. In effect to that, the countries which were previously under the control of the

investing countries experienced an increase in income and wealth which then led to a rise in

the GDP of the country (Bentzen 1377).

Since 1974, the world was sure that OPEC has a significant influence over the world's

prices. There oil importing countries spent a lot of their capital on the oil regulation which in

response led to inflation and a high cost of living. The oil importing governments responded

by rationing the level of consumption of fuel. However, the reaction of the different states

was not the same since OPEC had agreed to partner with individual countries. Therefore, for

the countries that refused to partner with the organization especially the western countries

had to extremely ration the consumption while the other economies in partnership received

the same supply as before (Kisswani 231). UK, Germany, Netherlands, the US, Sweden, and

Britain were among the countries that specifically had a severe oil crisis. After the 1974

crisis, there was a decline in the growth rate of the world economy. International trade was

ineffectively operational due to the increase in costs. Also, the foreign direct investment
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dropped drastically. The GDP of the developed and developing countries declined to a

negative rate. There was also increase in the rates of unemployment due to the increase in the

cost of living that led to a crisis in the labor market.

In 1979, there was a similar oil crisis which was as a result of the political and

religious conflicts in Iran that caused a trigger in the energy sector. During the period, the

Iranian government stopped exporting the oil and hence, there was a decline in the oil supply

globally. As a result, there were increases in the prices of oil to regulate the equilibrium in the

market. OPEC countries responded to the decline in the production by increasing the own

production of oil (Loutia, Mellios and Andriosopoulos 263). However, the price increased

even further. Due to the increase in the rate of the imports, the government went back to the

rationing like previously in 1974 to reduce the costs of living and to regulate the costs and

prices of the local fuel. However, in the process of controlling the prices, there emerged

political conflicts due to the different interest of the politicians. The currency differences in

response affected the entire international trade business (Hossein, Yazdan and Ehsan 275).

Later on, after the high prices, Iran went back to the supply of oil on the routine basis.

From 1980, the prices started falling, and the industrial sector which had retarded started

picking. However, it was the weakness of the OPEC to fail to make appropriate policies to

stabilize the oil prices; hence a change in the supply or demand affected the fluctuation of the

prices to a large extent. From that time to 1986, the prices of oil fell drastically (Fombona

75). There was a regulation of the rates after 1986 to 2000. However, there were rises in the

oil prices from 2000 up to 2008. The politics of Iran led to the hike in the prices. However,

there were other insignificant reasons as to which governments gave as to the cause of the

price increase. In response to the global recession in 2008, the oil prices still increased. In this

period, the OPEC, realizing the effects of its activities on the world economy, it decided to

stabilize the prices to a level that would favorably influence the producing countries without
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adversely affecting the consuming countries. According to researchers, there was a

conclusion on selling at an average$75 per barrel (Bentzen 1380).

Despite the agreement, some researchers outlined that there was a limit of the exports

by some OPEC countries which hence led to more development on the producing countries'

side and a straining growth among the consuming countries. As a result, the limited

exportation of oil resulted in a declined supply where the prices must increase to adjust the

equilibrium. Despite the average predicted, the prices still rose in summer due to the

increased demand which the current limited supply could not meet. However, after the

predictions, the price level fell to $60 per barrel which then threatened the investments in the

energy sector (Loutia, Mellios and Andriosopoulos 270). The recent price rises in 2014 also

attribute to the regulation of prices by the OPEC countries and the currency changes across

the world. Therefore, looking back at the previous operations in the global economy,

international trade and the sequential operations in the related sectors, OPEC controlled the

prices. Every decision that the individual countries made and the organization in whole

influenced the amount of fuel in the market and hence the prices (Kisswani 236).

Factors stimulating the changes of Oil Prices in OPEC

From the various incidences in the past that have led to the fluctuations in prices,

some factors spurred the changes. All the factors affect the oil producing countries or the

conducts of the investors hence causing the changes. First, variations in the energy sector

regarding the number of refineries affect the regulation in the industry. Without considering

the amount of oil in the production area, there are insufficient oil refineries and storage

capacities (Fombona 79). As a result, when the production of oil from the producing

countries decline, all the oil-dependent countries are affected, and the prices must go up in

response to the adjustments in the OPEC countries. Therefore as much as there are

fluctuations in the oil supply and demand, there should be enough storage capacity when the
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prices are expected to rise. Secondly, OPEC members are the major oil producing countries.

Other countries with oil supply have not been fully explored, and hence a reduction in

production of oil in the OPEC members due to the variant reasons affects the entire world.

Also, the other oil producing countries have a minor influence on the energy sector (Hossein,

Yazdan and Ehsan 280).

Thirdly, the fuel prices and the amount of oil in the market have a non-linear

relationship where a significant change in the supply of oil in the market does not

equivalently vary with the change in prices. There is different elasticity where there the future

expectation cannot be predicted. Demand and supply fail to affect the prices the same way

due to other constraints. Also, the future expectations in the supply demand and prices change

the prices as the producing countries have different policies and economic conditions.

Therefore, the OPEC countries respond to the expectations to their advantage, and hence the

prices fluctuate in response to the decisions of the individual countries (Loutia, Mellios and

Andriosopoulos 272). Furthermore, the exchange rates have a significant influence over the

prices of oil. The US dollar is used to measure the price of oil in the countries. The latter

explains that a decline in the value of a dollar leads to a drop in the other currencies that

exchange with the dollar. Depending on the particular currency, the response in the market

varies differently.

Other factors which have been considered to influence the oil prices and production

are the political conflicts within individual countries such as Iraq which as a result limit the

level of production hence affect the entire economy. Also, the attacks and conflicts in various

countries such as in Saudi Arabia also limit output and distribution of oil among the

countries. The investments in the financial market also influence the price regulation of oil in

the market. As the investors seek to increase the profits within the market, they cause an

increase in oil prices (Bentzen 1383).   

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OPEC's Influence on the oil prices

Just like other oil-exporting countries, OPEC regulates the rate by making

adjustments in the production quotas. Researchers explain that the fluctuations in oil prices

are determined by the OPEC and non-OPEC policies as well as the supply regulation in the

market. The many efforts by OPEC to regulate and stabilize the prices do not come to

accomplishment just as they have planned due to the variant factors contributing in the

energy sector. The persistent efforts by the organization to increase the revenue through the

increase of prices no longer work since other constraints affect the production capacity. The

cartel uses the predictions in the futures markets to affect the markets prices. However, the

interpretation and perception of the consuming countries affect the price elasticity (Fombona

80). In many occasions, OPEC has failed to achieve its aims of regulating the prices due to

the fear of making losses considering the production level of the other oil-producing

countries. Also, sometimes, the organization makes policies to control the production

capacity and the prices, but some member states fail to respond accordingly due to the

individual state problems (Hossein, Yazdan and Ehsan 284).

The major influence OPEC has is that it produces the world's largest capacity. Hence,

even though there are fears of more production in the market, OPEC is assured of its

significant contribution. For instance, in the 1990s, the demand for oil in the market

increased, and the non-OPEC oil-producing countries increased their production by 35%

which was their maximum limit. As a result, OPEC members had to supply the other 65%,

and that led to an increase in the welfare of the OPEC members more than the other countries

(Bentzen 1385). The latter explains that the world's energy sector can be dormant or inactive

without the contribution of the OPEC countries. However, OPEC's management must limit

the production of the oil in such a way that the production must not be close to the maximum
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production of control over prices in the economy will decline. For instance, in cases where

the supply of oil in the market is low, the energy sector looks over Saudi Arabia which is the

largest supplier. Therefore, OPEC uses such an opportunity and fails to deliver the production

as expected in the market, hence gain from the rise in prices.

OPEC works through checking the range of production in the market. The cartel gives

an absolute price control whereby a decrease in output in the markets causes an increase in

price over the set price while an increase in production leads to a reduction in the price. The

same happens to the adjustments in the manufacture. However, in extreme cases where the

prices increase, and it is beyond the control of OPEC, the member countries limit the

production to the actual amount. Furthermore, in consideration of the limited capacity, the

situation has to be solved through the regulation of national policies (Loutia, Mellios and

Andriosopoulos 272).

Three things are right from the observed behavior of OPEC. First, according to

researchers, the behavioral phenomenon of OPEC is not constant. Therefore, OPEC is always

influential, but there cannot be a prediction of the expected behavior. Secondly, the influence

on the world's economy changes since it depends on with the conditions in the individual

countries. The third concept is that with the dependency on the futures market, many people

have been attracted to the market and hence, OPEC only has an indirect influence on the

market (Kisswani 245). 

The dependence on the Middle Countries on Price Power

Saudi Arabia and Iran are the top suppliers of the oil energy market. Therefore, most

of the demand in the market is met by the supply of the specific countries. The other OPEC

members contribute only a quarter of what the two largest countries provide. Therefore, there
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should be more foreign investments on the OPEC countries to maintain the volume of oil

produced. The latter is because there is a high elasticity of the change in the production level

to the change in prices and the OPEC countries need to prevent that in advance. The pricing

power is therefore influenced by many investments in the OPEC countries, where lack of

investments increase the prices, and there is an easy tendency of fluctuation of prices. Also,

lack of investments in OPEC guarantees a bigger market share. Moreover, the elasticity of

supply is low which makes the other oil producing countries more insignificant (Hossein,

Yazdan and Ehsan 286).

The OPEC Policy

Despite the objective of OPEC to produce oil in the market abundantly, the cartel

limits the production limit of its members through the quotas which define the level of which

a given country should not exceed. Regarding the private decisions of the organization,

unless the problem is an international crisis, OPEC does not announce its intentions publicly

due to the possibility of quick action by individual countries which may cause diversity in the

plans. For instance, in 2004, OPEC proclaimed in the market increase in production to an

absolute output limit while it produced more than it announced in the market. With the kind

of policy, the world reacts to resolve the issue against the producing countries and towards

the consuming countries, and they end up favoring the OPEC producing countries.

Considering the aim to stabilize the prices in the world economy, as OPEC seeks to be

the dominant influence in the world to gain commendable profits, it focuses on the

appropriate investments to improve the welfare of OPEC (Hossein, Yazdan and Ehsan 278).

Moreover, regarding the foreign investments, the cartel is accurate on the specific countries it

allows to invest in the country depending on the influence that the individual state has.

Therefore, through such actions, OPEC can take appropriate measures to benefit from the

energy sector appropriately.

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Conclusion

OPEC influences global prices due to the contribution of the large reserve of oil in its

member countries to the world. Saudi Arabia and Iran are the major producers while

combining the rest of the members increases the significant influence on the production of oil

globally. The other oil producing countries also contribute to the reserves. However, even

their production limits depend on the level of production of the OPEC countries. Therefore,

the paper has outlined that the amount of oil disposed of in the market affects the oil prices

and OPEC decisions affect the current and future production and release of oil in the market.

However, despite the significant role the organization takes in the energy sector, due to

various factors that have come up, OPEC mostly indirectly affect the industry.

The individual member countries political, religious and economic activities also

affect the production level of oil and hence the prices of oil in the economy. In countries like

Saudi Arabia, Iran, and Nigeria where conflicts have been, they have affected the entire oil

production in the mentioned periods. The different elasticity of prices and the unpredictability

of the next price to the various prices also make the energy sector invariant. In the current

century, OPEC still determines the amount due to the position in the market. The effects of

the oil fluctuations affect the different individual economies whereby the commodity prices

have to increase for a better payoff. Also, other countries respond by restricting more oil

imports and regulating the consumption patterns within the country. Also, through the

activation of OPEC policies, the monopoly controls the operations of the global economy.

With the accomplishment of the objectives and regulation accordingly, OPEC influences the

world's economy.

Acknowledgement

I would like to give a vote to my friend, Chelsee for helping me in choosing the right

preferences and for proofreading my work frequently as I requested. Also, I would like to
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thank my professor, Lisa Donegan for helping me with the clear guidelines regarding the

research work. Moreover, I would like to thank all my friends that helped me in the

completion of the project by leading to the appropriate sites for the research work and

proofreading my work.

Work Cited

Bentzen, Jan. "Does OPEC Influence Crude Oil Prices? Testing For Co-Movements

and Causality Between Regional Crude Oil Prices". Applied Economics 39.11 (2007): 1375-

1385. Web.
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Fombona, Manuel. "CAN OPEC MAINTAIN CURRENT PRICES?". Institute of

Development Studies Bulletin 6.2 (2009): 68-80. Web.

Hossein, Abbasinejad, Gudarzi Farahani Yazdan, and Asghari Ghara Ehsan. "The

Relationship Between Energy Consumption, Energy Prices And Economic Growth: Case

Study (OPEC Countries)". OPEC Energy Review 36.3 (2012): 272-286. Web.

Kisswani, Khalid. "Does OPEC Influence Crude Oil Prices? Testing For

Cointegration and Causality Effect". Journal of Economic Research (JER) 20.2 (2015): 231-

255. Web.

Loutia, Amine, Constantin Mellios, and Kostas Andriosopoulos. "Do OPEC

Announcements Influence Oil Prices?". Energy Policy 90 (2016): 262-272. Web.