OPEC and Global Market

Running head: GLOBAL ECONOMY 1
OPEC and Global Market
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GLOBAL ECONOMY 2
OPEC and Global Market
Since the formation of the Organization of the Petroleum Exporting Countries (OPEC) in
1961, the organization has encountered many challenges. The organization constitutes of the five
founding members: Kuwait, Iran, Iraq, Saudi Arabia, and Venezuela. However, other members
joined to make a total of fourteen members. The dynamics such as the fluctuations in the prices
of the oil has affected the revenues of the exporting and consuming countries in the OPEC
region. The text examines the dynamics which OPEC has faced in the global market in the last
decade.
Growth Rates have been Slowing Down
The growth rates have been slowing down, and this has been evident even in the
emerging economies. In the past few years, the forecast for the global GDP continues to show a
downward trend. The slow growth in the global GDP negatively affects the OPEC as the demand
for oil products reduces. In the past few years, there has been a slower global demand for oil
(Ecer, Pamucar, Zolfani, Eshkalag, 2019). For example, in 2014, the global rate of oil demand
was estimated at 0.8mb/d and the trend continued to downslope through 2015. Major declines
were experienced in 2014 due to the weak demand from the European nations and Japan. Also,
the demand from Asia declined in the same period (Fattouh, 2015). For example, the Chinese
demand for oil products from the OPEC region has been weakening due to the economy
rebalancing from investment to consumption. Additionally, other Asian countries have also
registered a decline in demand for oil.
The US Oil Supply Shock
The US supply shock has had a negative impact on the oil from the OPEC region. The
U.S used to rely on oil from OPEC but since it began to supply oil, the demand has sharply

GLOBAL ECONOMY 3
declined. The oil output in the US has continued to increase steadily. In recent years, the U.S has
become a leading producer of oil. For example, in 2013 through 2014, the crude output was
estimated to grow at 1mb/d. Also, another factor that has worsened the OPEC market is the
supply by other non-OPEC members in the entire region of North America.
Inventories and Risks to OPEC
OPEC is faced with inventory risks. When there is excess supply, it leads to the rise in
the levels of stocks, and at the same time brings the price down. When the prices decrease, the
country members are not willing to supply the oil products to the market, and this may result in
building stocks. When a stock is built, a vicious cycle comes in. As a result, there will be excess
supply, and the rate of demand will be more than the consumption rate, implying there will be
more stock (Economou, Agnolucci, Fattouh, & De Lipis, 2017). Additional supply will raise the
marginal costs of storage. The additional cost of storage will be reflected in the curve structure, a
concept known as floating storage. In the long run, there will be limitation to storage and this
becomes a market issue.
Saudi Arabia Response and OPEC Cohesion
Before the decline in the price of the oil products, Saudi Arabia was unwilling to reduce
its output, and also indicated that it was comfortable with the quota system. For a long time,
South Arabia has been reluctant on cutting on its oil production (Behar, & Ritz, 2016). The idea
of South Arabia to reduce the output on its own to influence the market prices cannot be received
well by other members in the OPEC. The other members of the organization cannot expect South
Arabia to take such a step. In fact, nobody could realistically expect to see such willingness ever
emerging again
Implementation of OPEC Cut has never been Easy