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OPEC's Influence on Global Oil Prices - Doc

   

Added on  2020-03-16

11 Pages3606 Words36 Views
TOPIC:HOW MUCH CONTROL DOES OPEC HAVE OVER THEPRICE OF CRUDE OIL?

Executive SummaryIn this paper, we will examine the degree of control OPEC have over the price of crude oil price.....Introduction (Overview of the Problem)The Organization of Petroleum Exporting Countries (OPEC) is one of the biggest oil exporting nations. InSeptember 1960, OPEC was created in Baghdad by its founding members: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Currently, OPEC Membership group consist a total of 14 Member Countries: Algeria, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela. Main objectives of OPEC is to coordinate the petroleum policies ofits members, and to provide member states with technical and economic aid. OPEC aims to manage the supply of oil in an effort to set the price of oil on the world market, in order to avoid fluctuations that might affect the economies of both producing and purchasing countries. The oil market sentiment and prices can be strongly affected by all the decisions made by OPEC and how they implement it’s deal and agreement with other members. OPEC agreement usually consist setting up different level of ceiling for individual member’s total production and distributed through a quota system.Production ceiling is being adjust and change from time to time based on the latest assessment of world oil market fundamental. However, all members are expected to comply and abide with the agreement once the ceiling is set. It is important for all members to comply with the agreement as the level of compliance can strongly influence the price of crude oil. Hypothetically, the higher level of compliance often resulted in higher crude oil price whereas lower level of compliance usually decrease crude oil priceand leads to more volatility. This paper will be divided into four parts: Part One. of the paper will outline the hypothesis at the back of this research analysis. Definition of compliance and formula in how to calculate the rate of compliance will be discussed in Part Two. Part Three. will testify the assumption behind the analysis by analyse compliance level during OPEC’s production cut. Part Three. is outline possible alternative cause and disprove the cause. Lastly, the result will be given in Part Four.

Finding:1.Hypothesis-OPEC production’s cut drive crude oil price.-The compliance rate from all OPEC members and crude oil price have a correlation. -The decision of compliance level from all OPEC members have an effect on crude oil price. While compliance level are high, crude oil price are going upward whereas while compliance level are low, crude oil price are facing downward. 2.Definition of Compliance and Calculation FormulaThe following is a formula for compliance rate calculation that we are using for this analysis. Compliance Rate Calculation = (Total OPEC Crude Oil Production - Total Production Ceiling)_______________________________________________________ Total OPEC Crude Oil Production3.Testify the HypothesisIn order to testify the hypothesis and address the key question “How much control does OPEC have over the crude oil price?”, we will examine on OPEC’s members actual production level; production ceiling and compliance rate. Since 1980 until now, OPEC’s has made a decision on production cut in 2016, 2008,2001, 1998, and 1970s) (Wurzel, Willard and Ollivaud 2009). However, different time period will have different level of compliance.

Figure 1.Figure 1. shown a graph of OPEC’s total actual production and total production ceiling during the year of 1980 to 2016. According to the graph, we can see the total actual production level is showing a strong upward trend. On the other hand, the total production ceiling is showing a downward trend.Figure 2. (See Appendix for calculation)As is evident from the above figure, which plots the changes in the nominal price levels of oil and the compliance rate of the countries simultaneously, there is roughly a positive relation between these two variables. The overall nominal price levels of oil is seen to be remaining more or less constant with very moderate fluctuations between 1983 to 1999. The prices however fell a little in the year 2001, with the level consistently rising after that, the levels reaching a striking high in the year 2008 (Colgan 2014). The price however fell drastically in 2009 before rising again from the next period. The rise in nominal price of oil is seen to be consistent till 2013and the price fell moderately in 2014. However, there was a huge shock in the price levels as the price drastically fell in the year 2015 and till the recent times the nominal price level of oil is keeping near this relatively lower level (Key and Villarroel). However, unlike that of the nominal price of oil, which shows substantial fluctuations over time, attributed to different factors playing in the global oil market scenario, including both the OPEC and the Non-OPEC players, the compliance rate, as shown in the above figure, has maintained a rough positive

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