Petroleum economcs and project management - Assignment Example

OPEC’s first price band mechanism was developed at its 109th meeting of its Conference in March 2000. This mechanism directs that the price of a barrel will range between $22-$28 in order to balance the needs of both the consumers and producers. This method has ensured that OPEC’s role in stabilizing the market is successful because since its inception, the average price of a barrel has been $25.30 per barrel. However, this price band mechanism states that 500,000 barrels per dollar should be added to the market in instances where prices rise above $28 per barrel.

This is to ensure that cartels in the industry do not take advantage of high prices and create a shortage hence destabilizing the market. (Alvaro, 2003) As part of its role in ensuring stability in the oil market, OPEC is supposed to deal with shortages that arise from political instability in oil producing areas that may lead to sprawling up of prices. For instance the 2000 September 11 incidence in the USA followed by war in Iraq lead to ‘war premium’; a speculation of oil shortage due to effects of war.

Therefore as part of its role in ensuring stability, OPEC convened a consultative meeting to discuss on the ways of countering the looming shortage. This conference was aimed at finding ways in which OPEC could provide assurances to the market that its member countries have the capacity to overcome any shortfall that may occur due to war in Iraq. During the conference, it was agreed that member countries raise their outputs to maximum to meet the market needs and at the same time reduce actual production so as to ensure the threat of over-supply during the season of low demand.

(Edmund, 2006) Also, OPEC must demonstrate its commitment to ensuring that the prices do not rise and fall unstably. For instance, in the wake of the price weakness that followed the tragic bomb in September 11 and the war in Iraq, OPEC used the price band strategy in