The Impact of Oil Prices on Economies of OPEC Countries - Essay Example

The impact of oil on OPEC Countries Introduction It is no doubt that oil is the biggest source of business in the entire world, and America is one of the biggest consumers of oil – as America provides its public with oil at a cheaper cost than other countries. It shows that the "oil weapons" is something that could be utilized to stop the surge of the much-required oil to the worldwide markets, particularly to OPEC nations1. This could possibly comprise a wide range of measures that purposely stop or terribly ‘rationalize’ the flow of oil from the oil producing states to the Main Centers. Every time the OPEC states witnessed unpredictability and chaos, the result (shown in diminishing supplies of oil-to-consumer-nations, see figure 1) is moved to related nations with the similar consequences and to those nations’ economies powerless without oil exponentially. Saudi Arabia, as the worlds largest oil exporter, and the other members of the OPEC have plunged the ‘oil weapon’2 and changed their group into a central bank for the worlds oil. Claude Mandil, executive director of the IEA, who in 1975 set up at Kissingers proposal in response to the Arab oil embargo, said: "They probably understood that they shot themselves in the foot, and that is why the oil weapon has never been used again” (APS Review Downstream Trends 2003). The IEA brought the worlds chief oil customers together to counter the OPEC influence. As with any interest group, OPEC’s ability to seize the oil prices beyond the competitive stage is reliant on blockades to enter, which in that case hinge upon OPEC’s leading rights and power of economical oil reserves. Some 75 percent of the world’s confirmed oil reserves are to be found in OPEC countries (APS Review Downstream Trends 2003). Just take a look at the history of OPEC oil production: (Figure: 1, source:http://www.wtrg.com/prices.htm) Research Objectives OPEC countries hold world’s largest Oil Reserves The impacts of oil on OPEC states Supply and Demand Issues OPEC ability (or inability) to seize Oil prices Worries over the usage of ‘oil’ in OPEC countries Research Aims What are the roles of OPEC Countries? What is the American reaction to OPEC Countries? Is soaring oil prices really impact the OPEC Countries? What are the economic conditions of OPEC Countries and their dependence on oil? Are OPEC States well-aware of sky-rocketing oil prices? Research Methodology: The purpose of this research paper is to study the overall impacts of oil on OPEC countries. So this research paper can therefore be thought of as an exploratory study that deals with the overall economical issues that OPEC countries face in the world economy. This research will follow a quantitative approach and the data will be accessed from the internet or available literature. The collection of quantitative data is essential for developing a stronger academic framework. In this particular section, I shall focus on all the research aims and objectives mentioned above. How the oil started to play the role of a powerful fist into the face of the OPEC nations for which it was intended to be used. The Arabs started the use of oil weapons after seeing that “playing” with the supply and price of oil could wreak havoc on the world with the most alarming situation. The Arab countries found that oil was a means of getting their way to global level. Oil was the water for the “hungry beast” of economic development all over the world. However, all the factors were not in the favour of OPEC countries, since the prohibition upon the U.S. gave an opportunity (in disguise) to the Americans to see other options for the required energy sources. Whilst meeting that demand is handy, assuming an extent of collaboration from the oil-exporting nations that are already members of OPEC, pleasing the OPEC’s estimation of demand for 2030 of 125 million barrels per day seems more of a stretch. Jeroen Van der Veer, the chief executive of Shell, thinks the world will most likely start using two times as much as energy by 2050 (MTOMR 2007). Table: Oil demand and OPEC crude supply in the higher growth scenario mbpd 2010 2015 2020 2025 2030 World demand 90.5 98.9 107.4 116.3 125.8 OPEC crude 30.7 35.2 40.7 47.5 55.3 (Source: http://www.opec.org/) However, the question remains: can the ‘oil weapons’ hammer the OPEC states today? Worries over the possible usage of the oil weapon are part of varied concerns about the safety measures of oil supplies. This supply could be equally involved by technological mishaps, like hurricanes, fanatic attacks on oil facilities, civil turmoil in oil producing states of exporting nations, stoppages to spend at a suitable rate in exploration, progress, or production, and an early influx of a production peak (Taylor & Peter 2001). Given all these possibilities, the oil weapon should not be the single, or even the most important, apprehension – for even if it is instigated, it cannot be sustained. United States, Europe, and Japan all are desperate to lessen reliance on oil for both safety and ecological reasons. As Taylor & Peter (2001) suggests the ways that have been projected are dual: fuel replacement for nuclear or more competent usages of energy. Some advancement has been realized on both fronts. But the cutbacks required mitigating the worlds dependence on oil from Iran, Venezuela, and other OPEC states are further than what can be gained in the short or medium-term (Taylor & Peter 2001). A lessening of reliance on oil importations in the U.S., European Union, and Japan is beyond their reach for the simple reasons that a state ‘bringing in’ 12 million barrels per day (the U.S.) would not be less susceptible to a supply predicament if it managed to decrease its importation volume to 9 or 10 million barrels per day. Only a technological revolt in the fuelling of vehicle engines could slay the hunger for oil in these nations, and this probably does not take place for no less than the upcoming twenty years. Whatever happens, there is a reliance paradox: dropping the volume of oil import does not diminish openness to an oil supply jolt, providing these volumes remain fairly important. Literature Review The importance of this particular situation is judged by the fact that the economies of most OPEC countries depend on oil imports, while a disruption in supply from the exporters can create havoc in such nations (Lovins 2005). America can too predict a shut down in transport, air travel, and food supply, if the oil imports are not met due to the oil supply crisis. With well researched and abundant facts available in Lovins’ work, Winning the Endgame, it is portrayed how consumers owe to the Gulf countries, which are indispensable as they contain 65 percent of the world’s total oil reserves (Lovins 2005). In addition, out of all the Gulf countries, Saudi Arabia is single-handedly the biggest oil supplier to the U.S. The significance of ‘oil weapon’ in the policies of rapid development, or expansion of the manufacturing industry, and exponential personal use through automotive demand is of the utmost concern. A particular government’s stability in the developing countries depends on its ability to provide a cheap energy source. The strategic domination over the oil supplies by the U.S. enabled OPEC countries to change the ways in which they would like the U.S. to react to their assertions. However, the U.S. proved its success in rendering the oil weapon useless when it was first used against it in the 1950s and 1960s by its ability to setback its domestic oil needs, and even export some oil to France and Britain (Stork 1975, p. 211). The Arabs are not familiar with the in-depth of their working economy, but they understood the supply demand relations very well. Hence, they understood that if they stopped the supply, then demand (along with prices) would rise (p. 212). As Americans find the weapons of mass destruction in the Middle East areas, they know how much destruction can occur in their home country if the Arab sheikhs become annoyed. Terrorist threats are also a matter of concern for the OPEC countries’ infrastructure of oil refineries and extraction (Aarts 1998). The oil resources are bound to shrivel up, but it will be intriguing to see how and with what impacts it occurs. Now, it is more than thirty five years since the Arab Oil crisis of 1973 occurred – the Oil Embargo was only one episode in a huge series of oil wars. For instance, in the Suez Crisis of the 1950s, the Six Day War in 1967, the aforesaid Arab Oil impediment of 1973, the Revolution in Iran, the war of Iran and Iraq, and the Gulf War (Aarts 1998). Because oil can be used to buy arms and other sophisticated weapons to fight biased wars, the fulcrum of global harmony took a deep hit. Economists have discussed and experienced a variety of theories about the role of OPEC nations in wielding its influence on the marketplace, whether through the self-governing projects of individual associates, via actions and plans commenced by semi-autonomous alliances functioning within the huge groups, or through combined plans cuddled and carried out by the organization en bloc (Francisco 2004). One can ask whether OPEC has ever controlled to work effectively in the way of a typical ‘interest group’. No matter what are one’s estimations on those issues, there is no debate on that OPEC nations have limited production in approaches that are not related to the domestic dearth of oil (Francisco 2004). Even though OPEC’s confirmed oil reserves were progressively increasing during 1973-1985, manufacturing was incised by almost 50 percent in that period, diminishing from 31 million barrels per day (mbpd) in 1973 to a record low-priced of 16 mbpd in 1985 (Francisco 2004). These days, OPEC goes on to grasp production of crude oil below the level of 1973, even though the confirmed reserves of OPEC nations have doubled in quantity since then and global consumption of oil has grown by approximately 50 per cent. Hence, oil reservation and study on the alternative oil strategy, and renewable energy sources began (Taylor & Peter 2001). In addition, the U.S proved (see figure 2), by sustaining belief, that the oil weapon used against it could not deter its assertions (it should be noted that during the embargo, oil supplies did reach America, although indirectly through non-OPEC countries). In the same article, Taylor & Peter (2001) presented an exemplary number of points based on the thought that the fear of an oil supply cut off is in fact filled only with false air. If the Middle East countries impose a decrease in their oil production, they will suffer more in time, since oil is their only commodity; and even the world’s greatest powers see towards Arab countries for help. Without oil, there is no other source of foreign revenue for these countries. (Figure: 2, source: http://www.wtrg.com/prices.htm) There is no possible way that the oil exporting countries will accommodate a cut at this moment of rapid development due to the oil revenues generated. Arabs understand that the oil embargos of the past were a mistake and that it would not be economically prudent for them to bereft Americans of oil sources. World sum oil production remains on a summit level since 2006 and is predict to plunge this summit level in the midst of 2009. As per IEA, the present high production of 86.13 mbpd took place on July 2006 and after only one year, June 2007 total oil production chop down to an unpredictably low 84.50 mbpd. A good raise equal to 85.10 mbd cropped up for September 2007 (MTOMR 2007). On condition that demand keeps on rising then prices will also go on mounting. World oil forecast and rent condensate production keeps hold of its 2005 height (see figure 3). The prediction to 2100 explains deteriorating oil and lease condensate production, using a bottom up estimate to 2012. The prediction to 2012 explains a 1% per year turn down rate to 2009, pursued by a 4% per year turn down rate to 2012 (Khebab 2007). (Figure: 3, source: http://www.wtrg.com/prices.htm) Saudi Arabia keeps hold of its 2005 oil and lease condensate summit, which is exactly equivalent of the summit year for world oil and lease condensate. Saudi’s oil and lease condensate manufacturing has plummeted to 8.6 mbpd which is 1 mbpd less than its summit in 2005 (Khebab, 2007). It is now nearly a conviction that it approved high oil and lease condensate manufacturing of 9.6 mbpd in 2005 (Khebab 2007). Kuwait keeps hold of its 2006 negligible oil and lease condensate summit. Kuwait oil and lease condensate manufacturing has now plummeted to 2.5 mbpd which is lower than its summit in 2006 (Khebab 2007). There is a probability that Kuwait has approved its negligible 2006 summit. Kuwait’s chief summit was 3.3 mbpd in the year of 1972 (Khebab 2007). UAE also holds on to its 2006 oil and lease condensate summit. UAE oil and lease condensate manufacturing has now plunged to 2.6 mbpd which is just lesser than its summit in 2006. Once again, there are great possibilities that UAE passed its 2006 summit (Khebab 2007). But the question remains lingering over the heads that is future total oil production expected to go beyond the summit of 86.13 mbpd on July 2007? It might be likely but it comes out to be dubious. Preservation in the North Sea would be chiefly liable for the huge plummet in Norway’s manufacturing. After the preservation is over, its productions have to augment in the next few months but then its production should pick up where they left off its decline. Mexicos production is in complete rejection now. Ex-USSR production might augment by a diminutive amount. Canadas manufacturing must rise leisurely but the oil sands are experiencing manufacturing restraints and even with asserted reserves of equal to 315 GB (billion barrels), the oil sands will most likely manufacture, at best, an utmost of only 2.5 mbpd. Bio-fuels manufacturing must carry on rising (Khebab 2007). Non-OPEC entire oil production might boost gradually, assuming that no ‘shocking chaos’ takes place. As world sum production is predicted to decline to 2012, two significant effects are prone to take place: Firstly, as demand is predicted to boost, prices are predicted to go up, using short and long run price elasticity, which will compel demand down to equivalent supply. And secondly, the reduced available supply may appeal to the “IEA Response System for Oil Supply Emergencies” (MTOMR 2007). Sudden supply diminutions could prompt oil rationing amongst the 26 countries which are participants to this IEA Response System, but unluckily China, Russia, India and Brazil, which are not participants, are extremely dubious to concur to the IEA’s rationing method (Khebab 2007). The ensuing worries, from oil supply deficiencies, among the participants and non-participant states could direct not only to non-stop ‘bloodthirsty’ oil bidding, but also to continuous clashes and violence so as to secure very important oil supplies. Higher prices have already given a boost up to oil-rich Alaska, which in September 2007 lifted the yearly oil share rewarded to each man, woman and youngster living there for a year to $1,654, a boost of $547 from previous year (Steven Mufson 2007). In other states, higher prices make larger spurs for following non-oil energy developments that once might have seemed too costly and upset income at energy-intensive corporations like airlines and chemical makers (Steven Mufson 2007). With oil prices are now nearing $100 per barrel, there is no ending in sight to the redeployment of over 1 percent of the worlds gross domestic product (GDP). Previous oil upsets caused colossal shifts in wealth and pools of petrol-dollars, but they sooner or later washed out and markets adjusted (Steven Mufson 2007). This new best moment in petroleum prices has here for more than four years, and several consider it will stand for a new ‘flat terrain’ even if prices lag behind rather in the upcoming months. Two of those countries – Iran and Venezuela – may be better capable of confronting the Unites States government owing to the bulge of oil revenues. Venezuela has exercised its oil wealth to give out benefaction around South America, competing for control even with long-standing U.S. cronies (see figure 4). (Figure 4, source: http://www.wtrg.com/prices.htm) And, in contrast, Iran could be less susceptible to sanctions premeditated to force it into renouncing its Nuke program or opening it to scrutiny (see figure 5). (Figure 5, source: http://www.wtrg.com/prices.htm) The worlds leading oil producer and exporter, Saudi Arabia, is now using its invigorated oil resources to construct four cities. Developments like these are planned to polish the countrys representation, build up a non-oil financial system and produce enough employment services to uphold social constancy (Bronson Rachel 2006). America’s financially viable preeminence, which justified more than 50 percent of the entire world’s industrialized production after World War II, has been gnarled. U.S. continued existence now relies on the inflow of $3 billion a day of currency overseas to back its shortfalls and its hostilities (see figure 6). (Figure 6, source: http://www.wtrg.com/prices.htm) The 2005 balance of payments dearth drawn near to $800 billion and is now on course for $1 trillion yearly. To pay compensation for this paucity in financial might the American Empire is ever more course-plotting at armed force (Bronson Rachel 2006). The only solution now for the OPEC countries is to conserve the rest of the oil and search for alternative sources of energy for the future generations. This can, at least, prolong their existence on earth for a longer period. It would be overly optimistic to anticipate a new technological change that could replace oil in the future for the entire world. Summary Finally, the whole summary is that, since 1973, OPEC countries have failed to hold its position. This was a start for OPEC formation and made a base for oil weapon formation as we have seen earlier. However, the Arabs, though having a strong position, as their oil weapon weakened before western power, needed military and technical helps. This brought a dramatic change, as the Saudi government yielded to U.S. power. The point lies now whether the oil weapon has remained as powerful as before or if it has weakened with time. After the 1973 crisis, the oil embargo, the Arab-Israel war, and then the Iraq invasion, OPEC policies have been upset. Now, time will tell whether there is any future for the Arab oil weapon in the coming centuries. Future policies will be distributed in terms of their effects because developing countries will lead in producing and supplying among themselves (which will witness an increase in their demands for oil) and America. However, the American shift in paradigm toward alternative fuels also causes some concern in OPEC countries that can see America’s demands lessen over a period of time. References Parra Francisco. 2004, OIL POLITICS: A Modern History of Petroleum, I.B. Tauris & Co. Ltd. Joe, Stork. 1975, Middle East Oil and the Energy Crisis, Monthly Review Press. Lovins Amory B. 2005, Winning the Oil Endgame, Innovation for Profits, Jobs, and Security, Published by Rocky Mountain Institute. Rachel, Bronson. 2006, Thicker Than Oil: America’s Uneasy Partnership with Saudi Arabia, Oxford University Press. Paul Aarts. 1998, Emirates center for strategic and researches, 34 edition, in Paul A. Samuelson and William D. Nordhaus. 1995, "ECONOMICS", 15th Ed, McGraw Hill Medium-Term Oil Market Report (MTOMR) July 2007, Oil Market Report by International Energy Agency. Taylor Jerry & Peter VanDoren. 2001, “Oil Weapon Myth”, [Online] Available at: http://www.cato.org/research/articles/taylor-011206.html Bahman Aghai Diba. Feb 15, 2006, "Iran Oil Bourse and Petrodollar Wars", [Online] Available at: Http://www.iranian.ws/iran_news/publish/article_13228.shtml. Steven Mufson, November 10, 2007, “Oil Price Rise Causes Global Shift in Wealth, ran, Russia and Venezuela Feel the Benefits”, Pg. A01 [Online] Available at: http://www.washingtonpost.com/wp-dyn/content/article/2007/11/09/AR2007110902573.html Khebab. September 22, 2007, “Peak Oil Update Production Forecasts and EIA Oil Production Numbers”, [Online] Available at: http://www.theoildrum.com/node/3001 APS Reviews Downstream Trends, July 2003, [Online] Available at: http://www.thefreelibrary.com/APS+Review+Downstream+Trends/2003/July/28-p5205 Read More