Summary and Critique of Saudi Arabia and the Oil Market - Essay Example

Summary and Critique of Saudi Arabia and the Oil Market [Name of Student] [Institution Name] [April 22] Table of Contents Summary 3 Paradigm assumptions evident in the article 3 Research problem 4 Summary of research approaches used 5 Methods and procedures 5 Critique 6 References 10 Summary and Critique of Saudi Arabia and the Oil Market This paper addresses Nakov and Nuno’s (2013) “Saudi Arabia and the Oil Market,” an article published in The Economic Journal, which takes both quantitative and qualitative approaches to examining Saudi Arabia and the oil market. Summary Paradigm assumptions evident in the article.Nakov and Nuno’s (2013) article focuses on the impact of the oil market on the Saudi Arabian economy, and the importance of Saudi Arabia to the international oil industry, in terms of its position in dominant and fringe production. The article is based on secondary information to study Saudi Arabia as a dominant oil exporter and competitive fringe oil exporters, as well as economic models for estimating oil exports, market clearance, and balanced growth paths. The materials that the authors use were obtained from books, journals, and articles by other scholars. The article involves both qualitative and quantitative research theories. Nakov and Nuno (2013) base their study on a theoretical and conceptual framework and model that postulates that Saudi Arabia’s position in the oil market cannot be underestimated. The article also highlights the role of the Persian Gulf War of 1990-1991in Saudi Arabia’s role in the oil market. To address the issues that Saudi Arabia is different from other producers and their spare capacity in oil production, the authors have used both quantitative and qualitative design. They also create a model for studying the effects of a proportional tax on oil consumption. In addition, Nakov and Nuno (2013) present graphics that display the failure of oil consumption tax in Saudi Arabia, global oil consumption taxes, dominant oil firms, domestic consumption of oil in Saudi Arabia, and international gains from importing Saudi Arabian oil. They use a qualitative approach to support their arguments. They argue that evaluating the functions of Saudi Arabia in the global oil market is important to understanding international oil production issues. Research problem. The purpose of Nakov and Nuno’s (2013) research is to study and analyze the impact of Saudi Arabian oil production on the global oil market and national economy. Energy is one of the most common needs of modern societies around the world. Oil prices in the global market are highly volatile, with both oil producers and consumers suffering from the fluctuations. Major oil producers, such as the UAE, have duties in maintaining the oil prices. That is, the country has to create a balance between the quantity of oil in the market and the demand in order to stabilize the oil prices. Essentially, stabilizing the oil prices is the key to the stability of the oil industry. The oil statistics of the Saudi Arabia showed that its oil production changed during 1990 Gulf War, but significantly increased since 1990s. The country has been able to maintain its production capacity since. In addition, the oil industry remains a significant contributor of the country’s GDP, even with the presence of the non-oil sector. The oil revenues are actually responsible for the economic growth of the country and its capability to diversify its economy. The oil revenues have been invested on various non-oil sectors for the country’s effort to reduce dependence on oil (Nakov & Nuno, 2013).As a primary source of energy, oil plays a definitive role in the operations of production lines. Given oil’s importance for nations’ development, Nakov and Nuno’s (2013) research is particularly relevant, especially in explaining how oil affects other aspects of countries’ growth. Commercial trade between national oil-producing industries has become central to international trade. Oil prices dictate the value of other commodities in markets. Nakov and Nuno’s (2013) study is important in that it helps readers understand why oil is such a powerful force in international and local markets. The content in the article is presented effectively and explains the terms and methodologies of the studies in a well-structured manner. The study, grounded upon the desire of investigating upon the most important points that make Saudi Arabia an important player of global oil market, especially in reference to the kind of effect has, the desire is basically grounded on the need to note down the implicative reasons behind the strong influence of oil-price fluctuations that are occurring in the international trade directly towards the local market. Summary of research approaches used Methods and procedures: In “Saudi Arabia and the Oil Market,” the authors’ rationale for their quantitative and qualitative research design is clearly presented. Their approach is appropriate, as it allowed the researchers to gain a deep understanding of issues surrounding the oil market and Saudi Arabia. In their literature review section, Nakov and Nuno (2013) use information gained through a close examination of extant work on the current and historical situations of oil markets. They draw connections between elements of influence that have affected oil pricing internationally to explain how price hikes in oil could be managed in the future. They also use several integration tests to assess how factors in the oil production and distribution industries directly affect the oil market in general, and Saudi Arabia more specifically. These tests are designed to measure Saudi Arabia’s position and her ability to increasing the level of production of oil to remain in her position. Nakov and Nuno (2013) use historical data and review secondary data collected by other researchers. The main issue that they address is the fact that the oil production and distribution industry is currently controlled by a monopolistic business structure. Saudi Arabia controls most of the industry, including with regard to how particular markets are involved and how prices are determined. With this in mind, alliances have been formed in form of Organization of the Petroleum Exporting Countries to make sure that price control is given proper attention, especially in oil distribution operations in the international market. However, even if its production capacity increased due to its exploration and development efforts, the country has to adhere with the assigned quota of the OPEC. As a member of the OPEC, the UAE has to adjust its oil production based on the assigned quota. This also means that oil production could vary annually as a result of the quota stipulated by the OPEC. This control of oil production by OPEC is essential in maintaining the oil prices in the global market. The trends in pricing of both crude oil and gasoline offer a clear indication of how oil prices affect all aspects of the world’s economy. Understanding the factors involved in high oil prices requires a more refined understanding of the fact that human society will at some point consume more oil than is being produced. Low oil production levels have occurred since 2000, causing problems in the international market. Saudi Arabia is not only the largest producers of crude oil in the world, but it also produces different varieties of crude oil ranging from super light crude to heavy crude. Organizations that require oil as an energy source for their production processes suffer the most when oil prices increase. The primary industry that is affected is the food industry. Oil is required to process food products, and so oil price increases directly affect the end products released to the market. This is only one example of the direct effects of oil prices on markets. Nakov and Nuno (2013) explain that oil price fluctuations caused several problems in the international market during the mid-1970s. Impending problems in the oil industry continue to influence current international issues, especially in how they directly influence the pricing of products and basic commodities needed by societies for survival. Critique This section discusses Nakov and Nuno’s (2013) article in terms of the authors’ presentation and communication skills. These skills are of great importance in today’s world. It lays a solid foundation to the new study on the oil industry. Even if the research in a paper is highly innovative and important, its value can be lost if its ideas are not clearly communicated. Nakov and Nuno’s (2013) presentation is concise and to the point, and avoids highly technical details. This makes it possible even for people without particular knowledge of the subject to follow and understand their work due use of simple language. For a study to be trustworthy, it must be credible, transferable, dependable, and confirmable. “Saudi Arabia and the Oil Market” is credible because it presents well-developed research that utilized relevant secondary sources, studied topics within appropriate parameters, and arrived at the expected results. This was also made possible by the researchers’ prior knowledge of the oil market. The research was conducted for the purposes of interpreting, discovering, and developing materials for the advancement of knowledge on the oil industry. The results in the essay are strengthened through the use of relevant visual aids (graphs), which not only make the paper more interesting but reinforce the authors’ points. The authors also use sensitivity analysis models, which provide limited information to readers who wish to develop their own sensitivity estimates of the parameters considered.Baffes (2007) reports similar findings in a study of energy-intensive companies, and notes that varied approaches to sensitivity analysis measures pose a great challenge for conducting empirical evaluations of disclosures. The findings were summarized with appropriate use of tables and figures. Similar issues forced Glosten, Jaganathan, and Runkle (1993, p. 1789) to construct simulated earnings sensitivity measures from historical quarterly earnings and oil prices. This had limitations, in that it could not capture the flexibility of managers to choose models and relevant parameters for computing earnings sensitivity. The graphical presentation means that readers will get the gist of the article without reading the entire article Nakov and nun’s (2013) research paper analyzes the effects of the oil market on Saudi Arabia and its oil production. It suggests that taking a regulative approach to controlling oil prices is essential, especially with regard to the development of nations that are struggling to embrace the effects of globalization. The research questions of the article are clearly and articulately presented, and readers can easily understand the purpose of the article. Nakov and Nuno (2013) start their paper by defining the intent of their study. The article uses sampling methods that increase the validity and reliability of their findings by preventing methodology bias. The particular aspects addressed by Nakov and Nuno (2013) and the focus of their and research has been addressed in this section. It is notable that the authors concentrate on defining what oil prices are, what their impacts on the general market are, and what could be done to control them. The article explores every possible approach to determine the definitive causes of developments that could determine the effects of the oil market and how it affects Saudi Arabia. In presenting their recommendations to develop controls over the operations of the oil production and distribution industry, the authors suggest comprehensive solutions, explaining which adjustments should be given attention. Oil prices, like other product prices, often fluctuate with demand and supply. Having a well-developed understanding of how the elements of supply and demand affect the stability of oil prices in modern commercial industries will enable corporations to keep the prices of other commodities at reasonable levels. Oil price shocks are mostly the result of failures made by developing countries as they follow the path toward development. The approaches to operating in international markets that most countries have embraced mean that oil prices have a great deal of power and control over transactions and economic development. During the two decades of the 1990s and 2000s, it has become evident how fluctuating oil prices have affected all industries and the modern approaches of businesses engaged in development. Economic experts have pointed out that different elemental factors contribute to oil pricing fluctuations and are the core reasons for related changes in markets (Askari and Krichene, 2008). Bernanke, Gertler, and Watson (1997) have identified the core reasons for such fluctuations as the political and social situations of the countries distributing oil. The distribution capabilities of these nations also involve the levels of demand of other developing countries and their own energy needs (Bernanke, Gertler, and Watson. 1997 pp.145). As industrial developments fuel ongoing processes of globalization, the oil industry is crucial to countries’ advancement. Notably, transportation, food production, and industrial operations that produce and distribute items all use energy, 48% of which comes directly from oil-based products (Brook, Price, Sutherland, Westerlund, &André, 2004). In this regard, it can be understood that while oil production has been halted by past conflicts in Middle-Eastern countries, increased demand created by oil consumption around the globe has led to raised oil prices in the international market (Hamilton, 1996a). Higher prices should level the balance of distribution, and hence control the operations of developing countries and the developments that they hope to make for their nations and their people. This can cause stagnation in national growth, if countries do not have enough sources of national funding to support their industrialization needs, leading to disparities in the social structures of global development (Hunt, Isard, & Laxton, 2002, pp. 93). All of the information in Nakov and Nuno’s (2013) article is up-to-date and drawn from relevant literature. All of the authors’ major findings are interpreted and discussed within the context of prior research or the study’s conceptual framework. Their interpretations are consistent with their results and the study’s limitations are addressed. Their paper addresses the issue of generalizing findings. . References Askari, H., & Krichene, N. (2008). Oil price dynamics (2002-2006).Resources Policy, 30(5), 2135-2153. Bernanke, B., Gertler, M., &Watson, M. (1997). Systematic monetary policy and the effect of oil price shocks. Brookings Papers on Economic Activity,1, 91-142. Brook, A., Price, R., Sutherland, D., Westerlund, N., & André,C. (2004). Oil price developments: Drivers, economic consequences and policy response, OECD Economics Department Working Papers no. 412. Retrieved from Creswell, J. (2013). Research design: Qualitative, quantitative, and mixed method approaches. New York: SAGE Publications. Glosten, L. R., Jaganathan, R.,& Runkle, D. E.(1993). On the relation between the expected value and the volatility of the normal excess return on stocks. Journal of Finance,48, 1779-1801. Hamilton, J. (1996a). Analysis of the transmission of oil price shocks through the macroeconomy(Unpublished paper). University of California, San Diego. Hamilton, J. (1996b). This is what happened to the oil price-macro economy relationship. Journal of Monetary Economics, 38, 215-220. Hamilton, J. (2000). What is an Oil Shock?(National Bureau Economic Research, Working Paper 7755, and Retrieved from Hunt, B., Isard, P., &Laxton, D. (2001). The macroeconomic effects of higher oil Prices, IMF Working Paper, January (14). Hunt, R., Isard, P.,& Laxton, D. (2002). The macroeconomic effects of higher oil prices. National Institute Economic Review No. 179 (January), pp. 87–103.. Nakov, A.,& Nuno, G.(2013). Saudi Arabia and the oil market. The Economic Journal, 123, 1333-1362 Zakoian, J. M.(1994).Threshold heteroskedastic models. Journal of Economic Dynamics and Control, 18, pp. 931-955. Read More