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Economic (OPEC Project) - Research Paper Example

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The price band was a mechanism to keep the basket price between US$22 and US$28 for every barrel of oil. The price band was like an indicator. OPEC would cut down their oil production if it was seen that the oil prices were below the…
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Economic (OPEC Research Project)
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Economic (OPEC Research Project) Table of Contents What Is Meant By the Term ‘Oil Price Band’? 3 Five Factors That Effect the Demand and Supplyof Oil 3
Can OPEC Control the Oil Supply? 5
Why is the World so Dependent on Oil? 5
What does OPEC have to gain politically by Controlling the Production of Oil? 5
Despite the Glaring Problems of World Industries Being Almost Completely Dependent on Oil, Little Has Changed in Their Federal Government’s Energy Policy. Why? What Changes, If Any Should Be Made? 7
References 8
What Is Meant By the Term ‘Oil Price Band’?
The price band was adopted by OPEC in 2000. The price band was a mechanism to keep the basket price between US$22 and US$28 for every barrel of oil. The price band was like an indicator. OPEC would cut down their oil production if it was seen that the oil prices were below the lower price band for ten days. OPEC would increase oil production if the oil prices were above the upper band continuously for more than twenty days (Mabro & Organization of Petroleum Exporting Countries, 2006).
State Five Factors That Effect the Demand and Supply of Oil
The five factors that effect supply of oil are the following:
The low level of oil supply is due to less investment in construction of refineries and infrastructure development
The fact that after an oil site is discovered it takes almost eleven years before it can be used for oil production is another reason for the low supply
The large oil companies are facing problems in replenishment of their oil reserves
Geopolitical risks also contribute to the low oil supply
The improvement in drilling equipment has made oil drilling easier
(Elekdag, 2007)
The demand for oil depends on the following factors:
The growth in emerging countries is increasing the demand
The non-availability of other cheap alternatives is increasing the demand for oil
The high economic growth and increase in economic activities of various nations is also a reason for the increased demand for oil. The estimate of global oil demand are 120,000 barrels a day
The variations in the exchange rate of US dollar can affect the demand of oil. This is because oil price is based on US dollar. The change in the value of dollar and how the currency of the importing nation is adjusted with the value of dollar determines the price and hence the demand for oil (Elekdag, 2007)
The increase in population is increasing the oil demand (Elekdag, 2007)
The increasing number of vehicles worldwide is also increasing demand for oil (Elekdag, 2007)
Can OPEC Control the Oil Supply?
OPEC try to maintain stability in oil supply by decreasing or increasing the amount of oil its member countries produce. They have spare capacity of oil production. OPEC has 80% of the oil reserves in the world. This enables them to supply oil to meet increased demand (Organization of the Petroleum Exporting Countries, 2010).
Why is the World so Dependent on Oil?
The economic growth in many countries is enhancing the demand for oil. The world is dependent on oil as an energy source because alternative sources of energy are not available and those that are available are expensive. United States leads in oil import. The increasing number of vehicles and increase in population has increased the demand for oil (Elekdag, 2007).
What does OPEC have to gain politically by Controlling the Production of Oil?
The world’s most powerful countries are dependent on OPEC for their oil supply. OPEC has oligopoly in the oil market. They have an impact on industrial society. They have a big role to play in the economic development of nations. Their power is demonstrated by the fact that the economies of the world will come to a standstill if they stop their oil supply. They can use this fact for their political advantage to increase their power and control the powerful economies of the world (Goodlaw & Et. Al., 2003).
Despite the Glaring Problems of World Industries Being Almost Completely Dependent on Oil, Little Has Changed in Their Federal Government’s Energy Policy. Why? What Changes, If Any Should Be Made?
The Federal government has not been able to change their energy policies because the dependence on oil of these countries has not yet been reduced. Alternative sources of energy are not available. The energy policy is a sensitive issue and thus they could not afford to bring about a major change that could result in difficult situations (Obama Biden, 2010).
The Federal policy should be reviewed. Overdependence on oil makes the country vulnerable and threatens national security. Alternative sources of energy like biofuels should be used. Independence in terms of energy needs is the need of the hour (Obama Biden, 2010).
References
Elekdag, S., (2007). Supply-Induced Oil Price Hike. Oil Price Movements and the Global Economy: A Model-Based Assessment. Retrieved Online on December 24, 2010 from http://www.google.co.in/url?sa=t&source=web&cd=1&ved=0CBoQFjAA&url=http%3A%2F%2Fciteseerx.ist.psu.edu%2Fviewdoc%2Fdownload%3Fdoi%3D10.1.1.150.7823%26rep%3Drep1%26type%3Dpdf&rct=j&q=Oil%20Price%20Movements%20and%20the%20Global%20Economy%3A%20A%20Model-Based%20Assessment&ei=EDUUTbPvIoe0rAf1vLWRDA&usg=AFQjCNGWEAKusBcqIjyICIAkC07HP40U3g&sig2=sOc5QExfXQWGXe7wo_CW-w&cad=rja
Goodlaw, M. & Et. Al., (2003). OPEC and the Oil Market: An Economic Analysis of OPEC Power. Organization of the Petroleum Exporting Countries (OPEC) and Opportunities for Sustainable Development. Retrieved Online on December 24, 2010 from http://culturesocietypraxis.org/index.php/csp/article/viewFile/16/13
Mabro, R. & Organization of Petroleum Exporting Countries, (2006). Oil in the 21st Century: Issues, Challenges and Opportunities. Oxford University Press.
Obama Biden, (2010). Short-Term Solutions: Immediate Relief from Pain at the Pump. Barack Obama and Joe Biden: New Energy for America. Retrieved Online on December 24, 2010 from http://www.barackobama.com/pdf/factsheet_energy_speech_080308.pdf
Organization of the Petroleum Exporting Countries, (2010). Can OPEC Guarantee the Security of Oil Supplies? About OPEC. Retrieved Online on December 24, 2010 from http://www.opec.org/opec_web/en/press_room/178.htm Read More
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