Organization of Petroleum Exporting Countries - Research Paper Example

OPEC Organization Research Paper Outline 1.0 Introduction 2.0 Purpose 3.0 Research Question 4.0 Literature Review 5.0 Evaluation 6.0 Theoretical Study 7.0 Hypothesis 8.0 Design Methodology 9.0 Data collection 10.0 Data Analysis 11.0 Interpretation 12.0 Data presentation 13.0 Recommendation 14.0 Comparison of Evidences 15.0 Hypothesis Test 16.0 Conclusion Abstract OPEC is an acronym of the Organization of Petroleum Exporting Countries. The organization was founded in 1960 with its pioneer member states comprising of Iraq, Saudi Arabia, Kuwait, Iran and Venezuela. The main objective of the formation of OPEC was to be able to defend the economic interests of its member states. The first strategy to achieve its objectives was to control international oil prices and enforce standard international oil export regulations. The second objective was to ensure appropriate supply of petroleum products to various countries all over the world. In the present day, OPEC has member states adding up to twelve. Even though OPEC came into existence in 1960, it did not have control over oil prices and production until the year 1973. OPEC was then able to make decisions concerning oil production unlike in the past when productuion of oil was at the discretion of oil companies. By deciding on the amount of oil to produce, OPEC determines oil revenue and controls oil export related tarrifs. OPEC set the standard pricing policy during the 1970s by using the crude oil prices from Saidi Arabia, being the leader in the market. All member states of OPEC followed the Saudi pricing standard. 1. Introduction This design paper is a detailed study concerning the challenges that OPEC has had to deal with in the past as well as in the current state. It covers the issues related to OPEC formation and management, and the mandate of OPEC in relation to international policies, and the real influence of OPEC in the global oil market. Lastly, this paper will deal with the strategies of OPEC in mitigating the present variations of oil production capacities among the non-member states such as Brazil and United States of America. It has appeared that the oil fields for OPEC states have been on the decline. This paper will mainly focus on the research problems and appropriate solutions to the hypothesis on the current OPEC position and future emerging challenges facing OPEC states. In the broader picture, the paper will discuss the effects and nature of the international relationship policies and including trade barriers among the OPEC member states. It will involve the use of primary data as well as reviews of secondary information from external sources such as periodical journals. 1.1. Purpose This paper is interested in using the review and study of event as a method to facilitate the impact of the study of the behavious of crude oil prices in the global dynamic oil market. The study will first have to analyse the event of OPEC quarterly declaration of production status. The first declaration that we review here is the declaration on increase of oil production, declaration on tarrif waiver and the declaration of price control in the global oil market. The study also aims at ways of managing challenges from external entities such as competition from non member states such as USA and Brazil for oil market. The second declaration that this study will review is on the Strategic supply of Petroleum Reserve, specifically crude oil in the global market. This is essential in making significant contribution to the review in various ways. The first significance is that it presents reliable evidence from the present as well as futures global oil markets. For the future market, this study uses up to a period of one year to assess whether all the declarations and the events have either long term effect or short term effects on the market. This is vital for setting up strategies for sustainable efficiency of the oil export in the futures markets. The second significance involves the performnce of sensitivity test by applying 3 distinct parameters of excess return approximated by use of the market model. Lastly, this study use a reliable test of performance for period between the year 1983 to 2008. This range of years covers vital events that unfolded in the history of crude oil market. It will also give more sponteneous outcomes on the basis of a number of events under consideration (Wagner 27). 1.2. Research Question This research design aims at obtaining answers to critical questions with regards to the challenges that OPEC faces in the market of crude oil and heating oil. One of the questions is: What qualifies a nation to be able to join OPEC as a memebrs state? Of course the inherrrent notion is that the country has to be an oil exporting country. The reason for this question is because majority of the OPEC member states are countries in the Middle East region and countries close to the region. The second question is whether the supply of oil in the oil reserves among the OPEC countries is sustainable and long term. Detailed studies have evaluated the performance of the previous market of crude oil as well as heating oil in the perspective of OPEC. OPEC has in the past held a series of meetings between the yera1970 and 1991, following the challenges of global oil crisis. The global market has suffered acute shortages of oil despite the effots of OPEC to increase the supply of oil. Even though the meetings have born fruits in solving the challenge, there is a risk of reocurrance of such crises because the pattern has always been symetric. Global oil Crisis occur at almost regular intervals. The third question is about the safety of oil wells among oil exporting countries. This question comes as aresult of the vulnerable state of world security, that has frequently seen oil wells become target of war. There has been cases of oil wells burning due to borm explosion or deliberate introduction of fire. The last question in this study is how to obtain a practical sustainable mitigation to the competition from other oil exporting countries among the non OPEC countries. Brazil and United States of america of course are in this category. OPEC has to deal with this competition in a diplomatic manner if it has to obey its trms of existence (Wagner 28). Literature Review Among the recent research works on the impacts of the meetings that OPEC on the control of oil prices, studies have found a negative effect of the declarations of OPEC that it decided to pass restrictions on conferences whose main aim is to recommend hiking of oil price. Some of the research works have used the review of events as a method to evaluate the impacts of increasing OPEC oil production and reducing on return on stock among the competing states such as the United States of America and the UK. The studies have gone further to study the fluctuations of global oil prices with the variations of oil supply capacities. They consider the periods of gulf war between Iran and Iraq the peaceful period of the years between 1986 and2004, in which they find that OPEC oil production have a greater effects on the present oil prices than on the resolutions to raise oil production (Wagner 67). Comparing the studies of the past and the poresent oil supply, there are marked differences. In the first place, the present studies emphasize on the present prices of oil, with a little focus on the futures oil prices. Secondly, they introduce the model of the present market during the study. Research works in the past have applied various models to establish the nature of performance in the OPEC prodution in the contemporary market. Additionally, the decision to increase or reduce the prices of oil tends to go against the OPEC’s principal declaration that it will not change the production quotas. From the year 2001, the prices of oil have been constsntly rising, probably due to the growing oil demand and expansion of industrial productions in the global scene (Watkins & Streifel 138). This then causes the market participants to respond negatively to the news which they consider as null and void. This notwithstanding, the observers in the market realize that the OPEC production quotas do not entirely fall under the discretion of OPEC committees. There are other external events that the studies do not bring out as key players in the production quota variations. For example, the war between Iraq and Iran in the years between 1988 and 1991 reduced the supply of oil in the global market. The latest research studies have examined the impacts of OPEC on the regulation of oil production quota and the declarations between the year 1986 and 2002 about the present crude oil prices and the prices after two months in the futures. It goes further to the oil stock prices in the OPEC oil reserves. The sudy discovers positive relevant returns on production as a result of the frequent meetings during which OPEC decided to lower the collective proportion. The findings in this study also gave way to important and adverse irregular returns due to the declarations, which exhibits no difference in the collective oil quotas. However, this study only looks at one model, without considering any arrangement of the model, to ascertain regular performance in the market and its information period elapsed in the year 2002. It therefore lacked the application of the latest inconsistencies in the process of crude oil (Watkins & Streifel 135). Looking at other vital parameters of this study, there is an addition of the events relating to the United States declaration. The year 1977 had an oil crisis resulting from the challenges of 1973, which had an objective to deter the undesirable impacts of a greater interruption of the oil supply capacities on the global economic activities (Ramady 123). The studies however take note that the effects on economic activities can best be realized by having adequate petroleum reserves. Those who support the studies reason that the application of the oil reserves in the cases of considerable adverse oil crisis may play the role of an appropriate tool for the stabilization of the global oil market, especially in the United States of America among other areas of the world. Even so, other studies reasoned that such crises of oil caused by inter-governmental restrictions on oil supply and encouraged by the OPEC and non-OPEC countries may not work efficiently. Theoretically, and a subject to contemporary world affairs, the existing crude oil stocks and petroleum products are not adequate to considerably influence the market prices. This research design evaluates the effects of OPEC and non-OPEC state declarations on both the present and the future oil prices. It then attempts to illuminate this essential present debates on the current energy policies. OPEC attempts to make the global markets stable by use of sustainable price control programs (Ramady 128). There are few applications of event study, evaluating the effects of OPEC decisions to raise or reduce oil production and prices in the market (Carbaugh 79). One of the studies investigates the effects of OPEC declarations on various maturities in the market of heating oil using weekly reports. The outcmes show considerable variations in the mean weekly reports for normally organized OPEC meetings. This study is different from other research designs because it applies different regular performance indicator models to give the measurements of irregular returns on production and evaluate the behavioral attributes of the collective irregular return paths that can assist in testing the hypothesis of consistency in the excess returns on production. In addition to the irregular return on production, some studies focus on the daily returns and crude oil market, while others do calculations of weekly returns and mainly emphasize on the performance of heating oil market (Ramady 125). 2. Evaluation 2.1. Theoretical Study This paper coves the review of the research questions in a detailed insight and with the attempt to obtain conceptual solutions for them. The paper is keen on the issues on the capacities of oil reserves in the global market and the concern of the key stake holder such as the USA and the UK. Some of the recent concerns of United Kingdom particularly have been the times when oil supply in the global market goes down (Beaubouef 58). For example in 2005, the finance minister of Britain negotiated with OPEC countries to increase the supply of oil in the market and lower the prices. In 2007, United States of America also had to engage OPEC, on a visit to the OPEC headquarter in Saudi Arabia, to increase oil processing and supply in the market at considerably affordable the prices. During the negotiations, the stake holders have been on the lookout to find more sources of sustainable energy to supplement the industrial need for oil, such as solar energy and electricity. While alternative energy sources prove to be the best options, they also address environmental maintenance concerns. The challenge for OPEC has been in dealing with the pressure to candidly reveal the actual capacities of oil reserves among the member states (Beaubouef 58). The international relation between the OPEC countries and the world leading economies seem to revolve around the production and supply of crude oil and heating oil. Theoretically, the security issues and the diplomatic ties have a lot to do with the trends of oil supply. The leading economies silently admit that even though they are close competitors of OPEC, their survival still largely depend on OPEC’s performance in the global market, and places OPEC in a state of world monopoly. This is to say that OPEC is the focus of world’s economy because it determines the energy supply capacity that is very vital especially to the global manufacturing industries (Beaubouef 58). 2.2. Hypothesis OPEC has had a major challenge in dealing with the international trade barriers in relation to the world economies such as United States of America and Britain. This is because import and export of oil in the international domain always set the prices of oil in standard rates of payments, mainly in dollar form. Whenever the U.S dollar faces crisis for example from the year 1971 to 1973, the value of US Dollar reduced two times, forcing OPEC countries to introduce a modus operandi to automatically review the dollar price. This raises a hypothesis of any existence of mutual boundaries between OPEC and the non OPEC oil traders. It clearly appears that OPEC cannot enjoy the virtual monopoly without the involvement of US Dollar, giving United States a second position in monopoly as a result of currency control (Beaubouef 57). This is inevitable for OPEC considering that traders mainly receive and make payments for exports and imports respectively, strictly using US Dollars for price standardization and global trade financing regulations. In 1973 however, OPEC won the war on prices, and brought into the picture the unmodified dollar. From that time on the OPEC members have raised concerns related to the Dollar value. The same scenario of falling dollar value was evident in the year 2002. The value of US Dollar suddenly declined by 19.30 % trading against the Japanese currency, 28.80 % against the Euro currency and 18.60 % against the British pound (Beaubouef 50). Since the US dollar remains as the world determining currency for international oil pricing, any slight fluctuation in the US Dollar value against other international currencies inevitably affect the actual value of the export revenues of OPEC countries. Many studies have reasoned that because of the variations in the trade directions of individual states, the oil reserve and currency reserve composition, the losses caused by the dollar value variation are different. For the traders which purchase large amounts of their imports requirements from other countries apart from the US, the loss is clearly seen. The same case applies to the countries that invest huge shares of their reserves in the form of US dollar or assets that are valued in US Dollars (Beaubouef 47). Design Methodology This research design applies a systematic methodology involving the use of analytical tool on the events surrounding the empirical trade finance reviews. The objective of this methodolgy is to evaluate the contents of information of various events such as integrated declarations of earnings on production by assessing the behavioral attributes of irregular returns and excess revenues earned from the fundamental investment around a repeated key event. The methodology here includes the stages of systematic research process beginning with data collection from the contemporary oil market, data analysis, data interpretation, data presentation and reporting, followed by conclusive recommendation (Beaubouef 67). 2.3. Data collection Data collection here is majorly the study of secondary data from the reports of oil producing and exporting countries from the time OPEC was formed. These data, whether of qualitative or quantitative nature, have to be organized in simple measurable parameters that can easily be analyzed and interpreted. The data collection has to compare data from various sources and reports for consistency and accurate data presentation. Data analysis will concentrate on the critical areas of data that directly affect the market performance of OPEC and its relationship with the global stake holders in oil trading. 2.4. Data Analysis Out of the data collected, it will be necessary to conduct a process of professional statistical data analysis. This will involve the use of modern statistical techniques using statistical systems such as SPSS and STATA, MATLAB or SAS. For this study, the choice will be to use SPSS to take advantage of functionalities such as regression analysis, multivariate and correlation analysis. Of course the study of OPEC oil market performance involves multiple parameters such as a number of countries, types of oil produced, the international currency control, the volumes of oil exports in a range of years, and the yearly variation of oil prices. SPSS will be able to customize the output of the analysis in various ways and present a clear and comprehensive data analysis summary that conveys combination of multiple parameters at a glance. The quality of data analysis is critical since it determines the entire study’s outcome together with the results of hypothesis test (Beaubouef 59). 2.5. Interpretation This is the stage where the results of data analysis are converted into meaningful information that this paper can use to advise OPEC on certain decision making needs. For example, the analysis can show the average of annual OPEC export in the year 2002 as 2 Billion Tones, 2003 as 1.8 Billion Tones and 2004 as 1.4 Billion Tones. The interpretation here is that the global oil supply in the market has been on the decline. It can lead to the possible reasons why the decline has been realized; hence assist in generating possible solutions such as the dire need for other alternative energy sources to supplement the deficit. A practical example is in the global rise of oil prices dictated by OPEC countries between 1998 to the present date. This has been as a result of international security situation characterized by numerous wars and the increasing industrial energy requirements (Beaubouef 58). 2.6. Data presentation This is where this study will present data in an easy to understand form such as graphs, tables etc to present the analyzed and interpreted data. It will also provide a description of the graphical information to make the reader understand the contents. For example, it will be able to show labels indicating the reasons for price escalation. Presentation will show labels of various features that may otherwise appear to be meaningless in the graphical presentation. There will also be a combination of more than one presentation style, considering that readers have different attitudes and preferences for different presentation styles. Whereas one reader will prefer graphs, another reader prefers pie chart while yet another will prefer tabulated presentation (Beaubouef 45). 2.7. Recommendation This is where the research the interpretation provides ways of mitigating the challenges that the research design paper has identified. For example, if the prices have been on the rise, it means the demand for oil products has gone up. It also suggests to OPEC that there is need for more production and release of oil in the global market. About the annual decline of oil supply in the global market, OPEC has to confirm the sustainability of oil reserves among the member states. The recommendations will determine the decisions that OPEC will make as well as the actions that it will take upon making the decisions. 3. Comparison of Evidences We evaluate daily current and the future oil prices for crude oil and heating oil for the periods between the year 1983 and 2008. We place more emphasis on crude oil trading with the US as the Strategic Petroleum Reserve (SPR) was formulated with an aim to stabilize the oil market in the United States of America. Current or contemporary prices are set as the cash prices in the hope that the cash prices may effectively exhibit the real transactions. For the sake of examining the contents of information of OPEC and SPR declarations for various chronological horizons, we also document daily prices of the future light crude oil. More specifically, this paper studies the closest contract together with the third and the twelfth nearest connections that cover a wide range of maturities with a life span of up to 1 year in the future. The expected returns in the futures sequence are developed with contract renewal taking place nearly 1 week prior to maturity in many incidents. As it is expected, we make observation of the largest explosive nature of the present oil market with lower revenue instability values as we go towards the longer maturity periods. The greatest volatility seen in the present oil market is because the oil prices indicate transactions for instant delivery of the fundamental benefit and appears to be extra sensitive to the market supply changes as well as the demand changes in the contemporary market. This is also evident in the tremendous values seen in the return sequences with the daily current revenues ranging from the lowest amounts of - 40.20 percent and the amounts of 19.86 percent. Large revenues correlation values seen between the present returns and future return sequence indicates the existence of risk factor controlling the contemporary oil market (Beaubouef 48). In this study, we will visit the details of the contents of OPEC declarations as well as the United States SPR declarations. For this reason, we will evaluate the declaration summaries from the formal decision and media publication made by the OPEC head quarter, together with the summarized list of formal declarations concerning the production resolutions. OPEC makes two meetings in a year on preset dates for low level committees and also for large conferences made on short notices. OPEC also holds ministerial meetings in order to decide on problems of operation and oversight of the organization. They occasionally make decisions to change the levels of oil production. In this analysis, each formal press release by OPEC is seen as one of the organization events. Having prepared a list of organization events, this paper then classifies each of the OPEC declarations in terms of an oil production reduction, increase and no change in the levels of oil production. As it was covered in the section of methodology, several declarations were ignored because of the specific aspects of the methodology of event study (Beaubouef 42). Since the establishment of OPEC, this study has examined a total of 63 meetings out of which seventeen came to be a production increase, twenty one came to be a production reduction and twenty five resulted in no change of oil production levels. In a similar manner, United States government’s declaration on the application of Strategic Petroleum Reserves is summarized on an online system from the Energy Information Administration (EIA). During the periods that this research examined, fifteen declarations related to SPR have been passed, of which eleven were declarations on the supply of crude oil from the oil reserves to the global market. This was classified as SPR reduction (Beaubouef 42). Four of them were on the issue of purchase of crude oil from the global market at the contemporary market prices. This declaration was classified as SPR increase. Crude oil that was released from the United States SPR have been on the basis of either sales or loan, to the market, which is majorly the oil refinery companies where oil purchases have been made either in form of a direct purchase or payment by oil refinery companies in return for the releases from federal reserve. Regardless of the form of oil that takes place in the transactions, an SPR decrease declaration shows an increase in oil supply into the global market. On the other hand, an SPR increase declaration shows an increase in oil purchase from the global market. This is an origin of critical discussion for decision makers and regulators (Hale 40). There has been a question on whether or not the declarations benefit consumers among other stakeholders when the government buys huge amounts of oil from the global market and then creates more pressure in oil prices. In addition, such decisions do not make reasonable sense when the federal government buys oil at market process that are already high as decided by OPEC. In fact, some studies have suggested that the government it should indeed be selling in order to generate additional revenues to and lower the burdens of taxpayers. It is therefore a vital question from the research and the decision making view on whether the actions of SPR have made the expected market performance without causing unnecessary burden to the consumers by unreasonably hiking the market prices. 4. Hypothesis Test Having investigated the position of OPEC in relation to the world market and oil trading, it has become clear that the reserves of oil in the OPEC member states is threatening enegy security and is not sustainable to that effect. This is further proven by the US decisions to form SPR declarations as a machanism of minimizing the burdens created by the OPEC announcements on hike, decrease and no action. The control of the market also does not remain in the hands of a single entity. It appears that there is a global tie for mutual benefit between OPEC and the global economy stakeolders. In the issue of membership of OPEC, the dynamism of the oil producing countries tends to draw oil producing countries into joining the organization. However, the terms and conditions for joining keep other qualified countries outside. International sanctions on certain countries also interfere with market liberalization and limits certain countries ability to participate (Beaubouef 42). 5. Conclusion The tests of collective irregular revenues gives an impression that no considerable impression to OPEC production declaration on increase no matter which normal peformance model has been to do the analysis. In the case of production reduction declaration, this study finds considerable positive revenue following OPEC production reduction declaration and results into significant excess returns on production. OPEC conferences have found that there can be excess returns amounting to approximately 90.00 % in the current market and 55.00 % in the futures global market (Hunter 107). In the SPR declarations, it appears that the government utilizes this initiatiative to drive short term global market reactions that last for up to about one week from the declaration date. Nevertheless, tests of collective iregular revenues and their differences create impressions that there are no considerable effects of these declarations on the global oil market. This suggests that SPR Programs cannot effectively bring the market to a point of stability. Works Cited Beaubouef, Bruce. The Strategic Petroleum Reserve: U.S. Energy Security and Oil Politics, 1975-2005. Texas: Texas A&M University Press, 2007. Carbaugh, Robert. International Economics. New York: Cengage Learning, 2010. Hale, Douglas. Nonparametric Comparative Statics and Stability. Princeton: Princeton University Press, 1999. Hunter, Shireen. OPEC and the Third World: The Politics of Aid. London: Taylor & Francis, 1984. Ramady, Mohamed. The Saudi Arabian Economy: Policies, Achievements, and Challenges. London: Springer, 2010. Wagner, Heather. The Organization of the Petroleum Exporting Countries. New York: Infobase Publishing, 2008. Watkins, Gordon, & Streifel Shane. World Crude Oil Resources: Evidence from Estimating Supply Functions for 41 Countries, Issue 1756. New York: World Bank Publications, 1997. Read More