Role of OPEC and Oil Production and Consumption in USA
Regulation of oil prices by OPEC
Oil is one of the components that affect the global economy mainly because most of the activities that generate income are driven by oil products. Oil is widely used by companies as a form of energy thus ha a great impact on the economic growth and development of a nation. A rise in oil prices increases the cost of manufacturing for many companies that use oil products such as diesel to run their machinery. It is, therefore, important to have the oil prices at the lowest level possible. An increase in the prices of oil has an adverse impact on the economic development of a nation because the prices of producing goods in the country increase. The main challenge is the fluctuation of supply of oil in the market whereby the oil is either in excess or in shortage. However, this problem can be fixed through lowering the production costs of the oil, so that becomes feasible for both the suppliers and the buyers. To achieve this, the countries that produce the product must agree on the efficiency needed in the sector. When the level of oil production is high the rates for a barrel of the product decrease leading to slow economic growth for the producers of the oil. The supply and demand of the oil is a major determinant of the prices that in turn determine economic growth. As long as the oil supply is low, the prices will always remain high and in turn the economic growth will be slow. Among the primary aims, any government is increasing the welfare of its citizens (Yang, Hwang & Huang, 2002). This cannot be achieved with an exploitatively high price of producing goods and services in the economy. There is thus a need to balance the supply and demand levels of the commodity. The overproduction of oil makes the prices low, and this may even affect the investors in the oil industry who may withdraw. The weakening of the oil sector in an economy has an adverse effect in fighting against poverty. This paper aims at discussing how OPEC influences supply and demand of oil, particularly in the Scottish oil market.
Created in 1960, the body is responsible for controlling the oil prices in the countries that it operates. It is a non-governmental organization with 12 nations that produce and export oil. The nations involved are from different regions such as Latin America, Africa, and Middle East. Most of the member countries depend on oil as the main source of foreign exchange. The principles on which it is found are so strong that they have been able to hold the body together throughout the changes that have taken place in the economic, political, and technological aspects. OPEC coordinates the oil policies in the member countries so as to control oil prices. The regulation of prices is aimed at obtaining stable revenue for the countries that produce oil. In addition, it provides an economic, reliable, and efficient supply of the product to the nations that do not produce oil (O’Rourke & Connolly, 2003). The investors benefit a lot from the OPEC activities since they have a guaranteed return on investment. OPEC is committed to ensuring that all nations whether developed or developing will access the oil as a way of developing mankind.
The major objectives of OPEC include the unification and coordination of the member nations so as to define the best measures that can be used to safeguard their interests. The member countries have varying interests, and the OPEC has to align the individual interests for the collective interest of all the nations. OPEC is also involved in seeking means of stabilizing the prices of oil among the member countries. Stable oil prices in the international markets have the effect of eliminating unnecessary fluctuations that can have serious implications for the industry (Hamilton, 2008). Through OPEC, the member countries are able to provide economic, efficient, and regular supply of the crude oil to the other nations. The control in the supply of the crude oil is necessary for motivating the investors in the oil industry due to a fair return on investment. The representatives of the member countries meet annually to make decisions on the oil supply and other issues that affect the prices and profitability of the nations.
The fluctuation of prices in the petroleum industry affects the governments, consumers, and investors. The prices affect both the importers and the exporters of oil but differently. The importers gain from the lowered oil prices since the cost of producing their goods reduces. Their real income on consumption increases thus increasing their profit and investment. The low prices lead to a decrease in the value of exporting countries’ currency thus affecting the economic growth negatively. The decline in the prices has an effect on the exchange rates because they induce the adjustments of the rates either upwards or downwards. The financial positions of the companies that deal with energy sector are adversely affected by the decline in oil prices (Yang, Hwang & Huang, 2002). It is the responsibility of all nations that produce oil to come up with ways of regulating the supply so as to maintain stable prices.
Bodies such as OPEC are used to help lower the cost of production. Consequently, the popularity of OPEC has decreased over the years with the majority of the countries withdrawing. The withdrawal of such countries makes them free to make their own decisions on the levels of production to make. A reduction in the oil supply by the countries that withdraw from OPEC leads to high prices of oil thus making them produce more. The supply then exceeds demand and drops. The OPEC, therefore, gets the limited effect on the supply and demand of the oil over time. There are regions that produce oil but are not members of OPEC such as the North America and North Sea (O’Rourke & Connolly, 2003). The nations are free to make their decisions regarding their products, unlike the nations that are members of OPEC that have to follow the guidelines of the body. OPEC coordinates the nations centrally making their profitability uniform. The central coordination is also important in the regulation of the cost of producing the oil. In order to ensure that the nations make maximum profit from the production, OPEC ensures that their cost of production is low. A low cost of producing oil makes it possible for the prices to drop. The impact of oil prices on consumers is different from the producers but in both cases, the reduced cost of production is an incentive. The producers prefer producing more oil when the prices are high so that they increase their profit margin. The consumers on the other hand are favored by the oil prices and this occurs when the supply of the product is high.
Oil production in the countries that are controlled by OPEC is mainly done through the national oil companies. The companies are not mainly oriented towards making very high profits because the primary aim is to improve the efficiency of production. OPEC, therefore, has a direct link to the oil prices through control of the supply of oil in the market. In the countries that are non-members of OPEC, private companies (Hamilton, 2008) mainly do the production of oil. The private companies are motivated by increased oil prices in the market. The supply of the product affects the prices thus they influence this by cutting on the volume thy produce when the prices are low. The oil producers in counties that are not regulated by OPEC are the price takers in the industry. They tend to respond to market prices by making the necessary adjustments rather than managing to influence the prices.
Being the price takers, they have less spare capacity than the countries whose production is controlled by OPEC. The spare capacity is not necessary, as they are able to produce at full or near full capacity. The freedom enjoyed by the countries in relation to production decisions makes it easier for them to supply a high level of the product thus making more income when the other countries cannot exceed a certain level. When all other factors affecting the supply of oil are constant, the lowered supply of the product by nations that are not controlled by OPEC raises the prices of oil. This increases the call on OPEC to reduce the prices thus directly influencing the cost of fuel (Kaufmann, Karadeloglou & Sanchez, 2004). Most of the producers who are members of OPEC are located in areas that are well endowed with the oil, unlike the other nations that extract oil from areas like deepwater offshore. The cost of producing oil in the nations that are not members of OPEC is mostly higher than the members.
Crude oil production has a direct influence on the socio-economic aspect of a nation such as a fight against poverty. OPEC majorly influences the supply of the crude oil through the bargaining power of the member countries that have large oil reserves. In order to control the demand and supply of the crude oil, it is important for cooperation between the nations that are members of OPEC and the non-members. OPEC is determined to avoid extremes in the supply and demand of oil by ensuring using the price band mechanism. The body issues a price range that the consumers and producers are supposed to use. This has an impact on the supply of crude oil globally. The suppliers reduce their production level when the prices by OPEC are low thus inducing high demand. The high demand then makes the prices go up and this is when the suppliers get back to high production levels. The nations that produce oil without the regulations of OPEC may start producing more oil than the recommended level by OPEC thus influencing the supply of the same (Kaufmann, Karadeloglou & Sanchez, 2004). When the prices set by OPEC are very low, the nations that are not regulated by the body reduce their level of production thus making the supply less. When the supply continues to decline, the prices have to be increased again so that the producers have an incentive to work. This puts the production level of oil at a level that is close to the demand thus bringing the market into equilibrium.
The primary action that the members of OPEC take in order to stabilize the oil prices is adjusting their output. The United Kingdom oil industry and the economy at large are at risk because of the decline in oil prices. The only way to regulate these prices is by involving the OPEC so as to have an influence on the supply of oil. The countries that have large oil reserves such as Saudi Arabia have the potential to influence the market prices of oil. Apart from the fact that their oil reserves are large, their cost of production is low. This makes it profitable for the countries to produce oil thus lowering the prices do not affect the productivity in any way. The nations that do not have large reserves depend on OPEC to raise the oil prices are that they can sell at a profit (Hamilton, 2008). The cost of producing oil in such countries is low thus for the countries to reap benefits from the crude oil, they need to sell it at a relatively high price.
There has been a debate in the North Sea oil and gas in Scotland since the 1970s when it was discovered. At the time of the discovery the nation was undergoing hard economic times but the investments and the jobs created by the oil industry boosted the economy to great heights. However, the oil reserves in the North Sea are said to be declining but there are projections of up to 28% increase in the demand for oil in the next twenty years. The oil prices are therefore set to rise due to the high demand that will exceed the supply. The taxes imposed on energy companies may also rise thus increasing the cost of production even higher. The trend of the oil prices is thus expected to continue rising. It is therefore important for OPEC to regulate the supply of the oil so as to avoid a situation where the prices will be exploitatively high.
In the 1970s, the oil production in the United States was as high as 9.6 million barrels daily but this declined with time. More than three decades later, the production of oil in the country was less than 50 percent from the highest point. The nation had to start importing oil from other major producers such as Saudi Arabia. The low supply of oil in affected the global prices of oil and they rose to $ 147 per barrel (Hamilton, 2008). . The country had to take action and in 2010, scientists had phenomenal results in their search for oil. By last year, the production of oil in the nation was 80 percent more than in 2008. It increased by 4.1 million barrels daily a level that is greater than in any other oil-producing nation except Saudi Arabia. The move by OPEC to have the countries that produce a lot of oil reduce the oil supply in the market failed because the countries fear losing the market share.
The United States is a consumer of the crude oil, and it is thus affected by the activities of OPEC in regulating the supply and prices of the oil in the major oil producers. The level of oil in the United States is not enough to sustain the energy needs in the nation. This forces the United States to source oil from other nations so as to sustain its energy requirements. When the supply of oil in the market is low as a result of regulations by the OPEC, the United States incurs an additional cost of producing its goods (Hamilton, 2008). OPEC implements the regulation of the supply but through the non-OPEC countries, the prices get up again following a shortage in the commodity.hen this happens, OPEC sets in again to increase the level of oil that the nations can produce thus increasing the supply. This has the effect of reducing the prices. OPEC ensures that the oil production by the countries involved is uniform thus making sure that their level of profitability is at par. It also regulates the production cost of the oil thus influencing the prices. When the production cost is low, the producers find it profitable to produce high volumes of oil thus increasing the supply. Likewise, when the production costs are high, the producers can only manage limited production thus influencing the supply. The low supply increases the price.
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