OPEC\'s Role in Global Supply,

OPEC's Role In Global Supply, Demand And Pricing Of Crude

The global crude oil market is among the most important engines and indicators of the world's economic behavior. The commodity also generally known as petroleum in its commercial form has a direct bearing on consumer pricing, production costs, transport expenses and a whole host of other factors shaping economic realities. The result is a market centered on the single largest industry in the world, with the majority of the collective globe's energy consumption based on its exploration, realization, production and trade. Though nations vary widely in their production abilities, consumption habits and general position in the import/export balance, the petroleum industry and crude oil price directly impact all nations of the world. Even the lowest index of consumption, which is found generally in Europe and Asia, accounts for roughly 30% of all regional energy consumption. In countries in the middle east where crude oil is naturally plentiful, these indexes are closer to 50%. (Wikipedia, 1) The result is an industry which has its own unique structure, conditions and patterns.

Indeed, the habits of nations toward consumption, toward distribution and toward production of crude oil will be directly correlated to conditions of political orientation, economic robustness and even military entanglement. According to the Energy Information Administration (EIA), which is maintained by the United States Department of Energy (DoE), the top three oil producing nations in the world are Saudi Arabia, Russia and the United States in that order. (EIA, 1) The EIA reports that Saudi Arabia produced roughly 10,248,000 per day as of 2007. This compares to Russia's 9,874,000 barrels a day and the United States' 8,457,000 barrels a day.

The distinction between these rankings in terms of production and those rankings relating to the export of crude oil reveal a great deal about certain energy consumption tendencies. Indeed as with production, Saudi Arabia here occupies the top spot, exporting 8,038,000 barrels a day in 2007. Likewise, Russia exports 7,054,000 barrels a day, making second in the world. At a distant third though is the United Arab Emirates (UAE), which like Saudi Arabia is a member of OPEC, at 2,507,000 barrels exported a day. It is compelling to note that the United States does not even appear on the list of top 15 exporters in spite of the fact that it is the third largest oil producer in the world. This provides a telling picture of the nation which is by more than twice the next nation -- China at 7,565,000 barrels a day -- the largest consumer of the global petroleum supply. The United States consumed, as of 2007, 20,680,000 barrels of crude per day, meaning that in spite of its ranking as third largest world producers, it is also by far the world's largest importer of petroleum. This amounts to 12,224,000 per day and is three times as much as Japan's second place import ranking. (EIA, 1) To this point, we can see that the United States, historically itself a prime engine for the global economy, in many ways drives and dominates various aspects of the world's petroleum market.

In many ways, it is the influence and power of nations such as the U.S., as well as the former Soviet Union, present day Russia and present day China, that had inclined the creation of the Organization of Petroleum Exporting Countries (OPEC) in 1960. Due to the apparent imbalance between the oil production and export of many of the world's more modest economies, such as many of those lesser developed nations of the Persian Gulf region known as the Middle East, several nations fitting this description gathered together to create price-fixing strategies to counteract the authority of more developed nations in the oil trade. This would bring together first in Baghdad the increasingly powerful oil producing nations of Saudi Arabia, Iran, Iraq, Kuwait (all of the Persian Gulf region) and South American oil-producing powerhouse Venezuela to create an organization which could levy some control over global supply and demand. (OPEC, 1)

Price fixing occurs when companies in like industries agree to maintain a certain level of pricing on the provided service or goods. Taken to an explicit level, this approach to market interaction is referred to as a cartel. Members of a cartel agree to limit the supply of a good in order to ride its prices and share in available profits. In a cartel the actions of several independent providers are controlled by a central body constituted of representatives from the affiliated parties. Cartels are instigated in markets where there already exist only a few producers, primarily because of high entrance costs or rarified resource demands. OPEC is a primary and powerful example of a cartel, and its origin helps to demonstrate some of the practical concerns which bring such nations together. Especially today, as membership in such cartels is less inherently driven by geography and more by common purpose, we can also see that it was formed in the 1960s due to the fear by its member states that an oil surplus would over-saturate the market and cause producers to square off against one another in pricing. Today, OPEC consists of 12 countries; Qatar, United Arab of Emirates, Venezuela, Ecuador, Algeria, Angola, Iran, Iraq, Kuwait, Libya, Nigeria, and Saudi Arabia. (OPEC, 1) All OPEC's member states are oil-exporters who have sought to enhance their bargaining power with market devices and consumers by standing together even in spite of various historical conflicts which have stretched military and political engagement. Conflicts between Iran and Iraq in the 1970s and 1980s, or Iraq and Kuwait in the 1990s, would be directly implicated by actions relating to oil production and dissension within the context of OPEC. The relative sturdiness of OPEC in the long-term had demonstrated its importance to the region and to global crude markets thusly.

This is because the membership of many of the world's largest oil-exporters in OPEC means that decisions relating to production and exporting levels make within the cartel will directly impact world supply. OPEC maintains a right and practice driven toward production as a response mechanism to other economic realities, even allowing it to help have a stabilizing effect when such is demanded. For instance, in the account provided by its own website, OPEC describes the role it had been able to play in the global petroleum market at a time of relative global peace. Here, OPEC's self-maintained website indicates that because of its response mechanisms at that juncture, a "pricing crisis was averted at the beginning of the decade, on the outbreak of hostilities in the Middle East, when a sudden steep rise in prices on panic-stricken markets was moderated by output increases from OPEC Members. Prices then remained relatively stable until 1998, when there was a collapse, in the wake of the economic downturn in South-East Asia." (OPEC, 1)

Here, it becomes evident that OPEC does have the ability to impact global pricing by its control over the world supply of petroleum and such resultant commodities and oil-based fuels. To the point, in the immediate future, OPEC faces a number of considerations with regard to its pricing approach. In particular, the recession gripping the United States and the world by extension has threatened to offset oil-pricing throughout the world, with a major importing market incapable of absorbing rising barrel prices. Therefore, OPEC will be forced to either direct its attention more concertedly toward such markets as the consumption behemoth that is China, or to retain steady pricing in wait of brighter fortunes in the American economy. OPEC's future prospects and pricing options will also hinge on the advent of a viable and competitive alternative fuel, which would dramatically alter the oil marketplace. This is a point which is underscored by the aforementioned distinction between consumption in such markets as the United States and that in many more progressively outfitted energy-consumers on the European and Asian continents.

All of these are factors which have led to a general and substantial decline in the price of crude oil since late 2007, when we entered into a condition of global economic crisis, but also indicate a rise in price since the end of 2008. The turn in 2009, in fact, would reflect a global low point to this juncture. That would center substantially around the tremendous slowdown in global consumer spending, production, transporting activies and new capital development. According to a report published by Business Week in January of 2009, "the price of a barrel of oil has fallen from a peak of almost $150 last summer to below $40 in recent weeks as demand for oil has fallen sharply in line with the global economic downturn." (O'Grady, 1) This would prompt OPEC to drastically reduce its production numbers, resulting at the time in the production of roughly 4.2 million fewer barrels a day. (O'Grady, 1)

In many ways, this demonstrates the careful measuring of effects and patterns which is necessary in participation in the global crude market, as the dominant presence of the American dollar in the market has had a determinant impact on oil prices. So too does the modest recovery of a portion of oil value in the first half of 2009, which saw a more consistent gain in cost due to the shifting impact of the American dollar and the Euro. As a recent report from the Dow Jones Newswires denotes, "Oil gained some ground earlier, propped up by a weaker dollar, after a report showing that consumer confidence was rising in Germany, raising hopes that the worst of the downturn had passed. A weak dollar pushes investors into commodities as a hedge against inflation." (Iacob, 1) As a result, today, the global oil price stands at just a few cents above $69 per barrel. (Bloomberg, 1)

The current condition of war and economy has, likewise, cast a shroud of haziness over the oil market. And the Organization of Petroleum Exporting Countries (OPEC) has done its part to contend with the difficult uncertainty. As all indications seem to point to an economic recovery that will be both slower and more hindered than those that have followed previous recessions, OPEC has held tightly its strict limitations on the quantities of oil that it supplies to oil consuming nations such as the U.S. The intention, ostensibly, is to keep the price of oil relatively high, in spite of the multiplicity of factors that have extensively reduced the demand for oil. To begin with, the consumer demand for oil had been reduced by an unusually warm first quarter, whereby residents of the Northern Hemisphere found themselves less prone to the costly implementation of heating their homes throughout the winter. This circumstance was compounded by the drastic decline in air travel that inevitably followed September 11th. The reciprocating interdependence between the air industry and the oil industry ensured that any significant decline to one would translate into an obstacle for the other. And such has been the case for OPEC, which now finds itself, on top of dealing with these considerable difficulties, in a field with greater competition. OPEC's willingness to maintain degrees of exclusivity, in terms of supplying to and cooperating with consumer nations has, to date, provided it with an advantage in the ubiquitous battle for the precious and diminishing resource. But it is this very same intransigence that may provide OPEC with some troubles of its own. A greater willingness by non-OPEC, oil-exporting nations to participate in a more globalized marketplace has caused the organization to endure lost market share and lowered revenues. This is highlighted by recent emphasis on opening Gulf of Mexico exploitation opportunities for the United States.

As a result, OPEC has taken an approach of relative economic defensiveness, angling to protect the pricing integrity of their product. Refusing to increase supply in an effort to, perhaps, rectify OPEC's slumping market competitiveness, the member nations hope simply to maintain a stasis on pricing. So would this be the decision rendered by the 153rd OPEC Conference Meeting held on May 28th, 2009. Here, based on the perception that economic recovery will likely be slow and uncertain, OPEC declared that it had "decided to maintain current production levels unchanged for the time being. In taking this decision, member countries reiterated their firm commitment to the individually agreed production allocations, as well as their readiness to respond swiftly to any developments which might place oil market stability and their interests in jeopardy." (Vasconcelos, 1)