OPEC's Role in Global Supply  Thesis

Excerpt from Thesis :

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)

In effect, the dichotomy of drastically reduced consumer confidence and OPEC's evident approach to protecting its market interests are predominantly resultant from a wartime and recessionary global economy. The decrease in demand for products and services is the inherent fallout of an economic downturn, that have called into question many of the fundamentally assumed characteristics of the United States economic robustness. Though OPEC's primary concern in combating the lagging demands for oil that have accompanied the world's economic downturn have been to maintain current pricing structures, it seems clear that the actions they've adopted will not serve their best interests in the long run. In application, this response of virtual inaction, with regards to the exorbitance of their oil, may only invoke greater competition against OPEC. So it may not be a far stretch to suggest that the countries that comprise the organization, many of which have great interest in the current and escalating conflict in the Middle East, are motivated by political devices beyond economic benefit.

Just as the elements of this era of war and recession have had their effect on the consumer demands emanating from America's traditionally robust buying public, so too have they stifled the Arab supply of oil. And in an atmosphere increasingly geared toward the spread of globalization, outliers to this process such as those in OPEC will only spite themselves. With decreased oil demand, OPEC would do well to increase supply and drop its prices, thus allowing it to regain stature in the market. Subsequently, it would be in an opportune position, when the demand for oil increases, as it inevitably will with an increase in consumer spending and a broad improvement in the state of economy, to reap the benefits. Of course, this pricing drop would require an immediate increase in oil supply, a demand by which OPEC has confidently asserted its refusal to abide.

By and large, the actions taken within the oil industry also underscore a much larger concern spread throughout the world relating to the finite nature of the fuel source. Its absolute stature today as a foundation and motor to our economy make petroleum extremely crucial but also extremely dangerous to the sustainability of the world's shared lifestyle. Therefore, a necessity for change in energy consumption and sustainability habits will have dramatic and lasting effects on all the oil producing and consuming countries of the world.

Works Cited:

Bloomberg News. (2009). Energy Prices. Bloomberg.com.

Doggett, T. (2009). U.S. oil imports may not rebound after recession: EIA. Reuters. Online at http://www.reuters.com/article/reutersComService_3_MOLT/idUSTRE55N59N20090624

Energy Information Administration (EIA). (2007). Country Energy Profiles. U.S. Department of Energy (U.S.DoE, 1). Online at http://tonto.eia.doe.gov/country/index.cfm

Iacob, M. (2009). Crude Slides as Equities Turn Negative. Dow Jones Newswires. Online at http://online.wsj.com/article/BT-CO-20090623-709073.html

Mabro, R. (2006). Oil in the 21st Century. Oxford University Press.

O'Grady, S. (2009). OPEC: Oil Price Should Be Doubled. Business Week. Online at http://www.businessweek.com/globalbiz/content/jan2009/gb20090130_768973.htm

Organization of Petroleum Exporting Countries (OPEC). (2009). The Organization of Petroleum Exporting Countries: About Us. OPEC.org.

Vasconcelos, J.M.B. (2009). OPEC Communique: 153rd (Extraordinary) Meeting Of The OPEC Conference. Middle East Economic Survey, LII (22). Online at http://www.mees.com/postedarticles/oped/v52n22-5OD03.htm

Wikipedia. (2009). Petroleum. Wikimedia, Ltd. Inc.

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