Since after the WWII oil became a principal energy source, there aroused a need to regulate its production and consumption. With this aim, five countries supplying oil founded the Organization of the Petroleum Exporting Countries (OPEC) in 1960 to be joined by other members in the following years. The primary target of OPEC is to regulate and consolidate the petroleum strategies between the affiliate states to ensure moderate and fixed prices for the supplying states, an effective and steady economic petroleum stock for the countries utilizing it, and a reasonable income for the investing nations (OPEC: Brief history, 2016). Growing significance of oil in the world’s economic affairs made OPEC a powerful organization whose activity impacts the global market and dictates the economic trends for all the nations.
Literature Review
Many studies have been and are performed to investigate the oil manufacturing and the OPEC’s role in this process. In their research, Barros, Gil-Alana, and Payne (2011) examine the process of oil production by OPEC countries. The authors apply a framework of fractional integration modeling to perceive the capacity of structural suspensions and deviations. The research recognizes a constant mean reversion in oil manufacturing in the majority of the countries. Barros et al. conclude that the shocks impacting the OPEC system are going to have continuous outcomes for all the OPEC states (Barros et al., 2011).
Bentzen (2007) investigates the OPEC’s influence on crude oil prices. He employs the model of error correction for crude oil value information and discusses the exogeneity advantages and limitations for the three dominant oil prices: Brent, OPEC and Texas (WTI). The observational outcomes are that the crude oil prices causality is bi-directional. OPEC is reported to impact the Bent and WTI prices. The assumption of the global oil market regionalization is renounced (Bentzen, 2007).
Schmidbauer and Rösch (2012) research the impact of OPEC news announcements on oil price expectation and volatility. They notice that OPEC conferences, which are held several times per year, are preceded by excessive speculations about the future resolution about the levels of oil production in the world. By customizing the design variables showing the day of OPEC briefing, the authors formulate a model of influence on volatility and return expectation. Schmidbauer and Rösch find confirmation of a pre-announcement impact on volatility and a post-announcement impact on expectation. The latter can be positive on condition of a maintain or an increase resolution and negative on condition of a cut resolution (Schmidbauer & Rösch, 2012).
Vivoda (2009) examines the importance of a variety of oil import sources and energy security. He researches the significance of diversification tactics for the importers of oil, provides an account of carrying out the diversification policy by the importers, and explains the diversification of oil import in the general safety strategy of oil importers (Vivoda, 2009).
Discussion
The Energy Information Administration reports that nearly 43% of the world’s oil manufacturing in 2008 belonged to OPEC member nations. Moreover, OPEC countries own almost 70% of the world’s proven oil reserves (Barros et al., 2011, p. 442). While OPEC has succeeded in making use of production cuts to avoid the price decrease, its oil production depends on a number of factors including oil demand, geopolitical circumstances, market situation, and, most importantly, oil price. Thus, there are doubts whether OPEC can meet the increased need for oil manufacturing. The first major threat to OPEC appeared in the early 1980s, when reserves of oil were found in the non-OPEC countries. Along with the new facilities, this discovery allowed to lower the prices, which led to OPEC losing its market share. As a result, OPEC turned to market-reference price system established by the broadcast organizations. Spot market restricted liquidity led to the adoption of the futures market which granted clarity of price and better liquidity. To reach the needed price target sphere, OPEC accommodated the manufacturing quotas (Barros et al., 2011).
In the light of the current situation with energy security, there appears a question about the significance of diversification of oil import in the OPEC countries. The importance of diversification as a means of energy security is impacted by the existence and seriousness of several indicators. They include the rate of oil import dependence, total oil imports and alterations in them, Middle-East and non-regional import quota, overall oil stocks, vulnerability awareness, previous experience, instability and supply interruptions, non-market policies, and concentration of exporters (Vivoda, 2009, p. 4618). The strategy of diversification is outlined and carried out in accordance with these factors. The prerequisites and restraints impacting the success of diversification strategies involve the quality of crude oil and the export possibilities of alternate sources of the reserve. Additionally, freight expenditures and transport distance act as limitations to diversification. Every country has a different rate of the diversification process significance in their safety systems. However, the importance of diversification should not be overestimated as it is only one of the factors impacting the security of oil importers (Vivoda, 2009).
OPEC’s power in the world’s economics is exemplified by the fact that not only its direct actions have value but even the prospects of the actions. For instance, OPEC new announcements impact the volatility and price expectation (Schmidbauer & Rösch, 2012). While the organization blames speculation in oil price movement, the analysts tend to question OPEC’s stabilization attempts. Thus, the cartel is blamed for causing volatility in the days immediately preceding the organization’s announcements. OPEC’s resolutions are expected by market players, and such situation leads to price alteration volatility. Additionally, the influence of these decisions does not always correspond to the kind of decision (Schmidbauer & Rösch, 2012). Another serious influence of OPEC is connected with crude oil prices. In this connection, the OPEC’s role has grown over the past few years. The organization’s manufacturing efficiency impacts the real oil prices. However, this fact is true only in regional dimension. What concerns global extent, it is independent of the OPEC’s influence (Bentzen, 2007).
Conclusions
Since oil has become the dominant source of energy at the global market, the influence of OPEC as an organization controlling the supply of oil is growing all the time. Due to its purpose of sustaining the reasonable oil prices and regulating the manufacturing processes, OPEC has a strong power in the world’s economy. Although some of the trends of its activity may have an adverse impact (like causality of crude oil prices or influencing the volatility process), the role of the Organization of the Petroleum Exporting Countries for the present and future of the humanity cannot be overestimated. Its successful activity is the key to the world’s prosperous future.
References
Barros, C. P., Gil-Alana, L. A., & Payne, J. E. (2011). An analysis of oil production by OPEC countries: Persistence, breaks, and outliers. Energy Policy, 39(1), 442-453.
Bentzen, J. (2007). Does OPEC influence crude oil prices? Testing for co-movements and causality between regional crude oil prices. Applied Economics, 39(11), 1375-1385.
OPEC: Brief history. (2016). Web.
Schmidbauer, H., & Rösch, A. (2012). OPEC news announcements: Effects on oil price expectation and volatility. Energy Economics, 34(5), 1656-1663.
Vivoda, V. (2009). Diversification of oil import sources and energy security: A key strategy or an elusive objective? Energy Policy, 37(11), 4615-4623.