Adam Khan Aliyu Musa Cody Lample Abdikhaliq Timer Implications of OPEC’s Proposed Price and Supply Controls on the Oil Market Adam Khan Aliyu Musa Cody Lample Abdikhaliq Timer

OPEC Strategies – Why is it Topical? Price Stability Market Share Vital Resource Energy Security Oil is a major energy source to all the global economies, price stability therefore plays an important role in ensuring global energy security. OPEC members depend heavily on oil exports as a source of income. Venezuela has suffered significant revenue losses and has suggested the implementation of a price floor to recover those losses. Some OPEC members, particularly Saudi Arabia are also keen on maintaining their market share, and in order to maintain their market share and to increase their revenues, an increase in supply has also been suggested. Possible scenarios include setting a price floor or sustaining a surplus in supply. Oil is a major source of energy. It is vital for civilization in the 21st century. Oil is a vital fuel resource and source of raw materials for countless industrial products (plastics, detergents…) With the advancement of new technologies and industries, the importance of oil can be equated to the importance of potable drinking water to human health. - Some of the industrial products include plastics which are reasonably cheap to manufacture although harmful to the environment, as it takes many centuries to break down these polymers. Until research is presented to industry to provide a more cost effective way to produce products similar to plastics, demand for oil will remain Oil is a finite resource and supplies will diminish faster than they are being replenished. Oil is a finite resource, meaning the resource is being exhausted as resources are being depleted therefore changes in demand and supply of oil has a significant impact on the global economy. World Population continues to grow, this growth will result in an increase in demand for energy globally in the long term. This results in oil being a huge economic driver affecting both finance and energy security of a country

Possible Solution: Increase Supply In order to reduce national deficit, Saudi Arabia, OPEC’s largest producer, wishes to flood the market with inexpensive oil. An increase in the supply of OPEC oil corresponds to a rightward supply curve shift, and a new market equilibrium at a higher price and quantity in that market. Because OPEC oil and non-OPEC oil are perfect substitutes, a movement down the demand curve in the OPEC oil, indicating a decrease in price, induces a leftward shift in the demand of non-OPEC oil. With this action, price in both markets is reduced. Commentators surmise that the price decrease in the non-OPEC market squeezes out countries which rely upon more expensive methods of oil extraction, e.g. Russia and US shale oil. This will most likely lead to a more stable, higher market price in the long term. This squeeze occurs in firms such as shale oil because the market price of a unit of oil is below the marginal cost of production. When the market price is below the marginal cost, a firm has no reason to continue producing. We agree this will stabilize price in the long term; however, squeezing out other producing countries will give OPEC a far greater market share, and far greater ability to control the world oil market to their benefit.

Possible Solution: Implement a Price Floor Venezuela, an important member of the OPEC, is proposing a bold strategy of implementing a price floor of $70 a barrel to revive falling oil prices and reverse deficits. OPEC would then reapply progressive production cuts to control prices and ultimately reach a target price of $100 a barrel. The strategy is a possibility but is highly unlikely to be accepted by all parties in the organisation. Implementing a price floor above the market price of oil would mean consumers demand less oil while manufacturers produce more oil leading to excess oil supply in the OPEC market. As non – OPEC oil is a perfect substitute, this move would automatically cause an increase in demand in non – OPEC markets and subsequently cause an increase in price of oil (i.e. demand curve shift to the right). We believe this is a very good option as it stabilises the oil prices and ensures competition in the oil market. However, OPEC is hesitant to implement this because in the long term it keeps shale oil in the market, redistributes market share and decreases OPEC’s power in the oil market.

Our Thoughts Having fallen from $100 to $50, price of oil is on the decline as it hovers over the critical level. We, the consumers, with the price of oil being so low, and with the possibility of it to drop down even further can and will give many of us an advantage over a short-term period. Many business will also make a profit due to lowered transportation costs. However, we believe that a price floor might actually be good for the economy as a whole the introduction of a price floor will be advantageous to many countries around the world, unlike the other possible solution where the ‘cartel’, run by Saudi Arabia, would flood the market with cheap fuel. A price floor would decrease its power within the oil market. In our opinion, we believe it will allow for competition between firms, which creates possibility for innovation to drive the demand from consumers. The consumers will want to get the best quality of fuel for the price of which they will be paying. It also means that American shale oil is not driven out of its market BNP Paribas global head of commodity strategy harry said it would be hard for the market, which we are in, to lift from the price floor which it has found itself in. Switch from oil to clean energy will not come from shortage of oil supply, as better methods of refining and extracting oil is being found estimating up to 7.5 trillion barrels could be developed with new reserves.

References Alvaro, M., Said, S. & Benoit, F., 2015. Oil Price at $70 a Barrel Would Likely Trigger Cut in OPEC Output Ceiling. [Online] Available at: http://www.wsj.com/articles/oil-price-at-70-a-barrel-would-likely-trigger-cut-in-opec-output-ceiling-1415276042 [Accessed 5 November 2015]. Beattie, A., 2015. The Cost of Shale Oil Versus Conventional Oil. [Online] Available at: http://www.investopedia.com/articles/active-trading/051215/cost-shale-oil-versus-conventional-oil.asp [Accessed 5 November 2015]. International Energy Agency, 2015. Oil Market Report, s.l.: International Energy Agency.