Critically discuss different policy measures that non OPEC member States can take to mitigate the impact of OPEC’s current trend as an international oil producer cartel?
There was a quite hike in the prices of crude oil in 2013 and 2014 and this price was unusually stable. Brent is the benchmark for crude oil that had been traded internationally which lay between the ranges of $100-155 per barrel. The trend in the oil prices reveal that the stability in the oil prices do not linger for long and tends to be short lived but we can assume that the Brent prices of oil is rather normal. But recently from June 2014 there was a 40% decline in the oil prices. (Strategyand.pwc.com, 2015)This decline in the oil prices is benefiting countries like India but the Organization of Petroleum Exporting Countries (OPEC) have decided not to reduce their production to raise the oil prices. The situation escalated the problem of declining oil prices. The increased supply of oil has in some way saturated the global oil markets which have ultimately led to the decline in the prices. Ideally, the members countries should have cut down the supplies till the prices start rising. Once the oil prices stabilize, then the countries can slightly increase their oil production. In this regard OPEC plays an important role to play by keeping an eye and controlling the dishonest and rogue behavior of the member countries. Now Saudi Arabia had refused to cut down its oil production. Saudi Arabia was going through a phase of nervous politics in which the decision of maintaining the same level of production and increasing the production based on the market demand was out of fear and anxiety to lose its position and share in the global oil markets. (GLOBAL TRENDS IN OIL & GAS MARKETS TO 2025, 2015) (THE MONTH IN BRIEF: Lower prices, more oil and some refineries find buyers, 2012)
The relationship between the oil, energy and the stream of international politics is somewhat embroiled. We can say that the cynosure of the US is now Iran and Russia. US is trying to tarnish the image of both the nations by playing up with the oil prices. The decline in the oil prices would decrease the amount of foreign capital flow into Russia which will farther weaken the already injured economic situation of Russia. (The Economist, 2014)Russia would require reviewing its foreign policies and salvaging its status. Iran on the other hand had indicted Saudi Arabia for the downfall of the oil prices as it refused to cut down its oil production. This has led to the decrease in the oil revenue of Iran. It can be well anticipated that the US was using and forcing Saudi Arabia to be the reason behind the oil price fall so that Iran can be left with no other option but to sign a nuclear power deal with the US and thereby losing its nuclear capability. (Kent, 2015)
China could be the next victim to the decline in the oil price. The decline in oil prices was proving to be benefit for some of the emerging industrialized countries say China. China had plans to incorporate shale gas in order to be self reliant and sufficient in terms of energy. But this rise of power of China may be detrimental to the plans of the US. International companies who would have helped China to set up shale gas were running with low revenues with decreased production and higher cost which led to cropping down their investments on projects initiated like the one in China. China’s shale gas plan took a seat as for now. The impact that OPEC caused to its member states is damaging and destructive in all ways. OPEC’s member countries like Libya (FOCUS: Libya starts to rebuild its oil and gas industries, 2011) and Venezuela was affected by the decline in oil price which dampened their economy. In this regard it is inevitable to deny the role of the Non OPEC member states. (Peakoil.com, 2015) The slump behavior of oil price would have long lasting impact on the non OPEC countries. It was expected to increase its production but at a slower pace which would cause the companies of the energy of North America to stop making profits. Policies that can be taken by the non OPEC member countries (The Globe and Mail, 2015) are discussed in the context of the US. US can utilize the favorable situation of low oil price and can make energy policy change and reforms like restricting the subsidies spent on fossil fuel, formulating new measures regarding efficiency, establish policies that are beneficial for the economy and attract a line of investors who would help to increase oil production relative to the OPEC in which the revenues can be increased. (Lax, 1983) (Theenergycollective.com, 2015)
The countries like North America, regions of the former Soviet Union and the North Sea comprises the Non-OPEC countries which acquires about 60% of the world’s oil production. The International or investor-owned oil companies (IOCs) conducts the oil production in the Non-OPEC countries. It is generally regarded that the Non-OPEC countries are price-takers which means that cannot influence the price by adjusting the production. In this regard, the Non-OPEC countries can produce at full capacity (or have little spare capacity), considering ceteris paribus, low levels of Non-OPEC supply of oil in the market would exert an upward pressure on prices. Thus, the decline in the oil prices can be mitigated in this way where the total global supply of oil would decrease and this would accentuate the “call on OPEC”. The more the call on OPEC, the more is the rapid influence on the price by OPEC. Also the Non –OPEC countries can disrupt their oil production which would reduce the oil supply globally; this would hike the oil prices. (Eia.gov, 2015)
The energy policies are highlighted by several member countries. In the context of decreasing lignite production, the Czech Republic has initiated State Energy Strategy. Germany on the other hand wishes to create awareness regarding the country’s energy policy by implementing progress annual reports. The Responsible Resource Development Plan which is introduced by Canada aims at attaining the government goals by reforming its regulatory system. Netherland initiated to preserve the national interest by introducing a relaxed procedure for the infrastructure of the energy sector. Sweden is depicting as a carbon free economy and plans to launch a fossil fuel free vehicle fleet by the year 2030 and also has focus on the taxation on carbon dioxide emission. USA had previously implemented Climate Action Plan with a view to cut down Green House Gas emission by reducing carbon pollution, initiating preparation regarding climate changes and establish international initiative to combat climate change on a global basis and get ready for the impacts. (Energy Policy Highlights, 2015)
The implementation of the energy policies is not smooth as it has to face a lot of challenges and overcome them. It is necessary to consider the Environmental Impact Assessment (EIA) and spatial planning, without which there can be complication regard the initiation of the project and policy. Again for smooth execution of the policies an expertise concerning the energy sector need to be involved in the decision making and policy making. In the absence of such expertise, the policy may have to face criticisms. Another challenge that the energy sector faces while preparing policies is that sometimes there is interference regarding the policy framing from the national level which are not welcomed by the local and regional governments. By this there can a clash within the economy and the implementation of the policies can be hampered. While formulating policies incomplete data regarding the international energy prices and consumption of energy in the households, transportation sector and the trading sectors can restrict the policy making process. Some measures can be taken to mitigate these problems. Some of which are appointing an energy expert to enhance the monitoring process, accumulation of accurate statistics by skilled personnel must be hired and measures should be taken to allow smooth coordination between EIA and spatial planning. (Oilandgasuk.co.uk, 2015)
One of the complex challenges that the world is facing is the increasing demand for products and the corresponding supply which is the main factor that drives the direction of the situation of the global economy. This increased demand is derived from the increase in the world population and is expected to expand further. This will drive up the demand which the oil companies have to suffice by increasing their production. It is important for the OPEC to consider that economics powerhouses like in China and India are emerging which would create a threat to the other oil exporting nations. The evolution of such powerhouse would affect the demand and supply of oil and gas as they are expected to match up with the developed nations through the per capita energy use. There are also issues concerning environment and geopolitical strife that makes the challenges more complex. One of the far reaching problem faced by the sector is that inexperienced tech savvy fresher will replace the veteran industry worker which will have dual impact on the oil and gas production. (Batovic, 2014)
In this regard, there are several other challenges that the oil and gas will have to face. One such problem is the access to the resources. It is estimated that around 80% of the resources of oil and gas are acquired by the National Oil Companies (NOCs) and some of the host governments and are not accessible by the International Oil Companies (IOCs). Another aspect that needs to be catered is the cost of services. The industry requires services in the field of engineering, drilling, constructions and procurement. These require a lot of monetary resources that will initiate huge projects. Not only that new machineries must be implemented for heavy production, what is required in this regard is the appointment of experienced and technically sound professionals that will have the ability to operate and execute the machineries. This would definitely increase the cost of production. Generally the cost of production can be covered up by increased sale or increased price of the product. Assuming that the stability of the oil prices could never be predicted, hence it cannot be justified that the oil companies can earn revenues accruing to increase in the oil price by covering up the increased cost. (Smead, 2015)
Another problem associated with the oil and gas industry is the introduction of new and advanced technologies. There are two sides to this technological upgradation. The first side is explained that there is an urgent need to modernize the sector and increase the rate of production as the population of the world is ever increasing which will increase demand for oil and gas. Another aspect to this advancement is that highly skilled professionals are to be hired who have the capability to run the machines and increase the overall productivity of the sector. All these would drive up the cost of the industry. (Solutions and →, 2014)
The oil and gas industries can combat the different challenges by setting up and executing production in the most cost effective way. The industry must increase its Barrels of oil equivalencies (BOEs) and Management of Change processes for enforcing safety at the personal level.
The crucial mistake that the oil and gas industry is repeatedly committing is there business objective. The industry is busy analyzing the cost of the production of oil and implementing techniques to reduce such costs. The sector is unable to realize that such strategy is applicable and effective when the market conditions are narrow. In the current difficult business scenario the industry must focus on the supply of the assets and scrutinize their accessibility to available markets and ensuring that their presence in these markets are not short lived and they must not get into the price bidding war. Recently, we have seen that the oil prices are lower and the OPEC has out rightly refused to cut down its production aggravating the decreasing oil prices. But it does not necessarily mean that the global oil markets have a dark and gloomy future. The NON-OPEC countries can always mitigate this low oil price by disrupting their oil production and help the oil price to increase. It is the duty and responsibility of the producers and the organizations to implement and adopt policies and strategies that would help to capture and take the advantage of the upcoming reality.
References
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Energy Policy Highlights. (2015). 1st ed. p.https://www.iea.org/.
FOCUS: Libya starts to rebuild its oil and gas industries. (2011). Oil and Energy Trends, 36(10), pp.3-6.
GLOBAL TRENDS IN OIL & GAS MARKETS TO 2025. (2015). 1st ed.
Kent, S. (2015). Falling Oil Prices to Soften Non-OPEC Oil Supply Growth. [online] WSJ. Available at: https://www.wsj.com/articles/falling-oil-prices-to-reduce-supply-from-opec-members-1421322185 [Accessed 10 Mar. 2015].
Lax, H. (1983). Political risk in the international oil and gas industry. Boston: International Human Resources Development Corp.
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Peakoil.com, (2015). IEA Sees Oil-Price Recovery; Cuts 2015 Non-OPEC Output Estimate | Peak Oil News and Message Boards. [online] Available at: https://peakoil.com/consumption/iea-sees-oil-price-recovery-cuts-2015-non-opec-output-estimate [Accessed 10 Mar. 2015].
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