Impact Of Decline In Oil Prices On OPEC Member States And World Economy

Impact of decline in oil prices

Describe about the International Energy Policy?

The price of crude oil has decrease by over 40% since June, 2014. The price was $115 per barrel at that time. But the current price is near $60 per barrel. OPEC occupies 40% of global oil market. Declining in price of crude oil has created affect on the OPEC. They have failed to meet the agreement on production curbs. The oil price depends on the supply and demand. Economic activity influences the demand of energy (Elekdag, 2008). The demand of energy is high in northern hemisphere. In some region it is high in summer due to use of air conditioning. Weather and geopolitical factors affect the supply of oil.

As per current economy of world, it can be seen that there are four reasons which affect the price of oil. The current economic activity is weak. As a result the demand is also less. Second reason is the confusion of Iraq and Libya. These two are large producers of oil in the world. They produce together almost four million barrels per day. But there is no effect on output of them. The market is largely affected by geopolitical risk (Hassan, 2011). According to report, the largest producer oil is America. But there is no export made by America. It also imports oil very less. It creates a lot of spare supply. The last reason is that Saudis and their Gulf allies are not interested to sacrifice their own market share to restore the price. Saudi Arabia can continue with the low price because its reserve is very high and the cost to produce is very less (Al-Chalabi, 2010).

This study includes the impact of OPEC members State’s collective energy policies on the global energy security vis-à-vis both the oil industry and national economies due to decline in oil prices. It is also emphasized on the measurable actions that non OPEC member can take to mitigate the impact of OPEC’s current trend as an international oil producer cartel.

The members of OPEC were five when it was founded in 1960. Thereafter, another six countries had tied to this group. The production value of members of OPEC had decreased. Due to several factors including world recession, the demand has decrease. As a result the price of oil has decreased (Knetsch, 2006).

OPEC set quotas of production for stabilizing the price from 1982 to 1985. But, they failed because some members produced oil above the quota (Pitt and Leung, 2009). 

It is observed that the prices decreased from 2008 to 2009 by 70%. It was doubled in 2001 and it has declined by over 40% during 2014. At the same time, the exports of OPEC have declined 1 million barrels in a day (Balardini, 2010). The mix of export has also altered during that time for various factors.

Algeria

The revenues of Algeria mostly depend on the export of oil and natural gas. The revenue from hydrocarbon export was 97% of total revenue earned from export and this revenue was also 50% of total fiscal revenues. Due to increasing in price, the revenue has started to decline. It suffers revenue loss of $560 by decreasing price of $1 per barrel. As a result, export level decreases by 4.3% and GDP decreases by 0.8%. This country has faced several economical and social problems due to decrease in revenue of oil.

OPEC Member State’s energy policies

Iran

The revenue of Iran from export is about 36% and it contributes 80-85% to the total earnings from exports. It was predicted by the Central Bank Governor of Iran that the foreign obligation of debt is $ 26.4 billion. It will be difficult to repay that debt due to decrease in revenue of Iran’s oil. Iran will face high amount of budget deficit. Inflation and unemployed are also faced by Iran. It suffers revenue loss in oil export $1 in respect of falling $1 in oil price. As a result of revenue loss, the country may suffer cash crisis.  

Iraq  

The exports of Oil in Iraq majorly depend on the export sanctions of United Nations. But export of oil is increasing steadily. As a result it is expected that it will earn more revenue. There is significant of role on decline in global oil prices due to increase in export of oil.

Indonesia

The revenue of Indonesia decreased 32% ($3.5 billion) in 1998 form 1997 ($5.1 billion). As a result, it falls in economic crisis. It was estimated to fall 13.5-20% in actual.

Kuwait

The revenue of Kuwait is about 90% of government income. It contributes almost half to the GDP of the country.

Saudi Arabia

The largest producer of OPEC is Saudi Arabia. It is considered as leader in quota decisions. Saudi Arabia faces problem due to the economic crisis of Asian economy. The sale of 60% of Saudi occurs in Asia. The impact of declining oil prices is both positive and negative in Saudi Arabia.

The lower price may be beneficial for certain reasons. The cost of producing oil is very less and it has high reserve. There are several benefits which may be accomplished such as preventing in use of alternative energy resources, capturing the own market share, preventing the investment in non-OPEC oil.

On the other side, the earnings mostly depend on oil export. It contributes 88% to the total revenue. It has share of 75% in sate revenues and share of 40% in GDP. As a result of reducing revenues, the growth rate of GDP will decrease and Saudi Arabia may face budget deficit.

Qatar

The revenue of Qatar from oil export is about 70% of total government revenue. Though the oil price is falling, the country is still thinking to enhance the production capacity.

Nigeria

It is observed that the earnings of Nigeria from crude oil export have contribution of 90% in foreign exchange earnings. The revenue of Nigeria has decreased due to fall in global oil price. It creates a large effect on the economy and the fiscal growth of Nigeria.

Libya

It is observed that there is 36% decline in earnings of Libya ($9 billion). The earnings of oil contribute 95% to the hard currency earnings. Due to decline in oil prices, the growth of economy was very rear. The country is bound to apply more conservative fiscal policy and to reduce in spending of public infrastructure.

UAE

The growth of economy of UAE becomes very slow due to decline in global price. The effect is not so much like other Gulf states. It earns some part of revenue from other business and trade. As decreasing of revenue, the country has taken action to reduce its government expenditure.

Measures for non OPEC member to mitigate the impact

Venezuela

The revenue of Venezuela has also decreased by reducing of global oil price and it has large negative impact on its economy.

Mexico

Reducing in global oil prices has greater impact on stock market of Mexico. The stock is falling.

Russia

The revenue of Russian has also reduced due to decrease in global oil price though there is export of high volumes.

History says that OPEC has supported the high oil market prices for global crude oil by decreasing the supplies. The supply of oil has not reduced due to drop in global oil price by some members of OPEC. But some members have shown their disinterest to export in low price. It has observed in case of most members that the export of oil has reduced from 2008-2014 and presently is facing high revenue deficits (Luft and Korin, 2009).

The Saudi Arabia has good economic condition and good production capacity. Despite of that, the country has selected the low price. It may create negative effect on maximum members of OPEC. Negative effect may harm the revenues and economies of the maximum members which may lead to stabilize the Cartel.

As decrease in oil price, the production cost of goods and services will be high in the economy and profit margin will decrease. Price level and inflation of an economy can be influenced by the global oil price decline as well as the financial market of an economy can also be affected (Kalicki and Goldwyn, 2005).

The world consumers will beneficial and profitable for consuming the energy at a lower price (Kong, 2010). But it is risk for the producers. It will reduce the profits and capital spending. 

The current production of non OPEC countries is about 60% of total global production of oil. The production of non OPEC members includes USA, Mexico, North Sea, non-OPEC Middle East, china. The activities of non-OPEC are different from the activities of OPEC. The most of the oil sector of non-OPEC countries are controlled by private companies. The cost of lifting is higher than the OPEC. It is seen that the market share of OPEC is increasing. It creates problem to the non-OPEC. The global price of oil is also dropping. But the production of non-OPEC has increased s since 1993.

In non-OPEC countries, producers are generally the price takers rather than price makers. They are bound to accept the market prices rather than effort to control the prices by managing the production. Lower supply can also put in pressure and it can lead to decline in price (Cashin, 2012).

Policy 1: The main measure is the co-operation to mitigate the impact of OPEC’s current trend as an international oil producer level. The members of OPEC countries have blamed that non-OPEC countries are not intended to co-operate with them. Lack of cooperation is one of the reasons for declining in global price. But it is difficult to cooperate among. The international market is majorly influenced by geo-political factors. It is only possible when the constraint of geo-political can be solved. It is forecasted that the demand of oil will increase in coming years. Though, there is much resource to fulfill the demand, it will difficult to earn revenue by oil producers. If the OPEC and non-OPEC does not co-operate with each other, it will be very difficult the current trend of oil industry. The current trend of an economy in oil market will have an impact on the future market. So, it is required to stabilize the market now to get benefit in future. But, there are several areas of uncertainty associated with the oil industry in present market.  Uncertainties are related with the level of demand in future, policy development and development new technology. These uncertainties can only be eliminated taking collective actions by the OPEC and non-OPEC members.

Policy 2: If the production of domestic can be increased the impact of OPEC’s current trend can be mitigated. Increasing in the domestic production of oil reduces the imports and it makes independent (Helm, 2007). The reserves of oil will more due to increasing in oil production. So, the economy of the non-OPEC countries may not affected by OPEC. In US, the own production level of crude oil has improved continuously from 2008 and the net imports has exceeded in 2011. Presently, it is growing at historic rates (Crane, 2009).

Policy 3: It can be mitigated by increasing the supply. If they try to export more oil in international market, it will earn more revenue as well the market share of non-OPEC countries will also increase. The supply can be increased by higher production of domestic oil and making a well reserve. If the production and supply of non-OPEC countries increases, the production and supply of OPEC countries may decrease.

Policy 4: The non-OPEC countries can focus on the alternatives of petroleum oil (Mez, Schneider and Thomas, 2009). So, the consumption of petroleum fuel will decrease. As a result, the demand and supply of oil can be balanced. The maximum transport system in the world runs on petroleum. If alternatives to the oil such as bio-fuels, battery, etc are used the demand for oil will decrease.

Conclusion

It is difficult to say that how long the global prices of oil will decline. But, strategy of Saudi Arabia will affect largely to the others members of OPEC. If the country engages to keep on the exports of oil at lower price for maintaining the market share of them, it will create big effect on the economy of other members. They may suffer several economical problems such inflation, revenue loss and budget deficit. It may lead to an ultimate breakup of the Cartel. It Saudi Arabia even continues at price of below $75 per barrel in the current year, the energy security of US may suffer.

References

Al-Chalabi, F. (2010). Oil policies, oil myths. London: I.B. Tauris.     

Balardini, F. (2010). Oil price cycles: 1973-2010. Saarbrücken: Lambert Academic Pub.  

Cashin, P. (2012). The differential effects of oil demand and supply shocks on the global economy. [Washington, D.C.]: International Monetary Fund.

Crane, K. (2009). Imported oil and U.S. national security. Santa Monica, CA: RAND.

Elekdag, S. (2008). Oil price movements and the global economy. Cambridge, Mass.: National Bureau of Economic Research.

Hassan, F. (2011). Effects of environmental agreements on OPEC exports of oil. Saarbrücken, Germany: Lambert Academic Pub. 

Helm, D. (2007). The new energy paradigm. Oxford: Oxford University Press.

Kalicki, J. and Goldwyn, D. (2005). Energy and security. Washington, D.C.: Woodrow Wilson Center Press.

Knetsch, T. (2006). Forecasting the price of crude oil via convenience yield predictions. Frankfurt am Main: Dt. Bundesbank.

Kong, B. (2010). China’s international petroleum policy. Santa Barbara, Calif.: Praeger Security International.

Luft, G. and Korin, A. (2009). Energy security challenges for the 21st century. Santa Barbara, Calif.: Praeger Security International.

Mez, L., Schneider, M. and Thomas, S. (2009). International perspectives on energy policy and the role of nuclear power. Brentwood, Essex: Multi-Science Pub.

Pitt, E. and Leung, C. (2009). OPEC, oil prices and LNG. New York: Nova Sciences Publishers.