Kamil's Final Essay

Kamil Grebene
17/03/2010
OPEC’S INFLUENCE ON OIL PRICES
Introduction
Many people blame a wide range of factors and forces for high oil prices. For many, it is simply the Arabs of the Middle East and OPEC that are to blame for their setting the prices too high. However, others argue that it is not in fact open that should be blamed it is the petrol companies of the nation that have made record profits in recent years, at the expense of the customer. Research shows that while many believe that OPEC and its member nations influence oil prices by setting them the actual influence of the organization is minimal and that a wide range of non-OPEC factors causes the high price of oil.
Is the Price of Oil Too High?
In analysis of oil prices it must first be asked, and of course answered, if the oil prices today are too high. Recent research suggests that indeed they are. In fact, an article published on OPEC president, Mohammed al-Hamili stated that the price of oil is high and perhaps more importantly that the cause of the high prices is not supply and demand but because of geopolitics. However, others disagree the article reports as “..Claude Mandil, the head of the International Energy Agency, an energy watchdog for rich countries, said that prices were too high and that supply was “A bit too low” (“High oil prices caused by geopolitical, not supply concerns: OPEC” NA). Meanwhile, another source close to OPEC, the Qatari Energy Minister, echoed the comments made by the president of OPEC by stating that supply and demand are in balance.
Interestingly, OPEC has stated in the past that oil prices are out of its control. Four years ago, it was reported that despite a promise made by the organization to increase oil production that people should not expect a major break on the price of oil. As John W. Schoen reports, “In the past OPEC tried to cool overheated prices by pumping more when supplies got too tight” (Schoen NA). However, in this case, the OPEC producers says that they were already pumping as much oil as they could and that demand showed no signs of slowing despite the fact that the price was high. Moreover, Schoen reports how at the time, when OPEC ministers said that it would increase production it was believed that the effort would do any good because of the high demand for oil.
Clearly, OPEC has advanced different arguments related to the price of oil, more recently suggesting that the issue is a geopolitical one, several years ago stating that the problem is a demand issue. This does not mean that the organization is covering up some type of conspiracy. Rather, it suggests that there are a wide range of factors and forces that play a role in the price of oil. In fact, those outside OPEC appear to believe that the price of oil is not a result of OPEC but is a result of increased demand.
According to Scott Reeves OPEC does influence the price of oil but certainly cannot determine it. This view, advanced Reeves states by a senior fellow at the Cato Institute, is based on the theory, once again, that prices are established by global supply and demand. In fact, the senior fellow, Jerry Taylor states, “OPEC does not control global demand and it has a minority control over global supply. It influences prices, perhaps, but it certainly can’t establish prices. All they can affect is how much (member states) produce” (Reeves NA). However, once again, others differ in their views such as Raymond Learsy who argues that OPEC has constrained the product consistently over the last few years.
There are major concerns about the high price of oil and it appears that with even OPEC showing concern as well as other organizations, that indeed the prices are too high. An additional organization that has complained about the high prices is the International Monetary Fund. Just last year, the chief of the organization, Rodrigo Rato, “..warned that record oil prices are here to stay and appealed for collective action to rectify widening imbalances in the world economy” (“IMF chief warns high oil prices set to stay” NA). Rato stated at the time that the high prices of oil had had moderate effects on the global economy yet expressed concern that there remained a great risk of a larger impact such as global economic imbalances.
Yet, while some seem to believe that supply and demand is the problem and while OPEC suggests its concern over the price of oil, some have been highly critical of the organization. For example, an oil and petrol management expert at Southern Methodist University in Dallas states that, “OPEC is a strongly anticompetitive force. There’s no question that they have withheld oil from the market” (Trumbull NA). However, the expert, James Smith, also states that OPEC is even alarmed at oil at sixty to seventy dollars a barrel. Further, as Smith says, though the OPEC member nations agree on production quotas, they do not announce price targets.




OPEC and Oil Prices
OPEC, according to the organization itself, has its members meet at least twice per year as a means of coordinating their oil production policies. Here, the coordination comes as a result of various market fundamentals, such as the supply and demand relationship. As a result of the conference, OPEC further reveals, member nations may or may not make changes to their production levels. However, OPEC admits that, “Given that OPEC Countries product about 43 per cent of the world’s crude oil and about 51 per cent of the oil traded internationally, any decisions to increase or reduce production may lower or raise the price of crude oil” (“How does OPEC oil production affect oil prices?” NA). Moreover, OPEC states that the output decisions that are made with regard to oil prices should be considered as being separate from the prices of oil products, such as gasoline or heating oil as there are numerous factors that influence the prices of the oil products.
In fact, OPEC states that it sets oil production quotas as a means of bringing stability to the oil market. Moreover, the organizations web site state that its statute mandates that the organization pursue both stability and harmony in the petroleum market as a means of benefiting not only the producers, but also the consumers. “To this end, OPEC Member Countries respond to market fundamentals and forecast developments by co-ordinating their petroleum policies” (“Why does OPEC set oil production quotas?” NA). For example, the organization states that if some producers are producing less oil or if demand grows that OPEC can increase oil production as a means of preventing a sudden rise in prices.
Yet, it seems that there is a long lasting argument in favor of the supply and demand issue. After all, the world is believed to have limited oil reserves. However, M.A. Adelman states the alarms that oil is running out have been rung for decades. In fact, many doomsday scenarios have been advanced about the end of oil. For example, “In 1875, John Strong Newberry, the chief geologist of the state of Ohio, predicted that the supply of oil would soon run out” (Adelman 17). Other predictions have been more recent such as in 1979 then American president Jimmy Carter states that, based on an assessment conducted by the Central Intelligence Agency, oil wells were drying up all over the world. However, as Adelman states, all of these predictions have been proven false. In fact, in the year 2003 the oil production had increased four thousand times when compared to 1875.









Bibliography


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