Modernisation of Trade Regulations and Policy

Question: Discuss about the Modernisation of Trade Regulations and Policy. Answer: Introduction The objective of this study is to analyse the historical development and controlling power of Organisation of the Petroleum Exporting countries (OPEC) in oil supply. OPEC is the cartel of major oil producing countries such as Saudi Arabia, United Arab Emirates, Algeria, Angola, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar and Venezuela. They act as a monopolist in the global oil market (Colgan, 2014). However, appearance of USA as a supplier of petroleum oil in the global market has reduced the monopoly power of OPEC significantly. This essay critically analyses rise and fall of OPEC power and market share over the years. History of the development of OPEC OPEC was founded during 1961 by five oil producing developing countries. Due to having monopoly power in the oil market, OPEC has the power to control oil price by altering supply of petroleum oil in the global market. Kilian Murphy (2014) mentioned that, in recent fall of crude oil price in global market, OPEC has important role. Emergence of other oil suppliers in the market has reduced the monopoly power of OPEC in the oil market. Hence, weakness of OPEC to control supply and demand factors made it behaving differently that what market expected. Saudi Arabia is an important member of OPEC. In the view of DiChristopher (2016), Saudi Arabia has significant share in oil supply in world market. In the face of falling price of oil in the world market, Saudi Arabia refused to reduce the supply of oil and manipulating the price. Acquiring power compared to other OPEC members was the main motive as viewed by the market analysts. The argument of Saudi Arabia was that it would not bear the burden of oil production cut alone, when the members are not ready to production cut. The rationale behind this decision is that production cut may increase the oil price and Saudi Arabia may lose the market share (Goldwyn, 2015). As stated by Mirchi et al. (2012), OPEC members played no significant role production or pricing of crude oil since oil discovery on Middle East. After formation of OPEC, most of the global oil demand was met by OPEC. With the increase in market power, the six Gulf members announced an increase in light crude oil price from $3.65 to $5.119 and further to $11.651 during same year (Fattouh, 2015). After 1980s, OPEC started to face competitive pressure due to increase in non-OPEC supply. The non-OPEC countries like Soviet union, Mexico and North Sea set their own price. As a result, share of OPEC in total oil production globally has reduced from 52% in 1973 to less than30% during 1985 (theweek.co.uk, 2016). It indicates that entry of other oil producing country in the market has reduced the market share of the OPEC. Fall in market share reduces the power of price determination in the international crude oil market. Causes of decreasing share of OPEC During 2004 Vienna convention, OPECs oil minister faced several issues regarding market dynamics. OPEC is facing lower demand for crude oil due to availability of alternative renewable resources supplied by other countries. Therefore, OPEC has been suffering from the policy dilemma that how the oil producers having large upfront investment capacities, should react to the market dynamics. There has been policy dilemma regarding short term or long term development. High oil price has predominantly remained in the market due to long positions of the market speculators. Policy dilemma, structural problem and, several supply side bottlenecks affected the profitability of OPEC countries. Colgan (2014) argued that Japan has important role in decrease in oil demand from OPEC. Japan was an important importer of oil from the OPEC countries. However, overtime demand from Japan for gasoline oil has been decreased significantly. Figure 1: Decrease in oil demand from OPEC globally (Source: Fattouh, 2015) Among the OPEC member countries, Saudi Arabia played an impotent role to administer supply and pricing. Net back pricing system was adopted by Saudi Arabia resulted in price collapse during 1986. After 1986, the current market related oil pricing started in the competitive dynamics. Kilian Murphy (2014) cited that political rivalries among the OPEC member countries have been detrimental in fulfilling agreements regarding production cut and price stabilisation policy. Success of the cartel depends on the collaborative decision making. Among the member countries, Saudi Arabia is the rising power has limited the power of OPEC. Figure 2: Oil production of Saudi Arabia (Source: Fattouh, 2015) Saudi Arabia has recently decided to cut oil prices for exporting oil to the Asian countries violating the commitment to OPEC. In the view of Mirchi et al. (2012), the motive behind this decision is to grab market share from the regional rival Iran. However, Faucon (2016) argued that OPEC is likely to regain its power due to shrinking output in US and investment cut in many new projects. These two effects can reduce global oil supply less than its demand in 2017. Conclusion OPEC follows the role of cartel, whose objective is to hold the market power to supply crude oil and determining prices. Before 1980, most of the countries relied on OPEC for importing oil. Hence, OPEC had a monopoly power in the market to control demand and supply in the market. However, discovery of oil field in the non OPEC countries has reduced the share of OPEC in global market. Decision dilemma, rivalry among the member countries, lack of investment are the major causes of falling share of OPEC. Moreover, Saudi Arabias reluctance to respond market situation such as price volatility as per commitment to OPEC has negative influence on the regulatory power of OPEC. References Colgan, J. D. (2014). The emperor has no clothes: The limits of OPEC in the global oil market.International Organization,68(03), 599-632. DiChristopher, T. (2016). Saudi oil price cuts fly in the face of deal to limit OPEC output. CNBC. Retrieved 9 November 2016, from https://www.cnbc.com/2016/10/06/saudi-oil-price-cuts-fly-in-the-face-of-deal-to-limit-opec-output.html Fattouh, B. (2015). Current Oil Market Dynamics and the Role of OPEC. oxfordenergy.org. Retrieved 9 November 2016, from https://www.oxfordenergy.org/wpcms/wp-content/uploads/2015/01/Current-Oil-Market-Dynamics-and-the-Role-of-OPEC-Reflections-on-Robert-Mabros-Work.pdf Faucon, B. (2016). OPEC Sees Rival Oil Production Declining as Markets Rebalance. WSJ. Retrieved 9 November 2016, from https://www.wsj.com/articles/opec-sees-rival-oil-production-declining-as-markets-rebalance-1463135728 Goldwyn, D. (2015). Heres Why Saudi Arabia Has Let Oil Prices Falland Why They Could Revive by Years End. Atlantic Council. Retrieved 14 November 2016, from https://www.atlanticcouncil.org/blogs/new-atlanticist/heres-why-saudi-arabia-has-let-oil-prices-fall-and-why-they-could-revive-by-years-end Kilian, L., Murphy, D. P. (2014). The role of inventories and speculative trading in the global market for crude oil.Journal of Applied Econometrics,29(3), 454-478. Mirchi, A., Hadian, S., Madani, K., Rouhani, O. M., Rouhani, A. M. (2012). World energy balance outlook and OPEC production capacity: implications for global oil security.Energies,5(8), 2626-2651. theweek.co.uk. (2016) Will the oil price return to $26 if Opec deal fails?. (2016). Retrieved 9 November 2016, from https://www.theweek.co.uk/oil-price/60838/oil-price-rebounds-after-worst-trading-week-in-11-months