Opec and the Global Market

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OPEC and the Global Market

Organization of Petroleum Exporting Countries (OPEC) was founded on September 14, 1960 at the initiative of the five major oil producing countries in that time (Saudi Arabia, Iran, Iraq, Kuwait and Venezuela) at a meeting in the capital city of Iraqi Baghdad, thereby, OPEC has become the most important organization established by the developing countries to take care of their interests. The main reason for this initiative is the bloc in the face of the big oil companies and to control more heavily on oil prices and production arrangements. These nations practice perpetual power over their limited natural resources, essentially petroleum. They are focused on guaranteeing that these natural resources are exploited in a sensible and mindful way (Watts, 2014). The issue that will be discussed in the paper is the effective of OBEC in controlling oil prices and global petroleum supply in the last 10 years although the violation of the agreement by some members.

The cartel of OPEC has faced several obstacles; these relate to the challenges of globalization in all fields, global ecosystem, trading system, the role of the multi-affiliation oil companies and technical progress also energy programs in major consuming countries and the impact of political factors in the formulation and implementation of such programs. It is also transmission of the increase in oil demand from industrialized countries to developing countries and it is the organization's ability to ensure market balance and stability because the oil demand changes in seasons. The addition challenge is attributable to compete with alternative sources of oil (biofuels and tar sands, etc.). However, Economic downturn is also one of the riskiest parts for cartels. As showcase deals decrease in a debilitating economy, benefits fall. Cartel individuals may conclude that they can escape genuine reductions in profits by decreasing prices, in expectation of gaining sales at the expense of other cartel members. In fact, the effects of reducing oil prices on Gulf nations which have truly favored a higher oil value but their low production costs mean they can hold extended times of low prices. This is particularly valid for Saudi Arabia, which beside it has low production cost, has additionally taken advantage on years of high petrol prices to construct one of the world's biggest foreign reserve. By complexity, other OBEC members like Venezuela and Iran require high oil prices to adjust their financial plans and enhance their short-time monetary positions (Carbaugh, 2015).

. The continuation of the organization nearly half a century indicates to its invulnerability and the ability to adapt to the situation. In addition, defend the interests of its members.one of the short-term challenges facing the Organization is its ability to deal with crises of supply interruption, for any reason, and to resume the supply after that. The crisis has shown major supply interruption, and treatment due to the production capacity available to some OPEC countries, the value of the organization's role and credibility (Watts, 2014). There are now 14 member’s countries in OBEC (OBEC, 2016).

A creative OPEC oil value band mechanism encourages and balances out oil prices in the early years of the decade. But, a blend of market constraints, speculation, and different variables changed the circumstance in 2004, pushing up oil prices and expanding instability in the supply of oil market. Prices took off to record levels in mid-2008, before caving in the international financial turmoil and economic recession. OPEC has become prominent in supporting the oil sector, as part of global efforts to address the economic crisis. OPEC's third summit in Riyadh in 2007 built up stable energy markets and sustainable advancement (OBEC, 2016).

Prices were stable between 2011 and mid-2014 But in the mid of 2014 "OPEC" was facing large selections, as some believe that the organization had lost its function as a regulator of the oil market in the world when it decided at its meeting in November 2014 to maintain the ceiling of oil production unchanged at 30 million barrels per day, in order to defend market share instead of supporting prices by cutting crude production. What led to the fall in oil prices by more than half since mid-2014, as a combination "Brent" record reached in September 2014 level of $ 48 a barrel, compared with $ 115 a barrel in the month of July 2014 (OBEC, 2016).

Oil prices have fallen during the past two years due to an oversupply, where the world produces more than can consumes since some members exceeded the agreed quantity. As analysts say the supply in the global market still exceeds demand significantly (CNN, 2016).

Analysis the Effect on Saudi Arabia

Here we can refer to Saudi Arabia as the most important member in OBEC since it is being the primary oil producer; KSA has a large impact on oil prices around the world, and hopes of the Saudis in this way to get out of American oil producers of the game in the long run by keeping prices low. Ten years ago, Saudi Arabia was the largest producer of oil, as it pumped double crude oil, which was produced by the United States, but US oil hits expectations with the revolution of the extraction of oil shale in the past years and today the United States produces equals to Saudi production of oil (Daiss, 2016). This American oil attack on the oil sector, led to a drop in oil prices of $ 100 a barrel in mid-2014, up to $ 43 a day (CNBC, 2016).

However, Saudi Arabia economy is heavily dependent on oil and now it is suffering a deficit in the budget for the second year after a record deficit of $ 98 billion last year, in addition to economic stagnation. It has reduced government spending due to the decline in oil revenues which included the salaries of government employees (BBC, 2016).

In light of the growing fears of a continued fall in prices due to increased oil supply, "OPEC” will be hold a meeting at the end of current November where they will determine the level of production of each country also the Organization of independent producers such as Russia may also call for participation in the production cut (OBEC, 2016).