Since the 1973 oil price shock, the history and behaviour of the Organization of
Petroleum Exporting Countries (OPEC) have received considerable attention both in the academic literature and in the media. Many conflicting theoretical and empirical interpretations about the nature of OPEC and its influence on world oil markets have been proposed. The debate is not centred on whether OPEC restricts output, but the reasons behind these restrictions. Others explain production cuts in the 1970s in terms of the transfer of property rights from international oil companies to governments (Johany, 1980; Mead, 1979). Others explain output restrictions in terms of coordinated actions of OPEC members.
Within the literature, OPEC behaviour ranges from classic textbook cartel to two block cartel (Hnyilicza and Pindyck, 1976), to clumsy cartel (Adelman, 1980), to dominant firm (Salant, 1976; Mabro, 1991), to loosely co-operating oligopoly, to residual firm monopolist (Adelman, 1982) and most recently to bureaucratic cartel (Smith, 2005). Others have suggested that OPEC oscillates between various positions but always acts as a vacillating federation of producers (see for instance Adelman, 1982; Smith, 2005). The existing empirical evidence has not helped narrow these different views. Griffin’s (1985) observation in the mid-1980s that the empirical studies tend to “reach onto the shelf of economic models to select one, to validate its choice by pointing to selected events not inconsistent with model’s prediction” still dominates the empirical approach to studying OPEC behaviour and its pricing power.
We examine OPEC’s ability to influence oil prices. As in any other issue related to OPEC, there are divergent views regarding its pricing power. M...
... middle of paper ...
...mand from oil importers (hardly showing any sign of relenting in the near future), the situation will worsen. In the process, OPEC might just continue to exercise its non-compliance with the “call” more often in order to counter its own revenue loss leading to more spikes. As a consequence, problems for developing and less developed oil importing countries would get compounded with threatened resilience and severely constrained macroeconomic management.
We can conclude that OPEC ‘s claim that it has actually lost the price setter or has lost the pricing power cannot be accepted and the role of Saudi Arabia is very important and cannot be neglected. Thus, the recommendation is that they all should try to self reliant and not so energy dependent on other countries and they should try to reduce their import bill by being less dependent on imports of oil.
The risk associated with these countries being the top oil producers is twofold. One, they are located half way around the world, making it expensive to transport the product logistically to a desired destination. And two, the U.S. has weak, if not contentious, relationships with them. The risks continue to mount, as America imported over 58% of its imported petroleum in 2013 from the Persian Gulf and OPEC. The players in OPEC are known globally to be hostile actors who do not have the best interest of any Western country....
middle of paper ... ... 113-117. 429-477. Gans, King and Mankiw 1999, Oligopoly' in Principles of Microeconomics, eds. Janette Whelan, Harcourt Brace & Company, Australia, pp.
This organization belongs to the oligopoly market structure. The oligopoly market structure involves a few sellers of a standardized or differentiated product, a homogenous oligopoly or a differentiated oligopoly (McConnell, 2004, p. 467). In an oligopolistic market each firm is affected by the decisions of the other firms in the industry in determining their price and output (McConnell, 2005, P.413). Another factor of an oligopolistic market is the conditions of entry. In an oligopoly, there are significant barriers to entry into the market. These barriers exist because in these industries, three or four firms may have sufficient sales to achieve economies of scale, making the smaller firms would not be able to survive against the larger companies that control the industry (McConnell, 2005, p.
Pratt, Joseph A. “Exxon and the Control of Oil.” Journal of American History. 99.1 (2012): 145-154. Academic search elite. Web. 26. Jan. 2014.
OPEC is a clear example of economic nationalism, a conglomerate of countries agreeing to control their respective economies by limiting trade and export of oil. The 1973 oil crisis was caused by countries in OPEC imposing an embargo on the US and several other countries after the US resupplied Israel during the Yom Kippur ...
In 2004, crude oil producers around the world expected a 1.5% growth in the world’s demand for crude oil. The actual growth rate was more than double the projections at 3.3%. This growth was due to rapidly industrializing of foreign countries such as, China and India. Therefore the lack of crude oil affected the supply of gasoline to consumers at the pump.
Since its discovery back in the year 1858 crude oil has been become one of the most sought after resources on the face of the planet. It is due to this fact that the oil industry has fallen into a rather odd category in the case of globalization and seeking out new markets, new labor and new customers. The reason being that the need for crude oil and fuel is always present therefore the product of oil in its basic sense sells itself and the companies do not have to go out and publicly advertise it in the sense that clothing lines and other commodities do. Oil companies must focus more on the matter of why an individual should buy their oil and along with other alternative fuels over their competitors even though in the end the companies products are the same thing. The company ExxonMobil has been the superior company in the oil industry for quite sometime now, and had plenty of success as individual companies before their merger in 1999. The reason for there success is partially due to the power they wield as the most successful company, leading to many new refineries around the world, making deals with smaller companies to gain access to new markets and are leading the world in alternative fuel research. However these things all come naturally to the biggest oil company in the industry, the real question is how they became the powerhouse they are now. That question can be answered by the way in which the company has not focused in globalizing their product of fuel and oil, but globalizing the image of the company company. This is achieved by focusing on charity in which they donate hundreds of millions of dollars, Foreign Direct Investment in areas in which they wish to expand by attempting to provide these impoverished areas wit...
Gereffi (1999) further identified two distinct types of Global Commodity Chains based on this governance structure; producer driven and buyer driven. The governance and power structur...
Another key cause to the price inflation issue is the extended period of bitterly cold weather that loomed in the northern and midwestern parts of the U.S. throughout the winter months. This led to an “increased demand in home heating oil, which is widely used in the region and is virtually identical to diesel fuel” (Lang1). This increased demand for fuel coupled with the restrictions on exported oil allowed OPEC to jack up their prices an exorbitant amount in a relatively short period of time.
Economist has analyzed the causes of decline in world oil prices. Typically, the price of oil is determined by demand and supply of the world market and forecast advance to invest in which level of demand depends on the level of economic activity and behavioral use of energy from humans. The oil price decline has a benefit for oil importers like China, India, Japan, Europe but unfortunately for oil exporters such as: Kuwait, Venezuela, Nigeria, and Iraq. Crude oil prices fell steadily in the past seems to be a result of two main factors being the levels of demand declining and a level of increased supplies (Economic, 2015)
The Standard Oil case illustrates how a vertical relationship can create horizontal market power. Granitz and Klein argue that in such a case, the vertical relationship should not be the central aspect of concern for antitrust agencies. It was the explicit horizontal conspiracy by the railroads with the help of Standard that jointly fixed rail rates and railroad market shares. “Such horizontal collusive behavior is clearly anticompetitive, and would be anticompetitive even if there were no vertical connection between Standard and the railroads” (Granitz and Klein 1996, p. 45). They conclude their article by stating that their detailed analysis did not support any new antitrust policy that would condemn a vertical relationship in the absence of a horizontal conspiracy.
OPEC was established in the 1960's and ever since, Saudi Arabia gained a reputation of being the major power of the organization. Saudi Arabia has the biggest oil reserves in the world and production costs lower than any country. (economist.com 2003)This means that it is a natural monopoly and economies of scale arises; when the long run average total cost falls as the quantity of output increases as illustrated in figure 1. (Gans, J. King, S., Mankiw, N., 2003) Saudi Arabia is the undisputed leader of OPEC.
The current world dependence on oil leaves much to be said about the impact of Saudi Arabia and the Middle East on foreign policy and international politics. Presently the world's largest consumer of oil, the U.S. depends on Saudi Arabia and much of the Middle East for the energy to run its businesses, its homes, and most importantly, its automobiles. In the past few months U.S. consumers have felt the pressures of increasing gasoline prices as they struggle to commute and live their daily lives. This leaves the U.S. with important decisions to be made on behalf of its citizens and its position in the international realm.
In conclusion, the supply and demand of oil is a complex issue that depends on several factors. Geopolitical affairs are the major issues that affect supply and demand of oil. Geopolitical factors include wars, uprisings and political inconsistencies in the world. Other factors that influence the demand and supply of oil include market domains, availability of oil, recession and the world GDP. Since 1859, the price of oil has been inconsistent. Despite the fact that oil prices increased and fell, there has been a considerable rising trend in those prices. In most cases, the falling of the price reaches the previous price level. However, increase of prices goes beyond earlier prices. This trend has seen oil prices rise over the years. With this in mind, it is clear that by 2020 the real price of oil will be more than 200 dollars.
The type of firm we are going to investigate in this assignment is an oligopolistic firm. The essence of an oligopolistic market is that here are only a few sellers. As a result, the actions of any one seller in the market can have a large impact on the profits of all the other sellers. Oligopolistic firms are interdependent in a way that competitive firms are not. The company we chose to study is Petronas.