Introduction

The Organization of the Petroleum Exporting Countries was founded in September 1960 by five major oil exporters viz. Saudi Arabia, Iran, Iraq, Kuwait and Venezuela. Its initial aims was to cordinate crude oil policies among the member states and to explicate steps to brace monetary values. In add-on, the trust sought to guarantee consistent supply to their consumers and significant returns for investors in the industry ( OPEC 2011 ) .

The formation of OPEC was basically driven by the passage in international economic and political landscape and rose to prominence in the 1970s with its member states ruling the universe market accordingly act uponing oil monetary values ( OPEC 2011 ) . It was during this clip that OPEC gained the authorization to order oil production and oil gross among the 13 member states. The trust formulated a pricing policy whereby they set the market monetary value for Saudi Arabian petroleum through which other member states would standardise their monetary values. The policy remained effectual due to the prevailing high demand and monetary value consistence and enhanced monetary value increase which led to increased gross.

Due to continous addition in monetary values, the demand for oil fell in the subsequent old ages and impact on the oil industry was further intensified by the recession that took topographic point in 1980s motivating OPEC to restrict end product of its member states inorder to keep monetary values at high degrees. However, the monetary values continued to weaken and crashed in 1986 due to the oil oversupply, reduced planetary demand every bit good as the increasing environmental concerns sing the usage of hydro C fuels ( OPEC 2011 ) . Consequently, Opec ‘s planetary market portion reduced significantly with its entire gross dropping to such degrees that the member states experienced terrible fiscal turmoil.In response to changeless fluctuations in the monetary values and market conditions, OPEC developed an oil monetary value trade name mechanism which facilitated the strengthening and stabilising rough oil monetary values in early 2000 ( OPEC 2011 ) .

Tendencies In Crude Oil Prices And The Factors Affecting Such Tendencies

Crude oil monetary values, merely like monetary values of other trade goods, are affected by the predominating market conditions with respect to demand and supply ( WTRG 2009 ) . OPEC seeks to modulate monetary values in response to alterations in demand and supply of oil in the universe market. However, the trust has been invariably criticized for neglecting to efficaciously command rough oil monetary values particularly due to its deficiency of an effectual mechanism to implement member quotas other than Saudi Arabia trim capacity ( WTRG 2009 ) .

Oil Monetary values Trends ( 2000 and 2011 )

The monetary value of petroleum oil has risen drastically since 2006 due to the lifting economic instability, increasing planetary demand among other factors. The increasing concerns over sustainability of oil militias created widespread uncertainities which put force per unit area on monetary values coercing them to increase. In add-on, it significantly reduced supply amidst quickly increasing planetary demand for oil ( Alnaswari 1991 ) .

In 2006, the monetary values of oil remained comparatively low with the highest monetary value hitting $ 75 per barrel while the lowest monetary value was around $ 59.14 per barrel. As shown in the graph below, monetary values were comparatively changeless due to consistency in supply and little addition in demand along with little addition in supply.

Y axisOil monetary values Changes In 2006

Monetary values of Oil

PER BARREL

( $ )

59.14

74.73

Supply Curve

Demand Curves

Ten axis

Measure of Oil Barrels ( Billions )

0

100

50

In 2007, the planetary fiscal crisis was puting in and there was widespread uncertainities which limited supply accordingly increasing monetary values. Increasing demand for oil in the planetary market due to rapid industrialisation had a major impact on the monetary values of oil universe broad. Increased demand, coupled with diminishing supplies has merely served to force monetary values above the equilibrium monetary values as shown in the figure below.

Oil Monetary values Changes In 2007

Measure of Oil Barrels ( Billions )

Supply Curves

98.18

51.99

Yttrium

Monetary values of Oil

PER BARREL

( $ )

Demand Curves

Ten

0

50

100

The period of 2007/2008 was characterised by the planetary fiscal crises which saw the monetary values of oil addition aggressively during the period. In 2008, the petroleum oil monetary values reached a record high of $ 147 per barrel due to widespread uncertainities which limited supply. Supply increased somewhat during 2008 but non significantly to do the addition in monetary value in the first half of 2008. However, monetary values fell quickly in mid 2008 to stop of 2008 due to rapid diminution in demand from the OECD states ( ESCWA 2009 ) . December 2008 monetary values had fallen to a depression of $ 37 per barrel and demand had dropped signifcantly due to the financail crisis around the universe and recession.

Y axisOil Price Fluctuations In 2008

Measure of Oil Barrels ( Billions )

Ten

Supply Curves

Demand curve

Monetary values of

PER BARREL

Oil ( $ )

147

37

0

50

100

In 2009, the monetary values of oil continued to worsen from the high degrees achieved in 2008. Price increase in 2008 had risen partially due to guesss to offer up monetary values which led to creative activity of a bubble. However, these unsustainable monetary values fell drastically due to miss of equal demand to back up the hyperbolic monetary values. In title, towards the terminal of 2009, the monetary value of rough oil had fallen by 70 % ( ESCWA 2009 ) . Supply had besides dropped during this period somewhat.

YOil monetary values in 2009

Monetary values of oil

PER BARREL

( $ )

100

50

0

Ten

Supply Curve

Demand Curves

72

36

Measure Of Oil Barrels ( Billions )

The monetary values nevertheless stabilized in 2010 with the highest monetary value being $ 91 and the lowest being $ 70. The demand for oil went up during 2010 due to higher entries from non OECD Asia ( China ) and much improved economic chances from OECD North America. The supply of oil besides increased somewhat during 2010 this may hold been due to loss of oil due to BP catastrophe which caused loss of 100s of 1000s of barrels. Supply besides improved by OPEC due to increased supply from Nigeria due to a defective grapevine fixed and other techincal factors bettering ( Crude Oil News and Energy Review ) .

YOil monetary values in 2010

Monetary values of oil PER BARREL

( $ )

100

50

0

Ten

Supply Curve

Demand Curves

91

70

Measure of Oil Barrels ( Billions )

Below charts from International Energy Agency Oil Market Report illustrate supply and deamnd 2008 and 2011 – :

Conditionss Facilitating The Formation of OPEC

OPEC was established as a lasting organisation with international position by an understanding concluded between the five establishing members in 1960 ( al-Otaiba 1975 ) . Formation of OPEC was preceeded by increased struggle between oil bring forthing states and transnational oil companies which were runing under the concessionary understanding which gave such companies the rights to pull out oil in return for royalties. This agreement diminished the influence of oil bring forthing states on oil production and oil monetary values which called for extended reforms in the industry.

The early 1970s were characterized by lifting demand for oil which led to increased gross for OPEC member states. However, the Yom Kippur war and the arab oil trade stoppage made a major impact on the operations of OPEC during the early 70s. The oil trade stoppage imposed by OPEC in response to the American determination to supply support to the Israeli military during the war adversely affected the overall crude oil industry taking to an oil crisis. Consequently, the oil monetary values shot up, supply was disrupted and the economic system in most parts went into recession.

The oil market was fastening which prompted the oil bring forthing states in the Arab universe to strategically utilize the oil resource as a agency to procure economic and political aims ( Anonymous 2001 ) . This led to international prominence of OPEC during the decennary with the member states ruling the sector both domestically and internationally ( OPEC 2011 ) . The Arab oil trade stoppage of 1973 and Persian Revolution of 1979 nevertheless led to crisp oil monetary value increases which prompted OPEC to broaden its range of control and advocated for cooperation in international dealingss. Opec members farther sought to increase their incomes by increasing universe oil monetary values which resulted in monolithic income diminutions and fall out with major oil companies runing outside the trust. The formation of the Opec Cartel is a clear illustration of conniving oligopoly where the trust is in collusion in order to maximize net incomes. The factors favoring collusion were clear few members, same production methods and cost. Other factors dominant state in Saudia Arbia, no authorities measures to halt collusion and the same merchandise produced by each member state.

The old ages preceeding the mid1980s were characterised by monetary value weakening which saw the eventual monetary value clang in 1986. The overall consumer market was cut downing in favour of alternate beginnings of energy and OPEC market portion continued to shrivel. Towards the terminal of the decennary, monetary values began to increase coupled with significant recovery in the trust ‘s end product portion ( OPEC 2011 ) . This was facilitated by debut of a production ceiling and a mention basket for pricing coupled with increased cooperation between OPEC and non OPEC member states which promoted market stabilisation. The iran Iraq war had a major impact on the oil production in the Opec part which led to the demand for intercession from external organic structures. Hence the cease fire that took topographic point in the mid 80s and the UN intercession on the war positively impacted on OPEC operations through publicity in oil production in the warring states and sweetening of political stableness in the part.

In the old ages preceeding the early 2000s OPEC achieved increased monetary value stabilisation and significantly influenced the market through infliction of production ceiling. OPEC has faced great chalenges in the early 2000s emmanating from economic and political instabilities in the Middle East and the remainder of the universe. Economic crisis and changeless energy crisis over the decennary resulted in loss of monetary value control despite the legion policies formulated by OPEC to modulate oil monetary values during the decennary ( Mankiw 2007 ) . In add-on, Opec had to cover with the increasing concerns sing sustainability of militias and the increasing demand particularly in China and India.

Future Decline In World Output And Its Likely Effects on OPEC ‘s Behavior

The hereafter of universe oil production will be dependent on the same factors that have affected the same in the yesteryear. These factors include the predominating market monetary values, the rate of economic development, handiness and comparative monetary values of alternate beginnings of energy, technological alteration in production and public policies ( shojai 1995 ) . There exists sufficient oil supplies to prolong high degrees of production for a considerable period of clip with the distribution of oil militias across the universe strongly prefering OPEC members ( Shojai 1995 ) . Therefore, the function of OPEC in future oil production and oil monetary values ordinance continues to be emphasized.

The greatest challenge that OPEC will confront in future oil ordinance entails determination doing on issues sing the degree of production effectual to guarantee sustainability of the worsening oil militias in the long tally ( Pattra 2004 ) . In add-on, the trust has to develop efficient production installations that can ease deeper geographic expedition and enhance future productiveness. The trust will be faced with the dilemna of whether to increase or curtail current and future geographic expedition. Increased limitations on oil production either presently or in the hereafter may take to monetary value increase which may negatively impact on the demand by devouring states ( Shojai 1995 ) . On the other manus, increasing production in order to lower monetary values will merely take to farther depletion of oil militias. Hence, in be aftering for future production, OPEC ‘s failure to increase future capacity will ensue in high monetary values while increasing capacity will ensue in overrun which merely serves to perplex the function OPEC in the hereafter.

The past actions of non OPEC member states have played a important function in beef uping the future capablenesss of OPEC in oil production. States outside the trust have engaged in overrun which has resulted in depletion of their oil militias relative to OPEC members ( Patra 2004 ) . The individual most improtant aim of OPEC will hence be to maximise the gross of its member states through manipulating oil monetary values in their favour. This objecctive will merely be achieved if the monetary values are kept at degrees capable of prolonging both demand and supply over a long period of clip ( Patra 2004 ) . This critical hereafter function of Middle East and OPEC manufacturers will be to a great extent influenced by rate of planetary demand for oil, energy efficiency, non OPEC production, preservation and alternate beginnings of fuel ( Patra 2004 ) . With diminution in OECD production, OPEC will go on to turn doing the most powerful oil trust in the universe.

OPEC is expected to account for less that 50 % of entire jutting U S crude oil imports with the portion increasing bit by bit to 50 % by 2019 ( OIAF 2003 ) . This calls for the demand for extended future investing among OPEC member states which incorporates constellations that are more advanced than those presently in operation in order to enable the states to run into increasing universe broad demand for environmentally friendly fuels, lighter merchandises, upgraded residuary fuel, and fuels with decreased lead degrees ( OIAF 2003 ) . The jutting additions in OPEC production capacity is consistent with proclaimed programs for OPEC ‘s future capacity enlargement with its 2025 projections being estimated to be about 61 million barrels per twenty-four hours which will be twice the day-to-day capacity produced in 2001 ( OIAF 2003 ) . However fluctuations prevalent in prognosis figures are a clear contemplation of the uncertainities sorrounding chances of OPEC ‘s future production. Expansion of production capacities in the hereafter will imply substansive capital investing which will depend on handiness and ordinance of foreign investing in the OPEC part ( OIAF 2003 ) .

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