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Global Energy Security

I. Introduction:
A.Origin :
The Organisation of Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organisation which was formed at the Baghdad Conference of September 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.

B.Members :
Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Qatar, Indonesia, Libya, United Arab Emirates, Algeria and Nigeria. Saudi Arabia is the biggest producer of oil and the dominant partner in the cartel.

C.40% Share in Global Oil Supplies :
The OPEC supplies over 40 per cent of the world|s oil need. Between them the OPEC members have around three-fourths of the World|s proven oil reserves. Excluding Iraq OPEC has a total production capacity of 28.7 million barrels per day (Mb/d). The global demand for oil is around 80 Mb/d.

D.OPEC's Control of Global Oil Prices :
Controlling Oil Prices by Restricting Production: Analysts point out that OPEC tries to control global oil prices by restricting the production. When the cartel feels that the oil prices are low, the Oil Ministers of OPEC nations impose production ceilings. Lower supplies send oil prices up. In 1973, OPEC|s squeeze on supply of oil quadrupled oil prices almost overnight.

E.OPEC's Price Band Mechanism :
The OPEC introduced a price band mechanism that targeted a price range of $22-28 per barrel for the OPEC basket, with automatic adjustments to quotas if the range was breached. Over the last one year, the OPEC basket price has remained well above its stated price limits.

F.OPEC a Divided House :
OPEC has been a divided house with a big gap between advocates of production cuts and higher prices and moderates advocating high production and low prices.

G.Limitations of OPEC|s Control Exposed :
The spurt in global oil prices exposed the limitations of the OPEC. Several members of the OPEC could barely manage their quotas, let alone increase production to stabilise the spurt in the oil prices.

2. Non-OPEC Oil suppliers :

A.Countries with Substantial Reserves :
Russia, Mexico, Angola, Oman, Norway and Britain.

B.Russia the Largest Non-OPEC Oil Producer :
Since 1997, when Russian crude production began to pick up and its exports into global markets began picking up, non-OPEC producers have made inroads into OPEC|s global market share. Russia is one of the largest producers of oil outside OPEC in the world.

3. Spurt in International Oil Prices :

A.Large Increase in International Crude Oil Prices :
There has been a sharp increase in the prices of crude oil in the last few years. Annual average crude oil prices have increased from $21.74 in 2002 to around $ 72 in 2007. Currently the price of crude oil is hovering around $120 per barrel.

B.Reasons for Increase in the Oil Prices :

a.Increase in Demand from the US and China :
The major factors behind the increase in global demand for oil was the increase in consumption levels in the US and China. The booming economy of China was the key factor for increased consumption of oil by China.

b.Weak Dollar :
Analysts point out that oil prices are benchmarked in US dollars which has been depreciating. The fall in the value of dollar robbed it of its purchasing power which encouraged the OPEC to take a relaxed view about the situation as the cartel|s revenues are pegged to the dollar.

c.OPEC|s Refusal to Increase Production :
One of the reasons for increase of crude oil prices in 2007 was the refusal by OPEC to increase production to meet the rising demand.

d.Speculation :
Analysts point out that speculators made big bets on the future delivery of oil which was one of the causes of the sharp increase in global oil prices.

e.Investment Flows into Oil :
Analysts point out that the flow of investments from pension and hedge funds into commodities including oil have increased leading to the surge in crude oil prices.

f.Concern over Supply Disruptions from Iran :
Oil consumers are concerned about the supply disruptions from Iran which is locked in a confrontation with the West over its nuclear programme.

g.Poor Supply from Iraq :
The oil industry in Iraq is still struggling to reach peak production after decades of war, sanctions and under investment.

h.Cut in Supply from Nigeria :
Crude oil production has been cut in Nigeria since February 2006 due to militant attacks on the country|s oil industry.

4. Global Economic Impact of the Rise in Oil Prices :

A.Increase in Inflationary Pressures :
According to analysts the increase in global oil prices added to the inflationary pressures in various countries.

B.Increase in Interest Rates :
Economists point out that a mismatch between global oil price and domestic selling price can push up the subsidy from the government and public debt which in turn can put pressure on interest rates and reduce the capital available to more productive borrowers.

C.Slowdown in Economic Growth :
Increase in oil prices coupled with inflationary pressures will slowdown the economic growth in these countries. The World Bank has already revised the economic growth projections in these countries by reducing one percentage point.

D.Not a Full-fledged Oil Crisis :
Analysts point out that the current rise in oil prices is not a full-fledged oil crisis on the lines of the 1970s and 1980s. The reasons being the developed countries are now less dependent on oil than they were in 1979. Adjusted for inflation the crude oil prices are still below the $101.70 peak reached in 1980, a year after the Iranian revolution.

5. OPEC to Keep the Crude Output at Current Levels:
Despite pressure from the US and other countries to increase production, the OPEC special meeting in Vienna in February 2008 decided to keep the crude oil production at the current levels of around 30 million barrels a day.

6. Conclusion :

A.Equilibrium between Demand and Supply Key to Price Stabilisation :
Analysts point out that global oil prices are affected by long-term factors one of which is the equilibrium between supply and demand. Analysts point out that the oil demand has not been responsive to prices.

B.Stabilising the Oil Prices is in the Interest of OPEC :
Finally, analysts point out that it is in the interest of the OPEC countries to keep the global oil prices at manageable levels as higher prices will push the consuming countries into recession, leading to reduced demand for oil and a price crash.
Published date : 09 Aug 2009 04:21PM

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