OPEC. It is evident when filling up at the gas station, the prices have sunk below what

Transcription

1 Sample Student 1 English Composition II Spring 2015 OPEC It is evident when filling up at the gas station, the prices have sunk below what society is generally accustomed to spending on a full tank. There are many reasons for this, and the outcome affects every industrialized country around the globe. The Organization of Petroleum Exporting Countries (OPEC) plays one of the greatest roles in ultimately determining the fate of not only the their own economies, but the world economy as well because they set the standards for production, price, and output for every other country. OPEC was founded in 1960 with the objective of coordinating and unifying the petroleum policies of its Member countries and ensuring the stabilization of oil markets (Organization of Petroleum Exporting Countries 1). There are twelve member countries all located in key oil regions throughout Africa, Asia, the Middle East, and South America, and combined, extract 81% of the world s oil (Organization of Petroleum Exporting Countries 1). The rich amount of oil that each member country has in their respective country has caused OPEC to become a powerhouse in the world market, which ultimately allows them to determine the rest of the world s oil prices. To understand what is happening in the world s oil market today and how OPEC controls oil prices, it is crucial to have a basic understanding of supply and demand. Demand is how much people want a certain product while supply is how much of the product is available to consumers (Heakle 1). The rate of supply and demand determines

2 the price of a certain commodity. Price goes up if the demand is high or the supply is low, and the price goes down if the demand is low or the supply is high. The goal of any company is to make a profit, so that company will do this by manipulating supply and demand. So if the demand for a product is low, companies will produce more of it, which will set the price low in hopes that it will attract more consumers to buy the product. If the demand for a product is high, companies will produce less of it to be able to set the prices high and gain more profit. And this is exactly what OPEC has the power to do. In the mid 2000 s, the global demand of oil skyrocketed, especially in China. This caused other countries to step in by using some unconventional alternatives, in addition to OPEC s normal output, such as the United States and Canada. For example, the United States started fracking- extracting oil formations. Canada on the other hand started heating oil sands with steam to extract crude (Plumer 1). These efforts from nonmember countries assisted in combating the deficit of oil the world had been experiencing. At the time, the extra supply of oil had little effect on the market because of all of the conflicts occurring in key oil regions. There was a civil war in Libya, Iraq was facing threats from the terrorist group ISIS, and the United States and the European Union were controlling Iranian oil sanctions. It is important to note that oil prices can change fastest than the fundamentals of supply and demand (Conerly 1) when looking at oil in a short time frame. So when these conflicts became subdued, it was right around the time that global demand, in the long term, was decreasing on top of the short term demand decreasing. The excess amount of oil being produced led oil prices to quickly spiral downward.

3 OPEC called a meeting at their headquarters in Vienna on November 27, Although some members, such as Iran and Venezuela, were against keeping production at the same level, the majority of OPEC members decided to not change production levels. OPEC s hope is to engage in a price war with non-member countries, such as the United States, that are unconventionally extracting oil because their difficult methods will eventually become unprofitable, thus causing oil supply to decrease and prices to shoot back up. There was one country in particular that pushed to keep prices the same: Saudi Arabia. In the 1980 s, the world faced a similar oil glut like the one we are facing today. To combat the problem, Saudi Arabia decided to cut back on production in hopes of the prices rising again. However, their plan ended up backfiring on them. All of the members of OPEC had made a pact agreeing to keep production the same (like today as well). Members ended up cutting back on production as well as Saudi Arabia, but the difference was that Saudi Arabia decided to do this too late which caused prices to continue to decline (Gamal 1). Now, Saudi Arabia has saved up to 750 billion dollars in the foreign exchange money for deficits like the one they are facing today. This causes them to have no desire to cut production. Economists predict that the Saudi s might have to cut back on some of their social programs they just instituted after the Arab Spring. Citizens in the kingdom have mixed emotions about losing these programs, which is stirring controversy within the people. The decisions that OPEC has been making regarding the current oil glut have had already caused a variety of effects to occur in other countries around the globe. The

4 United States has greatly benefited from OPEC s decision, but will also greatly suffer from this decision. For a majority of people, a drop in prices has had a great impact on their lives. In current years, citizens have been learning to deal with the consequences of high gas prices. For example, there has been an increase in the sales of more fuel-efficient vehicles, and a decrease in the sales of SUV s, which has even caused dealerships such as Hummer to go out of business. Now however, there is a high possibility that SUV s will start to make a sales comeback. Also, now there is less money required to be spent on gas. This allows that money to be spent on other consumer goods, and this increase in the market will boost the economy. Although it may seem as if there could be no negatives to low gas prices, they can affect people in the wrong way. As mentioned before, OPEC is trying to drive US competition away in keeping oil prices low, which will eventually make it unprofitable for the United States to keep up with the rate of production that OPEC is at. Some states where oil production is a big industry, such as Texas and North Dakota, are going to economically be hurt as the country will be turning to OPEC s cheaper oil rather than its own (Plumer 1). This will cause people in the industry to lose jobs because there is no need for their work anymore. An increase in unemployment will result in a decrease in consumption of normal goods in these states. The reason that economists estimate that the demand of oil will continue to stay low is based on one solid reason. There has been no new innovation for either an easier extraction, or a method that could reach oil in places that oil companies have not been

5 able to before. Therefore, as stated earlier, prices will be kept at a stable level. However, one cannot just look at the demand factor of this situation to predict the market. It is important to recognize that supply also is a price determinate. There are three steps involved in supplying the oil market- exploration, development, and production. These steps all cycle off of each other. Exploration today is not very prominent because of the excess oil the market contains. Since there is no more exploration to be done, the United States, OPEC members, and other oil producing countries want to continue to develop these sites they have already found. So naturally, it would be logical for these companies to keep producing oil from these sites. It is likely that this current supply cycle will last about a decade (Conerly 2). The oil market could be easily compared to the components of a chessboard. The queen is the most powerful piece and can move in any direction she wants as long as she does not move any of her own pieces. The queen is OPEC as their power is so great they have control to do anything they please to not hurt themselves. The rest of the world would be considered pawns as they move to effectively get the job done. Also, they get promoted if they reach the other side, as can other countries if they start to produce more oil. The world economy is dependent on how each player of the game moves, so no one can predict the outcome until the next turn. Works Cited "About Us." OPEC :. Organization of the Petroleum Exporting Countries, Web. 18 Mar <

6 Conerly, Bill. "Oil Price Forecast: " Forbes. Forbes Magazine, 18 Dec Web. 18 Mar < Gamal, Rania El. "Facing New Oil Glut, Saudis Avoid 1980s Mistakes to Halt Price Slide." Reuters. Thomson Reuters, 14 Oct Web. 18 Mar < HeakleI, Reem. "Economics Basics: Supply and Demand Investopedia."Investopedia. Investopedia, LLC, 30 Nov Web. 06 Mar Plumer, Brad. "Why Oil Prices Keep Falling - and Throwing the World into Turmoil." Vox. Vox Media Inc., 23 Jan Web. 16 Mar <