Abstract
The world oil markets have evolved since the 1950s when the oil majors were in full control of the market from the MENA’s oil-producing wells to the gas stations in oil-consuming countries. Since then, OPEC has asserted its power, but recently it is facing challenges from the shale oil revolution as well as alternatives and renewable energy sources.
Oil markets have gone through several phases. Prior to the 1970s, the major oil companies, known as the Seven Sisters, controlled the oil production and ramped up the rate of depletion because of the impending threat of nationalization by oil producers (the countries producing oil). Eventually, the oil producers reasserted control over their oil and reduced production resulting in the oil shocks of the 1970s. Later phases resemble the first phase with the vertical integration of some of the oil producers and major oil companies operating along with the national oil companies.
OPEC’s long-term viability and its ability to secure a stable level of oil revenue to its members are now tested by the oil shale revolution. The latter has displaced a number of OPEC members’ oil exports as well as tampered the cartel’s control over oil prices. To make matters worse, the oil producers in MENA consume a large and growing share of their own production due to energy subsidies in an effort to appease the population.
A dilemma facing the oil MENA and the OPEC cartel is that at its core, a cartel’s main goal is to restrict output. Doing so leads to higher oil prices which makes marginal oil wells outside of the MENA region and oil shale more profitable. It also increases investment into alternative sources of energy and renewables. If the cartel chooses to flood the oil markets to lower oil prices and keep shale oil and other marginal producers at bay, it only hurts itself financially with much lower oil revenues.
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Notes
- 1.
For example, F.M. Scherer, the noted economist on industrial market structure, remarked more than 35 years ago about this remarkable defiance by OPEC of economic theory when he wrote, “Notwithstanding predictions by economists that divisive forces and a 90 percent divergence between price and marginal costs would cause its early demise, OPEC provides a spectacular counterexample.” See Scherer (1980). We also unfortunately believed that the cartel’s demise or a metamorphosis into a smaller grouping was just a matter of time. We were wrong. See Akacem (1985). That was the first time that the GOPEC idea was advanced, but of course that was 33 years ago. Given the spat between Saudi Arabia, the United Arab Emirates, and Qatar, the chances of a smaller oil cartel like GOPEC may be tested by the regional events and how they will eventually unfold. See also Akacem (1993).
- 2.
Within the range of oil prices that balance their budget.
- 3.
These were “1) Anglo-Iranian (started as Anglo-Persian Oil Company, now BP), 2) Gulf Oil (later Chevron), 3) Royal Dutch Shell, 4) Standard Oil Company of California (SoCal, now Chevron), 5) Standard Oil Company of New Jersey (Esso, later Exxon now part of ExxonMobil), 6) Standard Oil Company of New York (now part of Exxon Mobil), and 7) Texaco (later merged into Chevron).” Source: https://en.wikipedia.org/wiki/Seven_Sisters_(oil_companies).
- 4.
The use of a discount helps estimate the value today of some amount in the future. As an example, if we take $100 at an interest rate of 3%, it would increase to $103 in 1 year. If we wanted to know what the present value of $103 at a discount rate of 3%, we simply reverse the process and in this case, it is $100.
- 5.
We would argue that this phase could repeat itself in light of the Arab Spring and the pressures put on governments to respond to the demands on their economies brought about by the youth bulge and the relatively high unemployment rates.
- 6.
However, we should note that our core policy prescription that will be addressed in a later chapter would diminish the option of vertical integration. It will argue that oil revenues should be distributed directly to the citizens cutting the government out of the collection of these revenues. At this stage, we are merely describing the phases that world oil markets have gone through.
- 7.
For more details of this approach, see Akacem and Fleisher (1994).
- 8.
The fundamental problem is that the subsidies are not targeted to those who need it. The rich and the poor benefit from the same subsidies.
- 9.
Although, recently, Saudi Arabia has joined forces with Russia and other producers in an attempt to tame the world markets since its actions alone and those of the rest of OPEC were not enough.
- 10.
The sovereign wealth fund in this case approximates the so-called Hartwick rule put into action as described by Tom Tietenberg and Lynne Lewis, “John Hartwick … demonstrated that a constant level of consumption could be maintained perpetually from an environment endowment if all the scarcity rent derived from resources extracted from the endowment were invested in capital. That level of investment would be sufficient to assure that the value of the total capital stock would not decline.” From Tietenberg and Lewis (2015). The original article citation is the following: Hartwick (1977).
- 11.
Another scenario that does not favor the balance of payment program when even the leader in OPEC chooses a high oil production strategy.
- 12.
The latest data on oil production costs indicate that Saudi Arabia incurs a barrel cost of $9.50, while Venezuela is more than double at $23.50. We should note that the cost represents capital expenditure costs and operational expenditure cost. The capital expenditure cost per barrel is a lot smaller at $4.50 per barrel for Saudi Arabia and $9.50 for Venezuela (CNN Business 2019).
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Akacem, M., Miller, D.D., Faulkner, J.L. (2020). MENA and World Oil Markets. In: Oil, Institutions and Sustainability in MENA. Springer, Cham. https://doi.org/10.1007/978-3-030-25933-4_2
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