Question:

The rising production of oil by non –OPEC countries is the biggest threat to OPEC’s power over the global oil industry.Explain, by citing three reasons, whether you agree or disagree with this statement.

Answer:

Introduction

This paper would analyze the topic of how the rising production of oil by “non-OPEC” states has become the biggest threat to “OPEC‟s” power over the global oil industry. “Hamilton” recognizes that from “1973 to 1996” is “the age of OPEC” and “1997” was the presented as “a new industrial age.” For the duration of “1974–1996” increased in “non-OPEC” oil production caused an augmentation in “OPEC” oil production. “OPEC” oil production reduces considerably with constructive shocks to “non-OPEC” “oil production” in the former time, but doesn‟t act so in the “new industrial age” (Energy Economics, 2015).

2. History of “OPEC”

More than thirty years, “OPEC” has delivered not as much as half of the globe‟s oil. Certainly, “OPEC” produced just somewhat more than 41% of the globe‟s oil. However, the majority of the globe‟s extra limit held by the producers of the “Gulf State”. Therefore, “OPEC”, mainly “Saudi Arabia”, was able to control the cost of oil in two directions. Thus, historically it was implied that the focus of oil valuing authority dwelled with “OPEC” and its main maker, is “Saudi Arabia”. From 2005, the worldwide oil markets felt that “OPEC” was just capable to impact the cost of oil in only one course: “higher, by lowering output”. “OPEC's” capacity to lower costs began to break, separation, and usually falls flat as the 1 st period of oil's re-costing started into 2008. In fact, “OPEC” during the year “2004-2008” had raised the production level many times in an attempt to limit oil costs to guard the worldwide economic market from an oil stun. Though, at that time the oil market was experiencing an essential change, since it reoriented itself to a voracious, cost-insensitive demand from “Asia”, gave slightest consideration. Rather, supply disturbances at undersized makers and in undersized areas had a huge impact on the value of oil by pushing it more than “OPEC's” impact on an attempt to push the value inferior. It's not apparent that “OPEC” had some quantifiable impact on limiting the costs of oil for a long time. Summer tropical storms in the “Gulf of Mexico”, turbulence and blackouts in the “Niger Delta”, and different hits displayed prominent increasing pressure on the oil costs than upward “OPEC” supply alterations (History of OPEC, 2001).

3. “Oil prices, and OPEC and non-OPEC oil production”

At the time of Iranian revolution, the production of oil fell among “1978 and 1979” near about “2.0–2.5 million barrels per day of oil”. These decreases were shortly upturned following the rebellion. The start of the “Iran–Iraq War” in “1980” was a reason for a huge fall together in the production of countries (The Economist, 2011).

“The oil production actions of OPEC and non-OPEC from 1974 - 2012 is stated in FIG 1, OPEC oil production of Saudi Arabian in FIG 1b, Nominal and real oil price is shown in FIG 2 , The nominal and real oil price in U.S. dollars is based on an index of 100 in 1974. Striking aspects in FIG 1a and the drop in OPEC oil production and Saudi oil production from the end of the 1970’s through the 1 st half of the 1980s in FIG 1b” (Herrera & Pesavento, 2007).

in “Saudi‟s” oil making is stated in Fig. 1b. During “1990” the price of oil raised with the “Iraqi's invasion of Kuwait and the Gulf War”. Through the 1st “Gulf War in 1990”, oil making distorted in “Iraq and Kuwait”. Oil making by “Saudi Arabia” augmented partly and considerably counterbalance this fall down. In “Kuwait” the production of oil had improved early “1993”. “Oil production” in “Iraq” stayed comparatively steady till the end of “1990‟s”. The cost cycle then twisted. Development in “Asia” more than “1990 to 1997” added to globe‟s oil usage and oil cost increments. “Non-OPEC” oil making fell in the middle of “1990s” expert on a major decline in “Russian production” between “1990 and 1996”. The revival from “Asian Financial Crisis” brought world‟s petroleum utilization enlargement from “1999” onwards till the start of downturn in the U.S. from “2001”. In “2003” there were “Venezuelan” political turmoil and the “2 nd Persian Gulf War” (The Economist, 2014). The fast rise in oil value prompting a climax in “2008” is connected with fast monetary development in main rising economies, like “China and India”, and with lower extra creation ability. The drop in the oil rate from “2008 to 2009” is identified by the “Global Financial Crisis” amidst late “2008”, retreat in the U.S. over “2007 to 2009”, and feeble development in “Europe”. Moreover, “OPEC” reduced generation goal from “September 2008 to January 2009”. “The Global Financial Crisis” and the frail universal economy the spot cost for raw petroleum stays curbed before re-bouncing by “April 2011” whilst the worldwide monetary action stayed stifled (Energy Tribune, 2013).

4. Literature review on structural breaks in oil prices

“The document states the basic break determining so as to write on oil costs the qualities of distinctive periods, like, „the age of OPEC‟ and „a new industrial age‟. The acknowledgment of

basic breaks in oil costs could impact the ending relating to the time arrangement properties of the oil value information. If the auxiliary breaks is not accurately measured, endings might be reached relating to the times arrangement properties of the information. It is a vital subject that if the oil costs are motionless there is mean inversion, however if the oil costs have a unit root then stuns have changeless impacts. (Pindyck, 1999) and (Ferreira, Soares, & Araújo, 2005) does not consider auxiliary breaks and stated that oil costs are non-stationary. (Maslyuk & Smyth, 2008) with per week information and (Ghoshray & Johnson, 2010) with per month information authorize up to 2 basic breaks and are not able to dismiss the null of unit root. Within the oil value writing, diverse structural breaks were found, in any case to some degree as that distinctive time periods have been investigated and distinctive frequencies of information were used. (Mishra & Smyth, 2014) stated that recognizing heteroskedasticity with the two structural breaks in daily energy information helps in the finding that costs are mean reverting. Like, utilizing everyday information (Arouri, Lahiani, Lévy, & Nguyen, 2012) discovered one structural break in 1997 and numerous breaks in 2008 in the gasoline commerce sector utilizing information from January 1986 to October 2009. Utilizing per month information from January 1961 to August 2011, (Noguera, 2013) said that a few structural breaks: when the information is utilized as a part of levels a structural break is found for January 1978 and for both levels and patterns he discovered structural breaks for July 1979, February 1986, February 1991, July 1998 and November 2008”.