Discussion Thread: Financial Markets, Monetary Systems, and Regional Economic Integration Key Term
Discussion Thread: Financial Markets, Monetary Systems, and Regional Economic Integration
Key Term and Why You Are Interested in It
During this week’s reading for Chapters 5 and 6, one key term that specifically stuck out to me was the other international groups, Organization of Petroleum Exporting Countries – OPEC. This international group is interesting to me because they dictate how much oil and gas the participating countries will produce and market to the rest of the world. This is an interesting concept because this group holds a monopoly over the rest of the world as OPEC has the most influence on the spot price of brent crude oil. Specifically, OPEC relates to me because that I work in the Upstream function for an integrated supermajor oil and gas company. This means that OPEC has a direct affect on how much or how little that we try to produce oil as it is dictated by the spot commodities price. Should OPEC increase production of oil, this could over supply the world, thus driving down the price per barrel.
Explanation of the Key Term
Every modern nation in the world is driven by energy, where it is often produced in foreign lands. The Organization of the Petroleum Exporting Countries or also known as OPEC, is a key factor in the world supply of both oil and gas that is sold and distribute globally. OPEC’s major function is to help member countries coordinate oil production in an effort to stabilize the oil market, while achieving a reasonable return on oil investment (Scatterlee, 2018). OPEC is setup to soften the wild swings in the oil and gas commodity space, where there are numerous things that might affect pricing. A few factors that can affect the global price of oil and gas, is geopolitical risks, weather patterns, climate, among others. When countries do not have a secured energy source, this can cause conflicts between nations, much like we are seeing in Eastern Europe currently. An increase in economic growth in developing countries may be associated with a higher expected growth for commodity demand than an increase in growth in developed countries (Ratti & Vespignani, 2015).
Major Article Summary
The article that I chose for this week’s discussion board post was, Determinants of OPEC production: Implications for OPEC behavior, by Kaufmann, Bradford, Belanger, Mclaughlin and Miki. In this article, the authors discuss how OPEC countries influence the price of oil on the commodity market and how there is a quota system for the minimum amount of oil that is produced by OPEC countries. But when realized spot pricing for oil further exceeds the lifting cost for the OPEC producers, there is an incentive to produce or increase production of oil and gas to further supply the world. These decisions are generally used for short-run economics to help swing production or should the producing country have spare capacity to sell excess amounts of oil to capture the economic benefits of high pricing environment. Real prices generally have a positive effect on production and the size of this effect may depend on spare capacity, which implies that OPEC behaviors also embody competitive elements (Kaufmann, Bradford, Belanger, Mclaughlin, & Miki, 2008). This is a major reason that OPEC generally meets once a month to discuss production quotas, pricing of different weights or APIs of crude, and consumption forecasts that companies such as Woods Mackenzie are projecting.
Discussion
In the article, Determinants of OPEC production: Implications for OPEC behavior, by Kaufmann, Bradford, Belanger, Mclaughlin and Miki, they discuss how OPEC countries take advantages of pricing, when they can. Throughout this article, I learned about how OPEC, who controls a majority the world’s oil and gas supply, regulate production and place quotas on how much the participating countries will produce. Right now, the United States is experiencing tight oil supply and low availability of crude to be purchased on the open market, which is driving prices of oil higher. But eventually, the OPEC countries will begin to ramp up production of oil to bring on more supplies to help balance out the market. Higher oil prices increase production by individual OPEC nations, rather than depressing production, thus implying that OPEC behavior also embodies competitive elements (Kaufmann, Bradford, Belanger, Mclaughlin, & Miki, 2008). One such country that can help balance out the supply demand is Saudi Arabia, which is generally thought of as the leading member of OPEC. The reason for this, is Saudi Arabia has some of the world’s largest reserves of oil, and it has the ability to rapidly increase oil production in a short time frame. In addition, they have the financial coffers to withstand producing oil in a low economic environment for a sustained time. Given the complexities that are associated with the geological, economic, and institutional determinates of oil production in the completive market, it is often hard to find an equilibrium balance with vastly different geological endowments, economic structures, and political/social aspirations (Kaufmann & Cleveland, 2001).
References
Kaufmann, R. K., Bradford, A., Belanger, L. H., Mclaughlin, J. P., & Miki, Y. (2008). Determinants of OPEC production: Implications for OPEC behavior. Energy Economics, 30(2), 333-351. https://doi.org/10/1016/j.eneco.2007.04.003
Kaufmann, R. K., & Cleveland, C. J. (2001). Oil production in the lower 48 states: economic, geological, and institutional determinates. The Energy Journal, 22(1), pp. 27-49.
Ratti, R. A., & Vespignani, J. L. (2015). OPEC and non-OPEC oil production and the global economy. Energy Economics, 50, 364-378. https://doi.org/10.1016.j.eneco.2014.12.001
Scatterlee, B. (2018). International Business: with Biblical Worldview. 1st Edition. McGraw Hill.