Opec and World Oil Market

TABLE OF CONTENTS

Chapter No. Content Page No.

Abstract 1

Key words 2

Introduction 3

I World Oil Market 4

1.1.1 Description of the world oil market 4

1.1.2 Why is demand for oil inelastic in the short run but not in the long run? 4

1.1.3 What might be the long term consequences of oil becoming a scarce resource? 4

1.2 The structure of the oil market 5

II. Organization of Petroleum Exporting Countries (OPEC)

2.1 1973 Oil Embargo 6

2.2 Wars and price changes 6

2.3 Current and former members 7

2.4 The OPEC Fund 8

Conclusion 9

REFERENCES 10

Abstract

The purpose of this paper is to analyze the impact of an increase of oil price on the terms of trade during the period of 1970-2011. The relationship between oil price and world business cycle as well as the relationship between oil price, GDP and political influence.

Crude oil, the most widely traded commodity, has been the main source of energy the last fifty years and is expected to remain so for the near future. Crude oil is mainly used for transportation fuel and is a part of the production line in most manufactured goods at some stage, whether it is production, raw material or distribution. Because of its intricate use all over the world and within almost all sectors the importance of consistent supplies and relatively stable prices is crucial for the global economy at macro and micro level. Many government GDPs are heavily linked to the oil price and the power, motor and petrochemical industries are heavily dependent on the dynamics of it.

Recent years, oil prices have surged back and forth from between US$20-$30 in the beginning of the decade to spikes up to $150. The average crude oil price for the recent decade has more than doubled since the 1990s and oil price fluctuations are much greater. This increase in the oil price indicates scarcity of oil and a supply side, which cannot match the demand side, and is due because of the large growth in the emerging market economies and the developing countries. Continuing growth in these regions and lower supplies of oil will definitely lead to higher oil prices which, depending on different scenarios of the rate of depletion of oil, policy settings and adaption by industries to the new market can cause disruption in the global economy growth and especially for regions with oil intensive industries.

The increased oil price will directly create a relocation of income between oil importing countries and oil exporters generating increased capital flow reducing the real interest rates. Production costs will rise in manufacturing goods and services but also other major industries will be affected by mainly higher transportation costs. All of these factors will affect the growth of the global GDP and the inflation rate at a certain level depending on policy frameworks and development of sustainable alternatives.

Key Words

Automatic stabilizer - adjustments to fiscal policy that occur automatically during business cycle s and smooth the path of economic growth. For example, in a recession the government will pump money into the economy by paying more in unemployment benefit without a change in policy. Automatic stabilizers counterbalance the feedback effect of changes in economic activity, although in practice their effectiveness is limited;

Asian Tigers - Singapore, Hong Kong, South Korea and Taiwan (four Asian countries with rapid economic growth);

Balanced Trade - keeping or showing a balance; in good proportions;

Budget constraints - a limit to spending by some private or public body, where the results of breaching it are expected to be catastrophic. For example, managers whose firms fail to break even, or to achieve the required rate of profit, may expect the result to be loss of their jobs or closure of their firms;

Commodity - a raw material or primary agricultural product that can be bought and sold, such as copper or coffee. A useful or valuable thing;

Depletion - reduction in the number or quantity of something,

Disruption - disturbance or problems which interrupt an event, activity, or process;

De Facto - existing or holding a specified position in fact but not necessarily by legal right;

Excludability - the property of a good whereby a person can be prevented from using it

Future value - the value that a sum of money (the present value) invested at compound interest will have in the future;

Government purchases - spending on goods services by local, state, and federal government;

Homogeneous - denoting a process involving substances in the same phase (solid, liquid, or gaseous);

Impact - the action of one object coming forcibly into contact with another or a marked effect or influence;

Invasion - an instance of invading a country or region with an armed force;

Lump-sum tax - a tax that is the same amount for every person;

Moral hazard - lack of incentive to guard against risk where one is protected from its consequences, e.g. by insurance;

Normative statement - claims that attempt to prescribe how the world should be;

Oligopoly- a market in which relatively few sellers supply many buyers. Each seller recognizes that prices can be controlled to a certain extent and that competitors' actions will influence profits;

OPEC - Organization of Petroleum Exporting Countries

Poverty