1. Introduction
The Organization of the Petroleum Exporting Countries – OPEC coordinates and unifies the policies among the oil exporting developing nations. The increase oil production has an impact on the supply and demand side and impacts the prices and incomes of the OPEC countries. The examination will answer the research question what are the effects of increased oil production in the OPEC countries with the focus on the Middle East member countries.
Problem
The Middle Eastern countries with the production of oil impact the international price of oil and also their incomes. The OPEC countries, which are among the biggest world oil producers are highly dependent on the oil production and its exports. The oil represents the biggest income of the governmental revenues and collapsing and change of prices can greatly impact the countries normal functioning and financing. The oil prices are almost historically low because the major OPEC countries do not want to lose customers to the non-OPEC producers.
Context
The OPEC intergovernmental organization was established in the year 1960 and consists of 13 countries and hence Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela (OPEC, 7). The impact of the increased oil production will be shown on the Middle Eastern OPEC countries, Iran, Iraq, Kuwait, Qatar, Saudi Arabia and United Arab Emirates.
OPEC accounts for approximately 60% of the total global oil trade. What is more the OPEC had in 2014, 80.8% of the world proven crude oil reserves. World proven oil reserves are at 1.492.9 billion barrels. Beside the oil market the OPEC countries are also important in the area of natural gas, with the total world share of 47.3%. The world crude oil production has been increasing at average 73.4 million barrels per day and the major increase was seen in North America, especially in the United States of America and in Europe and its European member state country Norway. The total OPEC share of crude production was in 2013 at 43.3% (OPEC, 6). The production in the Middle Eastern OPEC countries is expected to increase more rapidly as elsewhere, because of the bigger reserves and lower production costs.
Problem
The policy of the increased oil production has been implemented due to the competition. In the year 2014 the OPEC decided to defend the market share rather than the price, which has resulted in the increased oil production (OPEC, 17). All OPEC countries have in 2014 produced 37.48 million barrels a day, in 2015 38.73 million barrels a day and in the first quarter of this year 39.35 barrels a day, which is in comparison to the first quarter of the 2015 increased (OPEC, 59). With the oversupply and high oil production OPEC countries results in the low global oil prices, which will impact its members differently. The oil prices, which are dependent on the amount of oil production can break or make the national economies. The impact of higher or lower oil production impact OPEC countries differently since they have different costs of oil production. High dependency on oil is seen among all members of the OPEC, which is causing the energy security risks. All oil producers are highly dependent on the oil governmental revenues. On the average in the OPEC countries the oil is accounted for around 73% of total exports and the % among the Middle Eastern countries is even higher. Among all five countries it is the highest in Kuwait and hence 95%. In all Middle Eastern countries, the oil revenues are used for financing the health and education and all national infrastructure (OPEC a, n. p.), which represents a big problem with greatly decreasing those revenues and incomes. The high dependence is evident from the fact that in the year 2013 Qatar and Saudi Arabia were 100%, United Arab Emirates 99.9%, Iraq 97.3%, and Iran 98.9% dependent on the fossil fuel energy consumption (World Bank a, n. p.).
The causes of increased oil production
There are various causes that can contribute to the increased of oil production, such as natural disasters, wars, increased demand and most common the regulation of oil prices with impacting the supply and demand. The reason is growing supply in the non-OPEC countries (International Energy Agency, 54). Current increased oil production among the OPEC states has been seen because OPEC countries want to guarantee its market share and want to overcome the competition. One of the most influential is Saudi Arabia, which wants to limit the future development of U.S. shale oil, which has been proven not to be profitable when the oil prices are low as todays values. New technology advances in horizontal drilling and hydraulic fracturing are more expensive in comparison to the oil production in the Middle Eastern countries. With less income and non-profitability there is not enough finance to continue the oil production and even more for the new investments (Kilian, 3-22). The causes of the increased oil production are the result of OPEC new strategy to shut down the US shale operators which could lead to the market share recapturing of OPEC.
The effects of increased production will impact all Middle Eastern OPEC countries with leaving the consequences on the profitability and costs. The geographical locations and already accessible reserves have different costs of pumping. Based on The Economist (n. p) Saudi Arabia, Kuwait, United Arab Emirates and Iraq can make a profit even if the oil is as low as 20 dollars. The same cannot be said for Qatar and Iran. Iran would have lower costs, but the majority of the production at the price of 20 dollars would not be profitable. The majority of the world’s oil producers’ production at this price would not be viable. When looking at the oil prices from May 2016 which are at around 47 dollars per barrel all non-OPEC countries are having loses along with OPEC countries Venezuela, Algeria, Angola, Libya, Nigeria and Qatar (The Economist, n. p.). The second major consequences are the lost revenues for the oil exporters. All of the Middle East and North Africa region countries that are rich in oil have seen in recent years the rapid economic growth because of the export of oil. Since the 2014 the persistent decline in prices that are the consequence of the increased oil production have turned surpluses into deficits, along with slowing the growth and increasing concerns about the unemployment. Export revenues loss for oil exporters has been estimated at 390 billion dollars in 2015 and a further 140 billion of loss is estimated for this year (International Monetary Found, n. p.). Based on the World Bank (n. p.) all of the examined countries are seeing the decrease of the Gross Domestic Product growth.
Literature review
The OPEC organization has been studied by various economic researchers. Major theoretical approaches concerned with the issue have examined the OPEC in accordance with the competitive, oligopoly and monopoly models to explain the OPEC behavior. The production of oil by OPEC member states and the theoretical examination has shown that no single model can explain the behavior, from which it can be concluded that member states are following various models at different points of time. The behavior of increasing or decreasing production and prices can be explained by the scarcity and market power (Cleveland, 215-227). In this time of increased production and today’s circumstances in the Middle East we can say that the OPEC and Middle East countries are acting in accordance to the oligopoly model. In the oil market, there are few producers and collusion inside OPEC is trying to reduce the competition with decreasing prices where all actors are aware of the actions of others, which can be seen in the fact that the price of oil is despite the different producers and outcomes the same.
Policy implications
Based on the U.S. Energy Information Administration (1) the OPEC countries have seen a great decrease in the net oil export revenues. From year 2014 the decrease of 11% in comparison to the year 2013 was seen. It is obvious that the current policy is not bearing on the long turn for any of the OPEC countries. It has been shown that OPEC and its Middle eastern member states, especially Saudi Arabia has been holding the prices of oil relatively low, which has shown not to be viable and cost effective for the majority of the oil exporters. The disadvantages for the Middle Eastern countries are less income from oil revenue, which will have a vast impact on its own citizens. With less income also less innovation and investments will be seen which will impact the overall economy in the oil export countries. They could possible achieve decrease of the competition and the advantage of the decreasing price can be seen in the decreasing of the debt among the oil importing countries.
Conclusion
The paper is very important for the current policy will have great impact on the whole world, where some could have more benefits as others. The impacts of the increased production will mostly negatively impact the OPEC countries and its current competition with new emerging technologies as well as positively impacted the import countries. It is relevant to change the politics in the Middle Eastern OPEC countries since on the long turn such low prices are unbearable and will further decreased the countries funds and savings. What is more with less income the countries will continue to remain highly dependent on the oil production and will increase the negative impacts on the environment with further increasing the climate change consequences.
Recommendations
Recommendation for the OPEC Middle Eastern countries is to work together, since not all countries have a profit from having such a low oil prices with which they are causing great social and economic consequences. They try to decrease the competition with new policies which cannot be productive in the long term and therefore the oil exporters should be focused on decreasing their dependence on oil and natural gas, with which they would gain more independence and become more resistant in possible cases of economic shocks. This would also increase the innovation and new technology with which the Middle East countries could gain even more competitive advantage.
Work cited
Cleveland, J. Cuter. Concise Encyclopedia od History of Energy. Elsevier: United States.
2009. Print.
International Energy Agency. Oil market Report. 2016. Web.
https://www.iea.org/media/omrreports/fullissues/2016-04-14.pdf
International Monetary Found. Cheap Oil Means a New Reality for Middle East, North Africa
Region. 2016. Web. http://www.imf.org/external/pubs/ft/survey/so/2016/car042516c.html
OPEC. OPEC Annual Statistical Bulletin. 2015. Web.
http://asb.opec.org/images/pdf/ASB2015.pdf
OPECa. Dependence is a Two-Way Street. 2007. Web.
http://www.opec.org/opec_web/en/press_room/844.htm
Kilian, L. The Impact of the Shale Oil Revolution on U.S. Oil and Gas Prices. Review of
Environmental Economics and Policy. 2016 Web. http://www-personal.umich.edu/~lkilian/kilian120514r1.pdf
The Economist. The Oil Conundrum. 2016. Web.
http://www.economist.com/news/briefing/21688919-plunging-prices-have-neither- halted-oil-production-nor-stimulated-surge-global-growth
U.S. Energy Information Administration. OPEC Revenues. 2015. Web.
http://www.eia.gov/beta/international/analysis_includes/special_topics/OPEC_Revenues/opec.pdf
World Bank. GDP Growth. 2016. Web.
http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG/countries
World Bank a. Fossil Fuel Energy Consumption. 2014. Web.
http://data.worldbank.org/indicator/EG.USE.COMM.FO.ZS
