1.0 Introduction
OPEC (Organization of Petroleum Exporting Countries) is an intergovernmental organization of twelve developing countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.
Venezuela and Iran were the first countries to move towards the establishment of OPEC in the 1960s by approaching Iraq, Kuwait and Saudi Arabia in 1949, suggesting that they exchange views and explore avenues for regular and closer communication among petroleum-producing nations. The founding members are Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Later members include Algeria, Ecuador, Gabon, Indonesia, Libya, Qatar, Nigeria, and the United Arab Emirates.
OPEC was founded to unify and coordinate members' petroleum policies. Original OPEC members include Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Between 1960 and 1975, the organization expanded to include Qatar (1961), Indonesia (1962), Libya (1962), the United Arab Emirates (1967), Algeria (1969), and Nigeria (1971). Ecuador and Gabon were early members of OPEC, but Ecuador withdrew on December 31, 1992 because it was unwilling or unable to pay a $2 million (two million dollars) membership fee and felt that it needed to produce more oil than it was allowed to under the OPEC quota, although it rejoined in October 2007. Similar concerns prompted Gabon to suspend membership in January 1995. Angola joined on the first day of 2007.
OPEC has maintained its headquarters in Vienna (capital of Austria) since 1965, and hosts regular meetings among the oil ministers of its Member Countries. Indonesia withdrew in 2008 after it became a net importer of oil, but stated it would likely return if it became a net exporter again.
According to its statutes, one of the principal goals is the determination of the best means for safeguarding the organization's interests, individually and collectively. It also pursues ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations; giving due regard at all times to the interests of the producing nations and to the necessity of securing a steady income to the producing countries; an efficient and regular supply of petroleum to consuming nations, and a fair return on their capital to those investing in the petroleum industry.
According to the Energy Information Administration, in 2008 roughly 43% of the world's oil production was attributed OPEC member countries. Furthermore, OPEC member countries have approximately 70% of the proven oil reserves in the world.
Furthermore, the International Energy Agency (IEA) and the Energy Information Administration (EIA) project an increase in global demand for oil over the next several decades which raise the question on whether this increased demand can be met by OPEC oil production.
By the early 1970s, in addition to the oil embargo, OPEC oil production was influenced by the change in the oil pricing system from multinational oil companies to OPEC with the halt on authorizing new concessions by OPEC governments, movement towards equity participation in the existing concessions, and in some cases the nationalization of the oil industry. As a result by the late 1970s, multinational companies diversified their oil supply sources in the development of oil reserves outside of OPEC.
In response to higher oil prices by the early 1980s, the discovery of oil reserves in non-OPEC countries in conjunction with advances in new technology brought forth an increase in the supply of oil to the international market resulting in downward pressure on oil prices with OPEC losing market share. With the infusion of non-OPEC oil producers and their prices more responsive to competitive market conditions, OPEC abandoned the administered oil pricing system by the mid-1980s instead moving to market-reference pricing based on the price quotes provided by oil price reporting agencies. However, the limited liquidity of the spot market gave way to the use of the futures market which provided greater liquidity and price transparency.
OPEC would adjust production quotas to achieve a desired price target zone. However, OPEC's ability to influence price is dependent on market participants' expectations in the futures market.
Essentially, OPEC's decisions on production quotas provided signals to the market about OPEC's desired range of prices, the effectiveness of the signals depended on whether the market believed that OPEC could make the necessary production adjustments in light of market conditions (Fattouh, 2007).
In the face of a decrease in the global demand for oil, OPEC would attempt to defend a target price by cutting production. However, the success of such production cuts hinges on the coordination efforts and bargaining power of OPEC member countries.
On the other hand, while coordination to increase production quotas may be easier with an increase in the global demand for oil, OPEC may not respond quickly to this upward trend given uncertainty about future demand (Fattouh, 2007). Due to the large investment outlays required and the irreversibility of the investment, the decision to wait and not increase oil production would be more profitable than to increase oil production when the trend may turn out to be false (Dixit and Pindyck, 1994; Gately, 2004; Fattouh, 2007).
1.1 Statement of the Problems
OPEC's oil production is influenced by a myriad of factors such as:
- The price of oil and market conditions, i.e. The global demand for oil along with the production associated with non-OPEC oil producers and the geopolitical environment.
- Declines in price.
- Output policies have become more complicated given the emergence of the future market in signaling oil prices and the corresponding adjustments in oil production.
- The ability of OPEC to increase production capacity is also influenced by state control of the oil sector and the geopolitical climate.
With respect to investment and production in member countries with state control of the oil sector, the increasing demands on the government to finance other socio-economic projects imposes budgetary constraints on national oil companies to expand production capacity.
Also, an unfavorable geopolitical climate for OPEC member countries in terms of security concerns and sanctions would have an adverse impact on the investment climate and thus may limit capacity expansion.
1.2 Aims and Objectives of the Study
The aims and objectives of this study are:
- To constructs and evaluate the mathematical model for the crude oil production
- To examine the growth pattern of OPEC crude oil production.
- To find out if there is persistence in the production of crude oil by OPEC member countries.
- To detect the trend of crude oil production by OPEC members.
- To predict what the overall crude oil production quota by OPEC members will be in the next three years
1.3 Research Questions
- What is the trend of crude oil production by OPEC?
- Would the global crude oil demand in the nearest future be met by OPEC, giving that the current demand for crude oil is on the high side and non-OPEC oil producing countries are waxing very strong.
- What is the best model for forecasting crude oil production by OPEC member countries?
1.4 Hypothesis
Research hypothesis that will guide the study are as follows:
Null and the alternative hypothesis respectively.
HO: ß = 0; There is no significant increase in the crude oil production by OPEC member countries.
H1: ß ? 0; There is significant increase in the crude oil production by OPEC member countries.
1.5 The Significance of the Study
The study will help OPEC and other oil producing countries to understanding the time series behavior of OPEC oil production in the assessment of the impact of oil shocks and structural breaks on both oil supply and the repercussions for global economic activity. Specifically, this study examines the degree of persistence for each OPEC member country within a fractional integration modeling framework.
In particular, two important features commonly observed in oil production data are the persistence across time (Lien and Root, 1999; Kang et al. 2009) and breaks in production (Altinay and Karagol, 2004; Lee and Chang, 2005; Narayan and Smyth, 2008; Rao and Rao, 2009). Modeling the degree of persistence is important in that it can reflect the stability of production in a particular country and given the importance of oil production to other sectors of an economy the persistence of such shocks may be transmitted to other sectors of the economy and macroeconomic aggregates as well. Such transmission of shocks has implications for the effectiveness of government intervention or stabilization policies.
