OPEC’s ability to influence oil prices reflects its dominance of world reserves (77% in 2006) and the substantial and growing share of world oil and NGL production that is accounted for by its members and, consequently, the impact that changes in their production policy can have on world oil supply. In 2007, oil production by OPEC members (including Angola) is estimated to have accounted for around 36mb/d or 42% of world demand for crude oil and natural gas liquids (although NGLs are outside the organisation’s quota system). Where all countries outside OPEC operate at full capacity, it is purely within OPEC that spare oil production capacity resides (and this predominantly in Saudi Arabia).
The ‘call’ on OPEC
In effect, OPEC therefore acts to meet the CALL on oil supply by consumers that cannot be met by the non-OPEC producers (hence the term the ‘call on OPEC’). OPECs importance to supply also means, however, that commodity market pricing is heavily influenced by its ability to supply and, as such, the level of spare capacity that resides amongst its members. To the extent that OPEC is operating towards full capacity, the price of crude oil will most likely reflect broad concerns that, in the event of an unexpected supply disruption, OPEC might be unable to ensure the supply of sufficient crude oil to world markets. Equally, at times of significant excess spare capacity the price of crude oil will likely fall reflecting both the likely availability of sufficient supplies of crude oil and commodity markets’ recognition that, on past occasions, a build in spare capacity has often been associated with poor adherence to production quotas by certain members of the cartel (i.e. quota ‘cheating’) as they seek to obtain additional revenues from the supply of crude.
In recent years OPEC has been stretched to capacity with very little slack left in the system. However, as new supply has come on-stream so too capacity has started to build, with spare capacity further augmented by the production restrictions implemented in 2007. Looking forwards, it would seem reasonable to anticipate that, with some 3-4mb/d of spare capacity oil prices would start to weaken. However, given uncertainties around the stability of some 8mb/d of supplies from Iran, Nigeria and Iraq, geopolitical tensions continue to prove an important concern.
Because OPEC does not have the power to force its members to adhere to their production quotas but instead relies upon their mutual compliance, past efforts to contain the level of supply have invariably seen certain members failing to adhere or ‘cheating’ on their production ceilings.
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The ‘call’ on OPEC
In effect, OPEC therefore acts to meet the CALL on oil supply by consumers that cannot be met by the non-OPEC producers (hence the term the ‘call on OPEC’). OPECs importance to supply also means, however, that commodity market pricing is heavily influenced by its ability to supply and, as such, the level of spare capacity that resides amongst its members. To the extent that OPEC is operating towards full capacity, the price of crude oil will most likely reflect broad concerns that, in the event of an unexpected supply disruption, OPEC might be unable to ensure the supply of sufficient crude oil to world markets. Equally, at times of significant excess spare capacity the price of crude oil will likely fall reflecting both the likely availability of sufficient supplies of crude oil and commodity markets’ recognition that, on past occasions, a build in spare capacity has often been associated with poor adherence to production quotas by certain members of the cartel (i.e. quota ‘cheating’) as they seek to obtain additional revenues from the supply of crude.
In recent years OPEC has been stretched to capacity with very little slack left in the system. However, as new supply has come on-stream so too capacity has started to build, with spare capacity further augmented by the production restrictions implemented in 2007. Looking forwards, it would seem reasonable to anticipate that, with some 3-4mb/d of spare capacity oil prices would start to weaken. However, given uncertainties around the stability of some 8mb/d of supplies from Iran, Nigeria and Iraq, geopolitical tensions continue to prove an important concern.
Because OPEC does not have the power to force its members to adhere to their production quotas but instead relies upon their mutual compliance, past efforts to contain the level of supply have invariably seen certain members failing to adhere or ‘cheating’ on their production ceilings.
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