The Behavior Of Opec In The Oil Market Economics Essay

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In this theoretical account, market consists of a dominant manufacturer which has control over the monetary value and many little houses. Two subdivisions of literature have discussed this theoretical account. One subdivision argues the function of Saudi Arabia as a dominant manufacturer within OPEC, whereas in another one a nucleus group is defined as dominant manufacturers. The latter subdivision splits into two versions: two portion trust and three portion trust. Quite similar to each other ; they consist of a nucleus group and some sub-groups.

Saudi Arabia as the dominant house

Consistent with the dominant house theoretical account, Erickson ( 1980 ) analyzes the oil market claiming that Saudi Arabia is the dominant manufacturer which determines the monetary value. Iran as one of the big manufacturers in OPEC behaves competitively. In fact, production measure ca n’t fluctuate every bit much as Saudi Arabian ‘s for the other big manufacturers. Plaut ( 1981 ) noted that “ Saudi Arabia, OPEC ‘s monetary value leader and largest manufacturer, is the chairing force that reflects that state ‘s alone economic function in OPEC. ” Subsequently on, Griffin and Teece ( 1982 ) besides argue about the dominant function of Saudi Arabia depicting it as the “ balance wheel ” in the market. Maximizing it ‘s wealth over clip, Saudi Arabia chooses the monetary value way sing fringe reaction. Griffin and Nielson ( 1994 ) investigate schemes adopted by the OPEC members for the period 1983 to 1990. Harmonizing to their empirical consequences, between the period 1983 and 1985 Saudi Arabia behaved like a swing manufacturer. That is, Saudi Arabia adjusts its production harmonizing to other member ‘s end product degree. Testing breast for cheapness scheme between Saudi Arabia and other members in OPEC, they add a nonlinear penalty for deceivers. They find that Saudi Arabia adopts this scheme and in instance of inordinate cheating, stops moving as a swing manufacturer. In his book, Adelman ( 1995 ) states that “ The Saudis have acted as what they are: the taking house in the universe oil market ” . Alhajji and Huettner ( 2000a ) see different economic literature features for a trust and seek to look into the being of those features in some trade good trusts. They found that none of the specified features adopt OPEC. Their survey besides introduces a theoretical account to cipher the snap of demand for OPEC ‘s oil. Result show that this snap is less than 1 for OPEC as a whole, between 1973 and 1994, while it ‘s greater than 1 for Saudi Arabia. This contradicts both net income maximizing and gross maximising conditions in a trust. In contrast to stable snap of demand for OPEC as a whole community, snap fluctuates a batch for Saudi Arabia which supports the swing function of Saudi Arabia. They believe that OPEC is non a trust. It ‘s chiefly Saudi Arabia and other members merely benefit from some side advantages by this rank. Regular diplomatic dealingss with other members, sharing the cost of energy market researches, and hearing the voice of little members through OPEC are some of these advantages. They conclude that “ OPEC is composed of Saudi Arabia, dominant universe manufacturer, plus several distinguishable sub-groups ” . Alhajji and Huettner ( 2000b ) , analyze different multi-equation theoretical accounts such as dominant house theoretical account, the Cournot theoretical account, and the competitory theoretical account to look into if OPEC as whole or different sub-groups of a trust exercises any market power on the rough oil market. Statistical consequences of their theoretical account indicate that instead than the instance which considers Saudi Arabia as the dominant manufacturer, all other theoretical accounts are rejected for the period 1973 to 1994.

To look into the dynamic deductions of OPEC behaviours, Spilimbergo ( 2001 ) tests the void hypothesis of competitory versus the option of the conniving behaviour for the period 1983 to 1991. In his survey, conniving behaviour is modeled as a market sharing understanding ( That is, each member in OPEC gets a fixed fraction of entire gross ) . Empirical consequences reject the option of market sharing trust at a really high assurance degree. However, Saudi Arabia as a swing manufacturer in OPEC was an exclusion of that determination. De Santis ( 2003 ) specifies two different behaviours construing the petroleum oil monetary value fluctuations in the short and long tally: Quota government and dominant house behaviour, severally. In the short tally, Saudi Arabian ‘s oil supply is inelastic, so a big daze in the oil market instantly changes the monetary value. By contrast, dominant steadfast behaviour of Saudi Arabia in the long tally let the end product alterations steadily with lower monetary value. To quantify numerically the short and long tally effects of dazes on the rough oil market, he constructs a estimable general equilibrium ( CGE ) theoretical account for Saudi Arabia under both the quota government and dominant house theoretical account. Results back up his oil monetary values overshooting analysis. Bukenya and Labys ( 2009 ) look into whether Saudi Arabian ‘s petroleum oil monetary values can be the leader for oil monetary values of other states in the universe oil market. This hypothesis is tested utilizing informations for six OPEC and six non-OPEC states for the period 1970 to 2007. Dynamic correlativity, co-integration and vector auto-regression analyses are econometrics techniques which were employed in their survey. Overall determination show the being of a long tally equilibrium between Saudi Arabia oil monetary values and monetary values in the considered states.

A nucleus group as the dominant house

Another subdivision of literature attempts to demo that OPEC power dressed ores in a group of states called the nucleus group. Large militias, low population, and wastes desert geographics are common features of members in nucleus group. They have the potency to significantly increase their exports because of economic and political events. Harmonizing to Singer ( 1983 ) , Saudi Arabia and some smaller Arab states are able to bring forth the spread between universe oil demand and other providers ‘ production. These states are able to impact the oil monetary value by seting their production. Dahl and Yucel ( 1990 ) besides believe on the power of a nucleus group in this community and reference that “ OPEC, instead than being a weak trust, consists of a non-competitive nucleus of swing manufacturers ” . To happen if OPEC behaved like a dominant manufacturer during 1973 to 2001, Hansen and Lindholt ( 2008 ) use a multi-equation econometric theoretical account. Their survey besides tests to happen the being of a dominant manufacturer within OPEC members. They use an Equilibrium Correction Mechanism ( ECM ) theoretical account mensurating the market power. Theoretical theoretical account of their survey follows the dominant manufacturer theoretical account outlined in Alhajji and Huettner ( 2000b ) . However, Hansen and Lindholt ( 2008 ) distinguish between the oil monetary value for the manufacturer and the consumer. The logic of their paper refers to short tally snap which is by and large smaller than the long tally one. Due to provide and demand side jobs, complete accommodation requires a drawn-out clip, normally in the order of few old ages. Hence, dominant manufacturers have more market power in the short tally. Empirical consequences in Hansen and Lindholt ( 2008 ) show that the features of dominant manufacturer fitted OPEC nucleus group after 1994.

Bipartite trust

Hnyilicza and Pindyck ( 1976 ) present OPEC as an illustration of a two parts trust: a block of rescuer and a block of Spender. The states that have small immediate demand for hard currency and low rate of price reduction are known as rescuers while the states with larger demand of hard currency and higher rate of price reduction are called Spenders. Their survey considers Saudi Arabia as a portion of rescuer states and Iran among the Spenders. Cartel policies define harmonizing to the understanding between two groups based on their bargaining power and theory of concerted games determines the bargaining solution. Consequently, pricing policies follow those of a monopolistic trust if end product portions are fixed. Otherwise, optimum way depends on the bargaining power. Tourk ( 1977 ) besides analyzes OPEC behaviour by spliting it into two blocks, one with big oil reservoirs and little figure of population, including Saudi Arabia and the other one which consists of states with big population but little reservoirs. Looking up the literature, we can largely happen Iran in the latter block. Bremond et Al. ( 2012 ) look into the nexus between production of each state and the remainder of the OPEC members to see if concerted behaviour exists. For this intent, they apply Engel and Granger trial. They besides use Granger causality trial to look into the influence of production on oil monetary value. Analyzing OPEC behaviour in different sub-periods from 1973 to 2009, they found that OPEC production policy have an consequence on monetary value merely in the sub-period after the counter daze. To demo that OPEC act as a trust, they classify it between rescuers and Spenders groups. This survey considers Iran as a member of rescuer group because of its big oil ( and gas ) reservoirs and its political government.

Three-part trust

In a three-part trust theoretical account, members divide into three groups: a nucleus group, group of states which try to maximise the monetary value and a 3rd group including states that maximizes the measure. Noreenge ( 1978 ) , Houthakker ( 1979 ) , and Griffin and Steele ( 1986 ) are in line with this thought. In these surveies, Saudi Arabia is chiefly grouped as a member of the trust nucleus while Iran is a monetary value maximizer.

3.2. One portion trust theoretical account

In contrast to the first group and its subgroups, which introduce Saudi Arabia as a dominant manufacturer or portion of a dominant group, this sub-section discusses OPEC as a one portion trust. Estimating OPEC market behaviour, Griffin ( 1985 ) tests four alternate hypotheses of trust, competitory, A mark gross, and belongings rights covering period 1971 to 1983. Different theories of his survey are often observed to be rejected ; nevertheless, the partial market sharing trust was the lone one which could n’t be rejected for all 11 members of OPEC. Based on his empirical consequences, he states that “ OPEC appears to be a existent trust with at least partly effectual end product coordination ” . Later on, Jones ( 1990 ) extends Griffin ‘s estimations and finds that the partial market sharing trust is the behaviour which most of the OPEC members continue to move for the period 1983 to 1988. In his paper, Loderer ( 1985 ) considers monetary value impact as a status for any effectual trust. He tests the void hypothesis of “ OPEC is unable to impact market monetary values ” versus the option of “ monetary value impact hypothesis ” during 1974 to 1983. Data analysis result of his survey support the trust hypothesis for the period 1981 to 1983. Updating Griffin ‘s ( 1985 ) survey, Youhanna ( 1994 ) through empirical observation tests competitory and trust theoretical accounts happening OPEC behaviour for the period 1983 to 1989. The competitory theoretical account is rejected by all states in his survey while the partial market-sharing theoretical account proved to be righteous for seven members. Consistent with Griffin ‘s determination, his empirical consequences show that market sharing trust theoretical account dominates other tried theoretical accounts ; nevertheless, his consequences had different strength to Griffin ‘s. Testing if OPEC was an effectual trust between January 1965 and February 1993, Gulen ( 1996 ) searched for a long tally relationship between each state ‘s production and OPEC entire end product. He made usage of informations obtained from OPEC members and estimates all co-integration vectors. Econometric consequences show grounds of end product coordination for the beginning of the 1980 ‘s. Bockem ( 2004 ) uses New Empirical Industrial Organization ( NEIO ) thought to happen if OPEC behaves as a trust. In this attack, demand and supply of oil market are at the same time estimated and market power parametric quantities are derived. As a following measure, several theoretical theoretical accounts are considered and the boundaries for market power parametric quantities are derived. A proper theoretical account is the one which its theoretical market power boundaries are in line with estimated market parametric quantities. Consequences indicate that for rough oil market all theoretical accounts are rejected except the one which consider OPEC as monetary value leader trust. Using econometric methodological analysis, Kaufmann et Al. ( 2008 ) effort to gauge theoretical accounts of rough oil production foregrounding economic and organisational determiners for eight OPEC states. Consequences of their survey show that quotas have an impact on OPEC oil production both in the short tally and long tally. In contrast to some other surveies, none of the analyzed OPEC members in Kaufmann et Al. ( 2008 ) show negative relationship between monetary values and production. Due to production sharing behaviour of all members ( except Saudi Arabia ) and the function of quota, a non-competitive behaviour such as trust is suggested for OPEC in their survey.

Keeping the position that OPEC members may move as a dominant house theoretical account or a trust theoretical account, utilizing dominancy and market sharing definition, we expect different oil production for each state in the market.

Iran as the 2nd largest oil manufacturer in OPEC after Saudi Arabia, and the 3rd largest exporter in the universe plays an of import function in universe oil market. Current oil trade stoppage on Iran will convey some effects for the universe and altering the universe oil monetary value can be one of these possibilities. If OPEC members behave as one of the dominant house theoretical account versions, Iran oil production could n’t hold any consequence on the universe oil monetary value. To the best of our cognition, Iran has ne’er been categorized in the group of dominant manufacturers, neither as a dominant manufacturer entirely nor as a portion of dominant nucleus manufacturers. It has merely seldom been mentioned as a saver state in the literature. Sing the whole organisation as a one portion market sharing trust, monetary value is expected to see a alteration under trade stoppage. To demo the relationship between Persian oil production and international oil monetary values, the modified Wald Granger causality trial with the void hypothesis of no causality is used in this survey. Sample period covers monthly observations from January 1973 to September 2011. Result show that there is no Granger causality relationship between the Persian oil production and international oil monetary values. For comparative analysis, we examine the same relationship for the instance of Saudi Arabia. In the latter instance, consequences show a extremely statistically important causal relationship between the Saudi oil production and international oil monetary values.