If we look at the dynamics,
then it shows that 81.5 percent of the world oil is being produced by the Gulf
region and the rest by non-OPEC countries. The proportion of oil production
between the OPEC and the rest of the world gives us the clear answer that the OPEC
countries have a greater influence on the global oil market (opec share of
world crude oil reserve 2016, 2017)
On the other hand,
it can be also seen that the oil consumption level of the non-OPEC countries is
much higher in comparison of their oil production. Due to this fact their
exports of oil are very low which makes them less dominant in the global oil
market as compared to the OPEC nations. Moreover, some of the non-OPEC
countries are unable to fulfil their own requirements and have to import oil
from different countries in order to meet their need. The overall scenario
shows how and why OPEC countries have a monopoly or dominance over the oil
prices and over the supply of the world and this is the reason why this trend
cannot be shifted towards non-OPEC nations. However, there were events like
wars and tensions among OPEC countries, but that was temporary and could not
affect the monopoly of the OPEC (Seth, 2016).
The invasion of
Kuwait by Iraq was another episode in the history of the oil prices. That was
the time when the Gulf region just came out from the chapter of the 1980s war,
and the world oil market was still adjusting and stabilizing itself (Looney, 1992). In 1990 when the Iraq
attacked Kuwait, all of a sudden, the oil price increased dramatically from $
14.9 per barrel to $ 41.1 per barrel. After the Iraq invaded Kuwait, the United
Nations put an embargo on these two countries. Kuwait and Iraq are very
important members of the OPEC and very rich oil countries as well, as they are holding
huge proportion in the OPEC production. Due to an embargo on Kuwait and Iraq
the world oil supply was severely affected. The oil shock of 1990s was not as
big as the previous which occurred during the time period of 1973 to 1974 and
1979 to 1980. It was measurable, and according to some economists it was a
short-term and foreseeable crisis (Tatom, 1991).
Boom And Recession:
After a recession or an instability, there is always a
time for an economic recovery. Events like a war always impact on the global
economy. When the Gulf war was over, the global economy started to recover. Advanced
economies like the U.S. improved and the unemployment rate of the U.S. fell
down. We know that oil is a very essential source of energy and it has a great
significance for the business world. An increase or a fluctuation in the oil
prices means a fluctuation in margins and higher costs of doing business, or in
other words, an increase in the oil prices means an increase in the costs of
commodities and services like transportation, which is energy intensive. During
the time of the gulf war, when oil prices reached a peak, the total oil
consumption of the world fell down due to a high price and a low demand of
goods and services. After the Gulf War, oil prices started falling because of an
improvement of supply. Besides that,
global oil demand also increased and reached up to 6.2 million barrels per day.
For instance, oil consumption in Asia reached up to 300.000
barrel per day, which was granted to a price recovery that extended to 1997. On
the other hand Russia also contracted its oil production to 5 million barrel
per day which was a very big aid in the price recovery process.
OPEC production decision always has a significance on
global oil prices. The increase of the production of oil from 2.5 million to 25
million barrel, effective from 1st of January 1998, was a blunder of
the OPEC, through which it lost control over the production discipline.
However, there was a sharp decline in the growth of the South East Asian
economy and for the first time in the history of the South East Asian economy
since 1982, oil consumption also declined. Due to the combination of lower
demand and higher production of oil by the OPEC, which resulted in a declining
oil price. The response of the OPEC towards a lower oil price was a reduction
in its oil production by 1.25 million barrels per day in April 1998 and later
1.335 million in July 1998. The downward trend in oil prices continued through
The OPEC dragged down its production by 3 million barrels
per day between 1998 till the middle of 1999. Oil prices started to restore on a
normal position and a recovering process had been started earlier in the year
of 1999. During the same year the OPEC took a step to influence prices by
cutting down its production once again by 1.719 million barrels in April. All
the production reductions and majors which the OPEC took was enough to
influence and move the price above $ 25 per barrel (Williams,
The beginning of the 21st century came up with
some bad news for the US economy. The GDP (Gross Domestic Product) of the U.S. which
was expected to grow by 2.8 percent, was not up to the expectations and considerably
slower than 4 percent. In addition to that, the unemployment rate was kept on
rising which was increased for more than 1 million jobs. Furthermore, short
term interest rates which rose to 5.5 percent as well as interest rate on long
term treasuries, reached to 7 percent.
The oil production itself is capital intensive and
obviously requires a lot of capital for an efficient production. The recession,
called dot.com bubble, which occurred during 1999-2000, did not affect the
production of oil due to two major factors of that time: availability of huge
capital amount and advance technology.
The starting of 21st century was quite
strenuous for the OPEC. Due to a growing population of the world and a growing
demand of oil, the OPEC faced several problems which included price control,
cutting down quotas from different places and to make a balance in production.
During the time when OPEC was facing challenges regarding
their production, on the other hand non-OPEC countries like Russia and Mexico
enormously increased their production in the year 2000. Russia increased its
oil production by 6.2 million to 9.5 million barrels in the year 2000. The increasing
Russian oil production was an exclamation for the OPEC members, having limited
production quota which was in comparison to Russian production.
The unforgettable incident which is called 9/11 Attack in
New York also led to a sudden decrease in prices which jumped from $30 per
barrel to $20 per barrel. The reason was a decrease in demand of oil.
In March 2003, the president of Venezuela tried to reframe
the OPEC by reducing the nation oil production, so that it can manage the
balance of the quota in order to earn sufficient revenue for the country (The
Millennium and Present Day Production, 2016).
Factors And Oil Prices:
The transportation industry is an oil dependent industry
due to which the oil price volatility matters a lot for the business. Small
variation in the price of oil effects the business either in negative way or in
positive way. However, there are always existences of traditional drivers which
are affecting the oil prices. But from the last several years it has been
noticed that there are also some emerging factors which globally play roles in
the oil price volatility. Traditional drivers have always an impact on the oil
prices but during the last decade there were emerging factors which also
influenced the global oil prices.
One of the key
factors of the govern oil price is the demand and supply. However, there is an existence
of various elements, which always influences the global oil prices. For example:
these elements could be weather conditions. Season like summers where the travelling
demand is high, cause an increase in oil demand. Natural disasters like
Hurricanes, which occurred for example in 2005 (Hurricanes Katrina and Rita),
vandalized refineries and offshore pipelines due to which the gasoline price
increased dramatically by 40 percent in U.S. Moreover, some other factors like the
U.S. crude oil inventory levels and OPEC production decisions spare the capacity
level, which has significant influence on the global oil prices (Natural
Resources Canada, 2010).
of The Oil Markets:
One of the
emerging factors affecting global oil prices is the financialization of the oil
markets and now global oil prices are decided in the future oil markets. The
Glass Stegall act of the U.S. in November 1999, authorized institutional
investors like the investment banks and hedge funds to get involved in risky
investments like crude oil markets and gasoline future markets (Natural
Resources Canada, 2010). During 2007 to 2008, which was an era
of a financial crisis, investments in the future of oil also caused a fluctuation
in oil prices. After the U.S. Glass-Steagall Act in the year 2009, NYMEX Oil Future Trading
represented the global trading volume of the world production 6 to 7 times (Natural
Resources Canada , 2010).
function of NYMEX is to provide platform to buyers and sellers. There are two
kinds of traders which exist in this market: the first type of traders are the
commercial traders like refineries and oil producing companies that guarantee
future prices of crude oil and other petroleum products, to put themselves on the
safe side and secure their revenues. The second type of traders are
non-commercial, in other words speculators, aiming for profit during the time
period of price volatility. Speculators include investment banks, insurance
firms and other participants. Speculators are neither producers nor consumers,
they just invest in future contracts for the sake of profit or spread.
According to NRC, the
holding for non-commercial traders in oil future contracts in 2010 was 20 percent,
and by July 2008, it reached 55 percent. The impact of these fluctuations on
holdings resulted in the increase of the oil price up to $ 150 per barrel and a
then sharp decline in 2008, which can be seen in the figure below.
Speculation is a trading
of financial instruments with a high risk and with the assumption of a significant
return. The objective of speculation is to gain maximum advantage of the market
fluctuation (Times, 2016). Speculation in oil
markets mean, that anyone who is buying crude oil, is not using it for present
consumption but for later use. The most common thing in all speculative
purchases is the buyers expectation of a higher price. Speculative buying may
also involve the purchase of crude oil for a physical storage with the
intention of building inventories, and it also involves the buying of future
oil contracts (Kilian, 2012).
Moreover, the world oil
price fluctuation depends on demand and supply but the factor which also
influences the oil price globally, is speculation. It was evidenced by
fluctuations in prices during 2004 to 2008. However, the research of the Federal
Reserve Bank of St. Lewis showed, after a global demand shock of oil, that speculation
is the second reason for fluctuations in prices. Further, in the past decade,
financial institutions, hedge funds and other investment funds invested
billions of dollars in the futures of oil, to take an advantage of a price
volatility which is evidenced by investments which rose from 13 billion dollars
in year 2004 and reached 260 billion dollars (Luciana Juvenal, 2012)
1.12 Declining Value of The Dollar:
The U.S. dollar is widely used in international
markets and as other commodities, oil is also priced in U.S. dollar. Further,
any change in the value of the dollar is responsible for fluctuations in the oil
price in other words oil has a direct correlation with the value of the U.S.
dollar. The figure below shows the position of the U.S. dollar compared to the Euro
during the year 2002-2009.
The Euro began to rise in January 2002,
and then declined slightly. But from January 2006 it kept rising and reached
its peak in July 2008, which was a clear indication of weakness of the U.S.
dollar and was definitely the reason of a rise in the oil price. During the
same period the Euro appreciated 78% against the U.S. dollar (Natural
Resources Canada, 2010) and the weakness of the dollar resulted
in the rise of the oil price by the OPEC.
Moreover, in year 2008 the decline of the dollar
was on peak, “The weak dollar is a major detriment to the price of
oil,” said Stephen Schork, publisher of the Energy Industry Newsletter,
The Schork Report. “It’s keeping prices artificially high” (Goldman, 2008).
Further, in 2008, the U.S. dollar was
declined over 10% against global currencies as a result of the fact that oil
jumped about 80%. However, the dollar was kept declining due to which investors
have bought oil futures as a hedge against inflation. As oil is priced in
dollars worldwide, so decline in the value of dollar is less beneficial for oil
exporting countries to increase production. “There is a very strong
correlation between the dollar and crude, so it all depends on how the dollar
reacts to the news,” said Schork. “If the dollar appreciates, then
that will give crude leeway to move downwards and drive a stick into this
bubble” (Goldman, 2008).
Amongst all means of travel, air travel is
the second largest after road transport. After the recession of the 2008-2009
air travel sector has suffered from the crisis, and the demand for air
traveling faced a down fall. As per the macroeconomic outlook, the projected
demand for air travel shows a slowdown over the course of forecast period 2018.
The average demand for Jet/Kerosene will be increase by an average 1.1%
annually between 2013-2018. While the decline in jet/kerosene oil is projected
in OECD countries during 2012-2018 by 0.1% annually. On other hand the non-OECD
consumption is about 2.6% annually.
In non-OECD sector
countries like China, Africa and Middle East has strong gains according to the
projection which is annually 4.1%, 3.9% and 3.0% respectively. The last two
results of this projection are backed by the recent airline sales figures.
According to the sales report of Airbus which stated 9% of the global
deliveries to the region Middle East and North Africa. Moreover, according to
the forecast of the company Airbus the Middle East region roughly account 10%
of Airbus sales in next two decades