Question

A) In 4000 words, Discuses, What is the role of OPEC and what has it done to regulate the price? Explain this using the principles of cartel economics.

B) In 5000 words Discus, where does South Africa import fuel from? And why?

C) In 4000 words, Explain the supply side risks necessitating the need for strategic fuel reserves?

Answer 1

Solution

OPEC is a cartel formed in 1960 consisting of countries that are one of the largest producers of oil in the world as these oil producing countries wanted to be on common platform and to cordinate aong themselves to make the best use of the precious resource they are having i.e., Crude Oil

Roles of OPEC:

1.To cordinate and unify the petroleum policies of it's member countries

2.To ensure stabilization of the oil markets so that there is eficient,regular and economic supply of petroleum to the consumers

3.To ensure fair and steady income to the producers and the investors in the petroleum industry.

They try to regulate the supply inorder to regulate the prices.They ensure that the oil prices do not get either too low nor too high.When the oil prices go down,they try to reduce the supply so that the prices again reach the normal / their desired levels.They do this by setting up quota system among it's member nations.The quota for each of it's member nation is decided base on the amount of production,cost of production (per barrel)of each country,financial dependency / status of the member country etc.,

So,when the oil prices become too high they instruct their member countries to increase their production so that supply becomes high leading to stabilization of prices.

As of 2019,the OPEC (Organization of Petroleum Exporting Countries) roughly controls close to 75% of the world's crude oil reserves and produced 42% of world's oil produce.

OPEC in it's meetings fix the total output to be produced and the priceof the oil produced.

It consists of 13 members of oil prodcuing nations

The OPEC + is another group of oil producers 10 in number.They team up with the OPEC and agree with them based on issue.They are a kind of flexible group.They are not officially the OPEC members but would club with them on case on case basis.

B) South Africa imports oil from different countries.It's largest partner is Saudi Arabia from where it exports 40 % of it's total oil imports come from.The next ones in order are Nigeria,Angola,Iran and UAE with approx. 29%,16%,7% and 4% respectively

The majority of oil imports enter from it's Durban port ~77% since there is a large crude oil refining capacity over there.

South Africa imports lion share of it's oil from South Africa since it is one of the cheapest in the world and also that the convenience and payment terms that it may be having with the South Africa.The middle eastern countries are high the highest deposits of oil reserves in the world and also have the lowest cost of production in the world.they also have deep pockets so they provide comparatively favourable terms of payment for countries.

According to UN COOMTRADE data ,in 2018 , South Africa imported oil worth $5.41 from Saudi Arabia.

The choice of importing from any particular nation depends not only on the price of the crude oil but also on a number of other factors such as the composition of the crude (whether heavy (or) light crude),the strategic partnerships with the country,the convenience offered by the producers like sometimes they offer to store the client's oil for a certain period of time for free,etc.,This is because some of the poorest countries may not have enough storage facilities to store excess oil when they purchase it when they want to take advantage of low global oil prices etc.,

For Example,Saudi Arabia invests heavily in developing crude oil refining infrastructure in South Africa but clubbing up with it.This will lead to more cordination between the two nations.

C) As discussed above, the global crude oil prices depend on a number of factors - Market forces of demand and supply,political and geographic conditions.Eventhough the OPEC is reponsible mostly for controlling the price of the global crude oil,from the past decade (or) so countries like US,Russia,etc., have also tried to play their role in influencing the global oil prices.For Example,the US has increased it's oil production in such huge way that last year,it became the largest producer of the same in the world.

There are supply side risks involved in Crude Oil :

- Geo-political situations - Most of largest oil producers are concentrated in the West Asia region.That region is a conflict region for most of the time.So,the supply can get disrupted if any damage occurs to the oil production facilities in these regions.For Example,during the gulf war,the oil prices have sky-rocketed as supply got disrupted,due to which many countries heavily dependent on oil like the US ,China,India etc., have suffered excessively during that time.

Another example can be US imposed sanctions on Iran so countries are not allowed to import oil from them.

- OPEC Cartel - As discussed above,these countries regualte the price and quantity of crude to be produced by them.

So,due to the above supply side risks involved which are primarily responsible for volatility in global oil prices,the oil consuming countries should construct huge strategic oil reserves so that they can purchase excess oil and store oil when the prices go down.These strategic oil reserves can also help the countries if there are any disruptions in the oil i.e., supply shocks due to above reasons.

-Countries can also purchase oil in bulk / excess so that they can get it at a cheaper price and can enter into long-term contracts with the producers when the oil prices go down.

Hope this solution helps!! Please give a " Thumbs Up " rating for this solution !!