Question

Question four

The opening statement on the website of the Organization of Petroleum Exporting Countries (OPEC) says its members seek “. . . to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.” To achieve this goal, OPEC attempts to coordinate and unify petroleum policies by raising or lowering its members’ collective oil production. However, increased production by Russia, Oman, Mexico, Norway, and other non-OPEC countries has placed downward pressure on the price of crude oil. To achieve its goal of stable and fair oil prices, what must OPEC do to maintain the price of oil at its desired level? Do you think this will be easy for OPEC to do? Explain.

NOT LESS THAN A PAGE

Answer 1

This situation is very relevant to the current situation, where we saw crude oil prices drop to historical lows. Due to the pandemic, the demand for oil has been less. Therefore the prices started plummeting as there was no regulation on production, finally breaching to negative oil prices (wherein the producer pays the buyer to take the oil). One stop solution to this is pass sanctions on production levels by various members of OPEC. These members are the major producers of oil, and if a production cap is set taking in consideration the demand trends of the current global scenario, then the oil prices shall regain stability. The agenda here is to cut the supply of oil as the demand has shrunk unprecedentedly.

Now the question, is it an easy thing? Well, it depends on how much the members of OPEC comply with the regulations set. The OPEC has already cut the global production by close to 10% as a response to the plummeting oil prices and the increase in CoronaVirus cases across the globe pushing a lot of busy airports to shut down indefinitely. The tough task here is to extend the time frame for this production cut, especially with countries like Oman which depends on oil majorly to run its economy. Apart from this, compliance from powerful countries like Russia is still a question mark as they have already been under the scanner during the price war. In short it is a diplomatic assignment to ensure that all the stakeholders of OPEC come to a consensus regarding the production cut keeping in mind the demand trends.

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