Essay Example on Crude Oil: Powering the World & OPEC's Role

Introduction

Crude oil is one of the most precious resources in the world due to its ability to provide energy for domestic and commercial purposes. Crude oil powers both homes and industries, and it is the primary force behind developing and the developed economies. The OPEC as an organization play an instrumental role in making decisions on crude oil production as well as the pricing of crude oil which affect the subsequent products prices such as the cost of gas and other consumer products because the producers have to pass the cost of production to the consumers (Mirchi, Hadian, Madani, & Rouhani, 2012). As such, OPEC operates as an oligopoly in which a small number of countries in collusion regulate the entire energy industry in the world. In one of the many aspects that the OPEC countries influence the crude oil and the energy sector is colluding to influence the price at the pump by decreasing or increasing the supply of crude oil which through the forces of demand and supply influence the price (Mirchi et al., 2012). This paper will exemplify the limitations of the power of oligopoly caused by the short-term and long-term market elasticities.

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Oligopoly Power Limitations

One of the primary limitations of the power of oligopoly is the inability of the controlling countries to influence the demand patterns, primarily due to the multiple externalities that affect the overall demand for crude oil. The oil demand changes due to the changing public sentiments due to climate change and the growing support for more environmentally friendly sources of energy, such as solar energy, wind power, and hydropower (Mirchi et al., 2012). Besides, the changing consumption patterns due to seasonal changes affect the demand for crude oil. For instance, during winter, the demand for crude oil and also the prices improve in Europe and the United States and declines when people can rely on other sources of energy such as solar energy, which becomes abundant during summer. The demand for crude oil has been on the decline due to the negative implications on the environment as more countries and developers emphasize funding environmentally friendly energy sources such as solar energy, nuclear, hydro, and wind power (Mirchi et al., 2012). Naturally, as more households install solar panels and embrace electric locomotives such as electric-powered trains and cars, the demand for crude oil will continue to decline, which is a significant limitation for the power of oligopoly.

The OPEC countries do not have control of the price elasticity and demand of gas in the global market due to the United States, which has grown to be a very elastic oil producer due to the shale boom. Despite the OPEC intention to use supply reduction as a means of increasing the pump price and the overall price per barrel, the growing power of the United States due to shale oil and consumption will be detrimental to any OPEC member economies which highly depend on oil to sustain their economies (Goetzke & Vance, 2018). Price elasticity of demand for gas in the United States is influenced by the taxation regime and changing behavioral patterns due to changing weather patterns and also social patterns that influence the traveling behavior of the people. For instance, during the Christmas season, people travel highly, which increases the elasticity of demand for gas and the price. During the cold weather, the demand for gas increases, which, based on the principles of supply and demand, leads to the rise in price.

The price changes due to the different co-acting factors have a significant effect on the crude oil revenue for the exporters. The OPEC member countries and the non-member countries affect the overall price of oil by manipulating the production of crude oil. The increase in the price of gas increases the revenue of the crude oil exporters, which is beneficial to the welfare of the people (Druzic, Gelo, & Susnjar, 2018). On the other hand, the decline in the gap prices decreases the revenue of the crude oil exporters, which forces them to come together to reduce the crude oil production in a bilateral manner which is instrumental in increasing the price and revenues for the crude oil-producing countries.

The income elasticity of demand for gas refers to the potential impact of a fraction change in income on the overall demand for gasoline. The income elasticity results in the increase in surplus income, which directly increases the demand for gas directly or indirectly by increasing the range of energy-consuming activities that people engage in. The income decline, on the other hand, results in the decrease of the surplus income, which prompts consumers to reduce their tendency to engage in energy-consuming activities such as traveling, which reduces the overall demand for gas (Mirchi et al., 2012). Another essential economic aspect that affects crude oil-producing countries is price elasticity. Price elasticity means the changing price of gas at the pump. The increase in the price of gas at the pump increases the overall supply for crude oil as the producing countries seek to make more money by gaining more profit when the buying price is high compared to the producing cost (Goetzke & Vance, 2018). On the other hand, the decline in the prices of gas at the pump leads to a decrease in the supply of the same by producing companies as they seek to make the product scarce and increase the market price, after which they will increase the production of gas.

The limitation of the power of oligopoly has a significant negative impact on the market outcome due to oil production from the non-OPEC member countries. It is difficult for the OPEC producing countries operating as an oligopoly by commanding most of the crude oil resources to affect the market equilibrium due to the growing shale oil by the United States (Mirchi et al., 2012). The efficiency of the market is reached when the market regulates itself through the act of demand and supply in the market. The OPEC member countries can influence the market efficiently through a unilateral decision to increase or reduce the crude oil production. The crude oil-producing countries do not operate in isolation because it is a precious commodity. There are potent externalities that can affect the oligopoly power of OPEC such as, international trade, state policies, and the economy in general. For the international trade, the oligopoly power of the OPEC countries declines due to the bilateral trade agreements between the countries, which is a challenge for the potential of creating a unanimous decision as an organization (Mirchi et al., 2012).

International trade brings together country configurations that are not members of OPEC with other bargaining power, which makes it difficult for the oligopoly power to work. For instance, Saudi Arabia's over-dependence on weapons from the United States makes it difficult for oligopoly production control to be effective. State policies also limit the oligopoly power of the OPEC members due to different state regulations on crude oil production and sell (Mirchi et al., 2012). Lastly, the oligopoly power is undermined by the economy in that the OPEC member countries are highly dependent on the crude oil sales to sustain their developing economies. The dependency of the economies on crude oil significantly reduces the oligopoly power of the OPEC countries due to the desire of the individual countries to safeguard their crude oil dependency economies, which can collapse.

Conclusion

In conclusion, the oligopoly power of the OPEC countries is highly limited by externalities such as renewable energy, economics, changing demand patterns, changing behavioral patterns that influence the consumption of gas. International trade and the member countries' overdependence on crude oil to sustain their economies significantly undermines the power of oligopoly of the OPEC member countries.

References

Druzic, I., Gelo, T., & Susnjar, I. (2018). Gasoline and Diesel Price and Income Elasticities. International journal of multidisciplinarity in business and science, 4(5), 139-145. Retrieved from https://hrcak.srce.hr/index.php?show=clanak&id_clanak_jezik=302296

Goetzke, F., & Vance, C. (2018). Is gasoline price elasticity in the United States increasing? Evidence from the 2009 and 2017 national household travel surveys (No. 765). Ruhr Economic Papers. Retrieved from http://dx.doi.org/10.4419/86788893

Mirchi, A., Hadian, S., Madani, K., Rouhani, O. M., & Rouhani, A. M. (2012). World energy balance outlook and OPEC production capacity: implications for global oil security. Energies, 5(8), 2626-2651. Retrieved from https://www.mdpi.com/1996-1073/5/8/2626