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TEAM MUD MEN

The market share of OPEC-produced oil in the global oil market keeps hovering around 40%. For instance, the
International Energy Agency (IEA) provides the following representation of OPEC oil share in the global market
between 2013 &2015.OPEC-exported oil accounts for
around 60% of the global oil trade, which indicates its
dominant position in the global oil market. IEA also
reports that 81% of the worlds proven crude oil reserve
liewithin the boundaries of the OPEC nations. Of that,
around two-thirds lie within the Middle Eastern region.
OPEC remains influential due to three primary factors: an
absence of alternative sources equivalent to its dominant
position, a lack of economically feasible alternatives to
crude oil in the energy sector, and the comparatively low-

cost price advantage against the relatively high-cost non-OPEC production. Riding high on the shale oil and shale gas
discovery, the US oil producers enjoyed increased production and larger market share in recent times. On the other
hand Russia has the largest reserves, and is the largest exporter, of natural gas. It has the the eighth largest oil
reserves, and is one of the largest producer of oil. Russia produced an average of 10.83 million barrels (1,722,000
m3) of oil per day in December 2015.[1] It produces 12% of the world's oil and has a similar share of global oil
exports. Russia is by far the world's largest natural gas exporters. Sources that consider that Russia has by far the
largest proven reserves include the US CIA (47.6 trillion cubic meters),the US Energy Information Administration
(47.8 tcm) and OPEC (48.7 tcm).

Past Events regarding Conflict:

The oil industry is full of economic booms and busts. World War II was an energy-induced conflict, impelled by
Germanys drive toward the oil fields of Azerbaijan and by Japanese aggression in the Dutch East Indies.

Pre Embargo Period

Crude oil prices ranged between $2.50 and $3.00 from 1948 through the end of the 1960's. Throughout the post
war period, exporting countries found an increasing demand for their crude oil and a 40ul(, decline in the purchasing
power of a barrel of crude. In March 1971, the balance of power shifted. This happened as a result of the Texas
Railroad Commission setting a proration at 100%, for the first time. This meant that Texas producers were no longer
limited in the amount of oil that they could produce. More importantly, it meant that the power to control crude oil
prices shifted from the US (Texas, Oklahoma, Louisiana) to OPEC.

Yom Kippur War Arab Oil Embargo

In 1972, the price of crude oil was about $3.00 and by the end of 1974, the price of oil had quadrupled to $12.00.
The Yom Kippur War started with an attack on Israel by Syria and Egypt on October 5, 1973. The US and many
western countries supported Israel. As a result of this support, Arab oil exporting nations imposed an embargo on
the nations supporting Israel. Arab nations curtailed production by 5 million barrels per day (MBPD). About I MBPD
was made up by increased production by other countries. The net loss of 4 MBPD extended through March 1974
and represented 7 percent of the free world production. Prices increased 400% in six short months!

Crises in Iran and Iraq

Events in Iran and Iraq led to another round of crude oil price increases from 1979-80. The Iranian revolution
resulted in the loss of 2.5 MBPD between 1978 and 1979. In 1980, Iraq's oil production fell 2.7 MBPD and Iran's
production by 600,000 barrels per day during the Iran-Iraq War. The combination of these two events resulted in
crude prices more than doubling from $14 in 1978 to $35 per day in 1981

Boom in shale oil production

Global oil prices in the second week of January,2015 came down to $50 a barrel from $111 in June,2014, almost a 60
% fall in prices.US oil import demand has reduced significantly because of increase in domestic oil production and
shale industry .Saudi Arabia may want to destabilize oil dependent economies like Iran and Russia. It also wanted to
hurt USs shale industry which is exploring its potential in other countries as well by dropping prices to such level
that it becomes unprofitable to go for further shale production. Of the participating countries in OPEC, Iran,
Venezuela and Algeria have wanted to cut production to firm up prices. Saudi Arabia, the United Arab Emirates and
other Gulf allies refused to do so.

How Fluctuating oil prices are affecting these countries?

With lower oil prices OPEC are maintain production to help sustain fiscal revenues. For both Saudi Arabia & Kuwait
80% of their fiscal revenue is dependent on oil. The hardest hit, however, will be those with least reserve to buffer
the market such as Libya & Iraq. Naturally OPEC government are preparing for fiscal austerity. Kuwait is considering
reforming its oil subsidy program & Oman has reduced defence spending. Others such as Iran are increasing taxes,
tariffs & depreciating their currency. Saudi Arabia is considering to end the tax free living

Russian economy depends heavily on energy revenues, with oil and gas accounting for 70% of export incomes.
Russia loses about $2bn in revenues for every dollar fall in the oil price, and the International Monetary Fund is
forecasting another fall in Russian GDP of 1%. Despite the decision by the Central bank of Russia to raise its short-
term interest rate to 17% from 10.5%, the value of the currency continued to slip. Being one of the prime oil
exporters of the World, Russia is finding it really hard to cope up with the plummeting oil prices .

USA : Oil companies in the United States and elsewhere are watching profits evaporate. Banks that financed the US
shale boom are reeling from a wave of defaults . Oil prices significantly have less impact on the U.S. economy, but it
goes two ways because of the diversity of industries. High oil prices can drive job creation and investment as it
becomes economically viable for oil companies to exploit higher-cost shale oil deposits. However, high oil prices also
hit business and consumers with higher transportation and manufacturing costs. Lower oil prices hurt the
unconventional oil activity, but benefits manufacturing and other sectors where fuel costs are a primary concern.

CONCLUSION:

OPEC controls oil prices through its pricing-over-volume strategy. The cartel derives its pricing power from two
trends: absence of sources of energy and a lack of viable economic alternatives in the energy industry. It holds three-
quarters of the world's conventional oil reserves and has the world's lowest barrel production costs. This enables it
to have a wide-ranging influence over oil prices. Thus, when there is a glut of oil in the world, OPEC cuts back on its
production quotas just like it did recently by reducing its production by 1.2 million BBL .When there is less oil, it
increases oil prices to maintain stable levels of production. But OPEC's monopoly over oil prices seems to be in
danger of slipping. The discovery of shale in America has helped the country achieve near-record volumes of
production. The United States controlled oil prices for a majority of the previous century, only to cede it to the OPEC
countries in the 1970s.

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