Extra credit assn eder

This paper has been prepared as an extra credit assignment for my college
economics course. The focus of this assignment is on current issues in the
news today with regards to our world oil supply (demand and pricing). We
all hear the acronym OPEC tossed around in the news, but the short snippets
from pundits and anecdotal commentaries have done little for my knowledge
of what is really going on. To be honest, as I write this I am asking
myself if I even know what the acronym stands for? Organization for
Petroleum something Countries? And so begins my OPEC crash course…

The Organization of Petroleum Exporting Countries (OPEC) was created
in 1960, and currently has 12 member countries (6 in the Middle East, 4 in
Africa, and 2 in South America). That being said, we (the United States)
are not a member. Neither is Europe, Russia, Japan, China, Australia, or
Canada. Some countries have become members but dropped out due to high
annual membership fees and their inability to meet production quotas set by
OPEC. At a glance OPEC provides an umbrella for these small countries. In
fact, they are an economic cartel whose mission is to coordinate the
policies of the oil producing countries (Wikipedia). The goal is to ensure
price stability in the world oil market; to obtain a stable revenue for oil-
producing nations; and to provide a regular, reliable, efficient and
economic supply to consuming countries and a fair return to investors in
the oil industry (OPEC Secretary General, 2003).

How is our oil production affecting OPEC's decision making and/or vice
versa? This is my primary concern, but I'm guessing it's bigger than
that…OPEC's oil exports represent about 60 percent of the total petroleum
traded internationally. In particular, Saudi Arabia, OPEC's largest
producer, frequently affects oil prices (U.S. Energy Information
Administration)…or is it?

In light of our most recent discussion about the Federal Reserve
Chairman's ability to control the future of the U.S. economy by raising or
lowering interest rates, I found it interesting that OPEC is afforded the
same power in the world oil market. And it seems that OPEC has been in
cruise control for a while now. Over the last decade or so OPEC hasn't had
to do much to keep prices over $100 a barrel. The current price of oil has
dropped to around $70 per barrel according to Bloomberg. This sudden drop
in price can be attributed to an increase in supply according to basic
supply and demand principles learned in this class. I'm guessing that the
increase has come largely from the U.S. oil boom in the Bakken and Three
Forks formations right here in Montana and North Dakota. In fact, analysts
have sited "The economic stagnation in Europe and Japan has sapped demand
and the steady increase in U.S. production of shale oil, up 4 million
barrels a day over the past six years, has bolstered supply. That new
incremental U.S. production is greater than the entire production of any
OPEC country except Saudi Arabia." What is really got OPEC running and
stumbling is their sudden realization that the shale producing formations
in the U.S. are not slowing down as a result of the drop in oil prices, as
they were initially forecasting when they increased Saudi oil production to
make U.S. drilling less profitable. The U.S. is still making a profit at
$70 a barrel and now OPEC is going to have to make a decision. It is
anticipated that they will make a cut in production, but prices will
continue to decrease before any leveling out is recognized.


The good news is that we are seeing a micro-explosion in our local
economy from the Bakken Boom. I have worked over there and its real, like
the wild-west, everybody is making money hand-over-fist. This has trickled
all the way down to the local merchants where prices have skyrocketed,
because the consumers are all willing to pay whatever the price is that
week. As far as prices at the pumps, I guess we will find out after OPEC's
decision.





OPEC Is High-Stepping






By Mike Eder













ECNS 203 – Extra Credit Paper
December 4, 2014