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Posts Tagged ‘stability’

The oil see-saw

In the blog OPEC deal pushes up oil prices John discussed the agreement made by OPEC members to reduce total oil output from the start of 2017, with Saudi Arabia making the biggest cut in output. The amount of oil being provided is a key determinant of the oil price and this agreement to reduce oil output contributed to rising prices. However, now oil prices have begun to fall (see chart below) with Saudi Arabia in particular recording an increase in output but all OPEC nations noting that global crude stocks had risen.

Supply and demand are key here and over the past few years, it has been a problem of excess supply that has led to low prices. OPEC nations have been aiming to achieve greater stability in global oil markets. Given the excess supply, it has been output of oil that the cartel member have been trying to cut. That was the point of the agreement that came into effect from the start of 2017. However, even with the recent increase in production Saudi Arabia notes that its output is still in line with its output target. The 10 percent fall in crude prices over such a short period of time has led to renewed concerns that pledges to reduce production will not be met. However Saudi Arabia’s energy ministry stated:

“Saudi Arabia assures the market that it is committed and determined to stabilising the global oil market by working closely with all other participating Opec and non-Opec producers.”

There were already concerns about the oil market relating to a potential increase in US shale oil output. Oil producers include OPEC and non-OPEC members and so while the cartel has agreed to cut production, it has little control over production from non-cartel members. This was one of the main factors that contributed to the oil price lows that we previously saw. OPEC’s forecast for oil production from non-OPEC member has been raised for 2017 and overall production from all oil producing nations looks set to increase for the year, despite OPEC curbing output by 1.2 million barrels per day. However, despite the 10% drop, the price of crude oil ($50) still remains well above its low of $28 in January 2016.

Oil prices are one of the key factors that affect inflation and with UK inflation expected to rise, this fall in oil prices may provide a small and temporary pause in the rise in the rate of inflation. There are many inter-related factors that affect oil prices and it really is a supply and demand market. If US shale oil production continues to rise, then total oil output will rise too and this will push down prices. If OPEC members undertake further production curbs, then this will push supply back down. Then we have demand to consider! Watch this space.

Report
OPEC Monthly Oil Market Report OPEC (14/3/17)

Articles
Saudis stand by commitment to oil production cuts Financial Times, Anjli Raval and David Sheppard (15/3/17)
Oil prices fall after Opec stocks rise BBC News (14/3/17)
Crude oil price slumps to new three-month low after OPEC supply warning Independent, Alex Lawler (14/3/17)
Opinion: Saudi Arabis has a big motivating interest in keeping oil prices high MarketWatch, Thomas H Kee Jr. (14/3/17)
Why oil prices may come under even more pressure next month Investor’s Business Daily, Gillian Rich (13/3/17)
Oil price crashes back towards $50 as Opec raises US oil forecasts The Telegraph, Jillian Ambrose (14/3/17)

Data and Information
Brent Crude Prices Daily US Energy Information Administration
OPEC Homepage Organisation of the Petroleum Exporting Countries

Questions

  1. What are the demand and supply-side factors that affect oil prices? Do you think demand and supply are relatively elastic or inelastic? Explain your answer.
  2. Use a demand and supply diagram to illustrate how OPEC production curbs will affect oil prices.
  3. If we now take into account US shale production rising, how will this affect oil prices?
  4. Why have OPEC members agreed to curb oil production? Is it a rational decision?
  5. What are the key points from the oil market report?
  6. How do oil prices affect a country’s rate of inflation?
  7. What, do you think, are oil prices likely to be at the end of the year? What about in ten years? Explain your answer.
  8. Should the USA continue to invest in new shale oil production?
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IMF and WB: strapped for cash

The International Monetary Fund is made up of 186 countries, which together strive for global monetary co-operation, financial stability, the facilitation of international trade, as well as promoting high employment and sustainable economic growth. At the same time, the IMF and the World Bank also aim to reduce poverty around the world. Some task! – especially with the current financial crisis putting strains on even the richest of countries. In its annual meeting on the 2nd October 2009, the ‘rescue’ of more than 12 governments has already been organised by the IMF.

But it is not just countries who are suffering. The World Bank has said that it could run out of money within the next year and the IMF’s Managing Director has also suggested that it will run out of money for its low-income-country loan facility, which loans money to low-income countries at zero interest rates. However, France and Britain have stepped up with a $4 billion allocation to the IMF to help poorer countries, which may lead to other countries doing the same.

Meanwhile, Alistair Darling continues to fight to keep Britain’s seat at the IMF, as some suggest that Europe has too many seats and should give them up to make room for growing economies. This comes at a time when Britain is also facing the prospect of being side-lined from a new group of economic superpowers that would include the US, Japan, China and the Eurozone countries. The following articles consider the role of the IMF and the WB, as the global economy continues to face financial turmoil.

Doubts remain over global power of IMF Financial Times, Alan Beattie (3/10/09)
Pledge for more IMF help for poor BBC News (4/10/09)
World Bank could run out of money ‘within 12 months’ Telegraph, Edmund Conway (2/10/09)
Will tough new G20 measures work? BBC News (26/9/09)
France, UK to loan IMF$4 billion for poor nations Bloomberg, Sandrine Rastello (3/10/09)
Darling rejects call for UK to lose permanent seat on IMF Guardian, Larry Elliot (4/10/09)
Alistair Darling battles to keep UK on the world’s economic top table Telegraph, Edmund Conway(3/10/09)

See also:
IMF Homepage
World Bank Homepage

Questions

  1. How do the roles of the IMF, the World Bank, the G7 and the G20 differ and overlap? Do we need all of them?
  2. What are the arguments for less European representation at the IMF? How may this affect decision-making?
  3. If the G4 does go ahead, with the Eurozone as one of its members, why will the UK be sidelined?
  4. It is often mentioned that all countries are interdependent, but what do we mean by international policy harmonisation and why is it desirable?
  5. The BBC News article and the Telegraph article talk about money shortages at the IMF and the WB. What does this mean for the poorer countries and also for the UK and France which have allocated $4 billion to the IMF?
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