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Effectiveness Of OPEC In Achieving Its Objectives Economics Essay

The UAE is a rich source of natural resources and it has substantially developed itself as a major player in the oil and gas industry. UAE is one of the member countries of OPEC and has been given a remarkable position in oil and gas industry all over the world by having 10% holding of total oil reserves of the world in the federation (Hellyer, 2001). The central theme of the report is to analyze the oil and gas industry of UAE country so as to analyze the contribution and impact of oil and gas industry to the GDP and economic development.
Fundamentals of the Oil and Energy Industry: Historical Development of the Oil Sector around the World: The UAE is a member of the OPEC since 1967 and holds superior position in terms of the oil and gas industry with the federation holding of 10% of the total oil reserves of the world. The future holds lucrative prospects in the natural gas sector as it would cater to the manufacturing industry, generation of power and petrochemical industry by providing a source of fuel. Abu Dhabi and Dubai are the two prominent emirates responsible for the success and growth of the oil and energy sector in the U.A.E. (Energy Statistics: Oil Reserves (By countries) Most Recent)
Importance of Oil in the UAE: The UAE is essentially an imperative provider of oil to global energy markets, by making around 10% of the overall global supply of crude oil reserves. In terms of oil exports, UAE accounts for nearly 30% of its gross domestic product becoming a mainstay in the economy.
Also, UAE is emerging as a relevant consumer of energy in addition to being an important global supplier of energy. The UAE will continue to maintain its long convention of being responsible energy stewardship owing to its diversification and development of economy; acceleration of growth of additional hydrocarbon reserves and contributing significantly towards the implementation and development of other alternative sources of energy (The UAE and Global Oil Supply, 2009).
Production and Reserves: Production: S.No
Oil Production
3,096.34 (Thousand Barrels Per Day)
Crude Oil Production
2,687.67 (Thousand Barrels Per Day)
Natural Gas Production
1,811 (Billion Cubic Feet)
Electricity Production
81.08 (Billion Kilowatt-hours)
Reserves: S.No
Oil – proved reserves
97.8 (Billion Barrels)
Natural gas proved reserves
214 (Trillion Cubic feet)
OPEC: Background of OPEC: The Oil Producing Exporting Countries (OPEC) has been established with the sole purpose of stabilizing the prices of oil in the member countries and also to impose quotas so as to prevent the wrong and over usage of natural resources which result to their extinction sooner than expectation. As per the current information, OPEC’s combined reserves accounts for 1190 billion barrels of oil. According to the 2008 agreement, the production cut was imposed on the existing quota and continuing to till now. Facts reveal that the OPEC countries produce 2 million barrels a day in excess of the permitted capacity of 24.845 million barrels per day (Alternative Energy Sources – Synthetic Fuels – Renewable Energy, 2011).
Source: (OPEC share of world crude oil reserves)
Effectiveness of OPEC in achieving its Objectives: OPEC was primarily formed to keep a check on the oil prices and bridging the gap of demand and supply in the global oil market. But still the quota implementations are not followed by various countries resulting in the production of oil more than the permitted quota. According to the claims of OPEC, the fluctuation in the prices is not due to the changes in demand and supply but due to the overproduction oil other than the allotted quotas (OPEC share of world crude oil reserves).
OPEC and Oil prices in the last 4-5 years: The following figure shows the fluctuations in the global oil prices with the adherence of OPEC rules associated with oil production:
Source: (Why oil prices are so high: Production shortfall, Iran concerns, and low interest rates, 2012)
OPEC Quota and how it has changed over time: The OPEC quota for the production of oil for UAE is 2.23 million barrels per day. It had joined OPEC in 1967 and is the Full Member country. It produces 2798000 barrels of oil and exports 3.32% of oil in all over the world. It is ranked as the 6th largest country for the oil reserves in the world. The OPEC aims at providing the stabilization of the price of oil as regards the member countries and also the imposition of quotas as will prevent overuse of the resources which could lead to finishing up of oil reserves sooner than expected. OPEC decides the production quotas for its member countries as per the global requirement of oil which could be changed by the OPEC as per the strategic decisions pertaining to conservation, preservation, demand and supply of the oil globally (Sousa, 2011) .
Source: (Sousa, 2011)
Role and the influence of the UAE within OPEC: UAE become the member of OPEC countries in 1967 and acts as an active member since 1974. Since then it act as a major contributor of oil and gas industry among OPEC members. It provides the constant source of oil to the consumers of OPEC by providing approximate 2.3 million barrels of oil per day. In addition to the supply of traditional sources of energy, UAE also contributes to provide new alternatives of energy through substantial development. (UAE contributes to global energy sector: OPEC, 2010)
Effect of a quota cut by OPEC: The quota cut by OPEC will affect recovery of economy in the global market. As per the evidences, the quotas cut is not helping in controlling the price issues of the oil and gas industry rather it is increasing the problem as countries tends to produce oil other than the permitted quota. The hikes in the prices of oil will increase the prices of other commodities resulting increase the rate of inflation and slowing down the economic development. (Pirog, 2005)
Analysis: According to the data obtained from the Journal of Oil and Gas, the UAE is an important producer of oil, holding significantly seventh position in terms of proven resources globally. The UAE has been able to sustain its global reserves owing to the advanced enhanced oil recovery technology, EOR being implemented that leads to increase in extraction rates of several major projects in oil sector. The technology combines with high oil prices eventually to make reserves more commercially viable (United Arab Emirates Energy Data, Statistics and Analysis, 2011)
Statistics of Oil Sector in United Arab Emirates: S.No.
Middle East
Total Oil Production
Crude Oil Production
Net Exports/Imports
– 208
Refinery Capacity
Proved Reserves
(Billion Barrels )
– 7
The policies and procedures of oil in the UAE is primarily carried out by the government under the flagship of the Supreme Petroleum Council, through ADNOC operating at every level of oil and energy sector in UAE. The government has pushed back several its plans to increase capacity in order to increase the production capacity of crude oil (United Arab Emirates Energy Data, Statistics and Analysis, 2011).
UAE economy, underpinned by its wealth in oil, has recorded a steady growth over the last couple of years. In terms of oil GDP, the figures have doubled from AED 387.8 billion to AED 934.3 in last assessment year.
2010 2009 2008 GDP (Purchasing Power Parity): $246.8 billion $239.1 billion $246.9 billion GDP (Real Growth Rate): 3.2% -3.2% 5.3% GDP (Per Capita PPP): $49,600 $49,800 $53,400 GDP (Official Exchange Rate): $301.9 billion Source:
Recent Development in Oil Sector of UAE: With the advent of Habshan-Al-Fujairah pipeline for the purpose of carrying oil from oil fields of Abu Dhabi to the exporting port has been essentially proved as a strategic and economic advantage for the overall sector of the country. The pipeline extending 350 kilometers from oil fields and with this the country will be able to export 1.5 million oil barrels in a single day. (Asoomi, 2012)
Alternatives to Oil Industry: Keeping in mind the limited availability of fossil fuels and to prevent its overuse to meet the world’s growing energy demands, various alternatives to energy sources have been identified. Unconventional alternatives
Liquefied Natural Gas (LNG) is the upcoming form of natural gas which provides an excellent alternative to conventional natural gas usage. GTL is not only a beneficial alternative but is also environment friendly as there are no harmful emissions on its combustion. Oil sands also provide a source of the extraction of oil from it and its use is significantly increasing with time. The only limiting factor is the increasing cost of setting up the required infrastructure and cost of mining and extraction of oil from it. However the oil sands are accompanied by noxious fumes which are contributing to the global warming issue (Alternative Energy Sources – Synthetic Fuels – Renewable Energy, 2011).
Bio-fuels have been the outcome of recent developments in scientific researches. In this the organic matter is used to derive hydrocarbon based fuels such as Biodiesel, ethanol, etc. The conventional sources of energy include solar, wind and hydro energy all of which are renewable and 100% environment friendly. (Alternative Energy Sources – Synthetic Fuels – Renewable Energy, 2011) .
Recent Developments: UAE has been involved in many new projects including increase in crude oil production to 4 million barrels per day by 2020. This would results to the increase in 40% from current capacity. The major upcoming projects include Bourouge complex expansion projects and the Habshan Gas Complex Expansion. UAE is planning to invest $ 6 billion to develop the infrastructure of oil and gas industry. Abu Dhabi government is planning to invest $ 20 billion in Masdar to develop alternative energy resources to oil and gas industry. (Oil

A Microeconomic Analysis Of British Petroleum Economics Essay

BP’s (British Petroleum) origins can be traced back to 1901 when William Know tried to explore oil in Persia. The first commercial oil discovery was made in the Middle East by BP in 1908. In 1935, the company prospered and was renamed the Anglo- Iranian Oil Company. The war effort resulted in the British government becoming a shareholder of the company (until 1987). In 1950, Anglo-Iranian expanded into petrochemicals. The Iranian nationalization of the oil industry and subsequent diplomatic solution involving Britain, the US, and Iran led to the emergence of a new consortium involving Anglo-Iranian Oil called The British Petroleum Company (founded in 1954).
1.2 Company Overview BP is one of the largest vertically integrated oil and gas companies in the world. The company’s operations primarily include the exploration and production of gas and crude oil, as well as the marketing and trading of natural gas, power, and natural gas liquids. BP is headquartered in London, the UK and employs about 92,000 people.
1.3 Why choosing BP for the essay The company recorded revenues of $361,143 million during the financial year ended December 2008 (FY2008), an increase of 27% over the financial year ended December 2007 (FY2007). The operating profit of the company was $36,347 million during FY2008, an increase of 9.2% over FY2007. The net profit was $21,157 million in FY2008, an increase of 1.5% over FY2007.
1.4 Business Description BP is one of the world’s largest oil and gas companies. It has presence in more than 100 countries across six continents. The company operates through two reportable business segments: exploration and production; and refining and marketing. The company also operates through a third business segment, other businesses and corporate. Upstream activities involve oil and natural gas exploration and field development and production. The midstream operations involve the ownership and management of crude oil and natural gas pipelines, processing and export terminals, and LNG processing facilities and transportation.
For the FY2008, BP’s worldwide network consisted of some 22,600 locations branded BP, Amoco, ARCO, and Aral. BP’s retail network in the US for the FY2008 comprised approximately 11,700 sites, of which approximately 9,200 were owned by jobbers (who purchase their products directly from the refining companies and either sell them to retailers or directly to the end users) and 900 operated under a franchise agreement. At the end of FY2008, BP’s European retail network consisted of approximately 8,600 sites and had approximately 2,300 sites in the rest of world.
Other businesses and corporate segment of the company comprises treasury (which includes interest income on the company’s cash and cash equivalents) the company’s aluminum asset, the alternative energy business, and shipping and corporate activities worldwide.
1.5 What we will discuss Not a clue yet.
2.1 Microeconomic analysis 2.1.1 Consumer demand, price elasticity and BP revenues for FY 2008 We will take one example here to analyse the law of demand and how it applies to BP. For this specific example we will use petrol as product. In general, the law of demand states that the quantity demanded of a good falls when the price of the good rises (assuming other things equal). To represent this change, the demand curve is used. It is a graph that represents the relationship between the price of a product (petrol in this case) and the quantity demanded.
Figure – The Demand Curve
(image taken from
As you can see in figure1, when the price increased from P1 to P2 the quantity demanded dropped from Q1 to Q2. Changes in the demand curve can be caused by many factors such as the consumer income, the price of substitutes and others.
There are 2 categories of goods though. The ones that the demand doesn’t change a lot when price is changed and those that even a small price change will result in a huge change in the demand. This is called the elasticity of demand. The price elasticity of demand for petrol is inelastic (price elasticity <1) and we can put all the goods necessary to people in this category. This means that even if the price of petrol increases dramatically, people will still continue to buy it as it is necessary for let's say driving to work.
Figure – Inelastic demand
You can see here that an increase in price (p1 to p2) leads to a decrease in quantity (q1 to q2) that is proportionately smaller. This results in an increase of the total revenue of the company. Let’s see how BP performed.
Figure – BP revenue in 2008 (BP annual review)
BP recorded revenues of $ 361.143 million in the year 2008 compared to $ 284.365 million in 2007.
This large revenue increase is partially due to the very high oil price. Peter Sutherland (BP chairman) said in his speech in February 2009: “There are few precedents in history for such a rapid and dramatic change in the business environment. In the space of a few months we went from a record oil price of more than $140 per barrel, and BP reporting two consecutive quarters of record profits for the group”.
This profitability in 2008, in theory can be based to the “price effect” which states that after a price increase, product (petrol) sells at a higher price, which tends to higher revenue. The “sales effect” doesn’t apply here because we are talking about inelastic demand.
2.1.2 Oil Market Structure (supply curve, market equilibrium, total surplus) It’s difficult and most times inaccurate to try and analyse the supply curve for inelastic products. A supply curve illustrates firms’ willingness to supply at particular prices. But in the oil industry there are exogenous factors that affect the prices. When a factor changes we say we have shifts in supply. That can be anything, for example a change in the number of firm selling petrol, a change in the price of a factor input (oil exploration expenses) or a change in technology. In our case, the supply is not affected by customer’s willingness to buy. Someone will buy petrol at any price in order to cover their needs (e.g drive to work). But in theory, the more quantity requested, the higher the price set by the firm. In the case which the price has reached the level where quantity supplied equals quantity demanded, we use the term “equilibrium”. On a graph, it is the price at which the supply and demand curves intersect. The total surplus refers to the total net gain to consumers and producers from trading in the market. IT is the sum of the producer and consumer surplus. But in practice the things are a little bit different. There is always need for more petrol (or oil products generally). This means that BP and other firms can produce as much petrol as they want. The boundaries here are if the petroleum firms can produce more petrol. It’s clear that the firm that can sell more barrels of oil, they will generate more revenue and gain more market share.
BP’s performance in the last 10 years has been exceptional well. They improve and increase the production every single year and that’s due to increased refining availability.
In the next page (figure4) you can see some of the performance factors.
Figure – BP’s performance (picture taken from BP’s annual report 2008)
As you can see in the photo, the production was high but a bit lower that the year 2006. This is due to the unstable economy and prices in the last 2 years. BP still managed to increase their profits by improving their processes. The highlights of the year are: replacement cost profit of $ 25.594 million (up 39%), capital expenditure and acquisitions of $ 30.700 million and share price increase. The complete table with data will be attached in the appendix.
2.1.3 Government legislation (competition policy and carbon trading) The competition policies are different from country to country. We will talk about the policies in England as the BP is a british firm. In the UK there is the role of “Director of fair trading” and their job is to supervise the behaviour of companies. If they think that a firm is doing something is not supposed to do then they can refer those firms to the “Competition Commission” for investigation. The maximum market share that a company can hold is less than 25% of the total market. If it exceeds this limit the Director of fair trading can refer the company to the Competition Commission. Also, firms are not allowed to collude because this way they restrict the competition by setting prices. Also, because many companies operate in Europe or worldwide, there are other organisations that keep an eye on firm’s strategy.
In the oil industry the top 3 competitors are : Exxon Mobil, Royal Dutch Shell and BP. BP is the second largest refining and fuel retailing firm in the UK and third in the world. In their effort to become the largest petroleum and offer high variety of products, BP merged or acquired other firms over the past few years. The company’s key products and services now include the following: Aromatics and acetyls, petrochemical products, oil and gas exploration and production, lubricants downstream derivative products, aluminum coil and other.
To produce their products, firms utilise big amounts of energy. This energy usually comes from burning fossil fuels. For example, oil and coal are used to generate electricity. By burning these fuels, greenhouse gas is emitted in the atmosphere. Carbon dioxide is a pollutant and the European governments have set rules to try to reduce the emissions. The reason the firms don’t care much about pollution is because they maximise profit by reducing their costs. Nowadays though, they have to pay big amounts of money depending how much they pollute the environment (surplus permits).
“BP is helping to meet the world’s growing demand for sustainable and affordable energy, building alternative energy businesses with the potential to grow and compete far into the future”. gas.JPG
It is also impressive how much money BP invests in alternative energy, $ 1.4 billion just in 1 year. The total cost they are willing to invest is $ 8 billion. Alternative sources of energy BP is experimenting with are: Wind (432MW), Solar(162MW) and Biofuels.
Moreover, they are running a project called CCS that stands for Carbon Capture and Storage. What CCS does is capturing the CO2 emitted during the burning and processing of fossil fuel. Then, it is transported and stored in deep geological formations such as gas or oil fields. CCS technology is supported by the government and the target is a worldwide implementation that will help reduce the problem of global warning.
2.2 Macroeconomic Analysis 2.2.1
Based on your analysis, state your recommendations describing the possible strategies that the firm can consider.