The dominant Role OF Saudi Arabia in the oil Market 1997-2010
The dominant Role OF Saudi Arabia in the oil Market 1997-2010
Nourah Alyousef
Associate Professor
Economic Department
KingSaudUniversity
00966565166788
Overview
Saudi Arabia had an effective role for the period 1974-1985. Where it played the role of the Swing producer. However, in 1985, with increase in non-OPEC supply and decrease in demand for OPEC oil, Saudi Arabia abandoned that role. Since 1987, Saudi Arabia followed a policy with maintaining its share in the oil market. However, with decline in prices in 1998, decline in OPEC’s spare capacity and with low growth in non-OPEC supply, Saudi Arabia has more power in the oil market. This paper is an attempt to test the role of Saudi Arabia in the oil market by considering the swing producer model for the period 1997-2010.
Objective of the paper: Test the role of Saudi Arabia in the oil market by considering the swing producer model for the period 1997-2010. Since the mid-nineties Saudi Arabia maintained, as an official policy, excess capacity of 1.5-2 million bb/d. In 2010, oil production capacity, estimated at over 12 million bbl/d. While Saudi Arabia's average production in 2010, was 8.2 million barrel per day. For that, Saudi Arabia can increase production during demand surge and market interruption and decrease it during low oil prices in order to moderate world oil prices.
Griffin and Teece (1982) Adelman (1982) Dahl and Yucel (1991) Griffin and Neilson (1994), Alhajji and Huettner (2000) Smith (2005) emphasize on the dominant role of Saudi Arabia in OPEC. Doran (1977) Moran (1982) Askari (1991) Stevens (1991,1995) Khadduri (1996) political Objective behind Saudi Arabia’s policy. De Santis, and Roberto (2003) profits and welfare is an incentive.
Methods
The swing producer Model: Price control means, setting an effective transaction price preventing market forces from changing it. However, high prices will induce competitors to enter the market. A dominant supplier thus has a choice: it can achieve short run profits by raising price at the expense of losing its dominance in the future, or it can charge a moderate price that supports its market share and generates high competitive profits over time. When engaged in the latter strategy, the dominant supplier will try to lead the market by signaling what price it strives to maintain the target price. PT. Since 1987, OPEC set a reference price, which is the OPEC Reference Basket, used as a guideline for determining the ceiling of OPEC production. In 1987, the price was $18 per barrel; In the 1990s, a minimum reference price of $21/B is used. In June 2000, members of OPEC established a mechanism to adjust the supply of oil by 500,000 B/d if the 20-day average price of oil moved outside a $22 to $28 price band. At the end of 2007 it was announced that the target price of OPEC is 75
Saudi Arabia manipulated its production in order to minimize the difference between the target price PT and the market price PM. However, it was not concerned about the absolute value; it was concerned about the proportionate difference. Thus, the objective function is( PT/PM) keeping the difference between both prices equal to zero. If the demand were high for OPEC oil ( PT/PM)<1 Saudi Arabia would increase its output. If demand were low for OPEC oil Saudi Arabia would decrease its output ( PT/PM)>1 . Using the notation PTM=(PT/PM). َQSA=f(PTM). Saudi Arabia is a member of OPEC, so its production is also a proportion of total OPEC production , QSA=f(Qoo,PTM).
Data, Monthly Data from 1979.1-2010.12, n=168, production data from six sources (Petroleum Argus, Reuters, Petroleum Intelligence Weekly (PIW), Platt’s Oilgram Price Report, International energy Agency (IEA), Middle East Economic Survey (MEES), Petrostrategies, taking a simple average of the estimation of those sources of OPEC members’ actual production. We will rely on this data for that period as is reported by OPEC secretariat. Price DataThe Market price is the OPEC Reference Basket. The Target Price determined by OPEC.
Method of analysis:Using the autoregressive distributed lag (ARDL) cointegration procedure introduced by Pesaran et al. (2001).. to test for the null of no cointegration against the existence of a long-run relationship .Estimate The error correction representation of the ARDL model .
Results
For a swing producer role, the difference between the Saudi price and the market price has an influence on the Saudi output decision. When the ratio between (PT,PM) decrease Saudi Arabia would increase its production to lower PM. When the ratio increases, (PT.PM) Saudi Arabia would decrease its production to increase PM, that is Saudi Arabia has a negative relationship with the production of other members of OPEC, which shows we have cartel behavior with Saudi Arabia acting as the swing producer
Conclusions
Saudi Arabia has a significant role in the oil market. It changes its production in order to stabilize the price of oil, we can say the swing producer is partially applicable to Saudi Arabia where the kingdom changed its production in order to keep stable oil prices.
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