The value of OPEC’s spare capacity to the oil market and global economy

Almutairi, Hossa; Pierru, Axel; Smith, James L.

doi:10.1111/opec.12199

Cited by 7 publications

(5 citation statements)

References 12 publications

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“…7 To our knowledge only two papers focus explicitly on the period after 2016, the founding year of the OPEC+ alliance. Applying the model framework developed in Pierru et al (2018), Pierru et al (2020) and Almutairi et al (2021) show that OPECâ€™s management of its spare capacity after 2016 has led to a significant reduction in the volatility of oil prices. Whereas our research question differ from these two papers, their finding confirms that active interventions in the oil market by members of the OPEC+ alliance affected oil prices in recent years.…”

Section: Relationship With the Existing Literaturementioning

confidence: 99%

The Influence of OPEC+ on Oil Prices: A Quantitative Assessment

Quint¹,

Venditti²

2023

The Energy Journal

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Between January 2017 and March 2020 a coalition of oil producers led by OPEC and Russia (known as OPEC+) cut oil production in an attempt to raise the price of crude oil. In March 2020 the corona virus shock led to a collapse of this coalition, as members did not agree on keeping the oil market tight in the face of a large negative demand shock.Yet, was OPEC+ actually effective in sustaining the price of oil? Between 2017 and early 2020 when the OPEC+ strategy was in place, oil inventories fell substantially and the price of oil reached a peak of around 80 USD per barrel, from a minimum of 30 USD in 2016. This suggests that the OPEC+ strategy had a significant impact on the global oil market. Yet, to what extent did crude prices actually reflect OPEC+ production cuts rather than other factors, like swings in demand for oil? How would the price of oil have evolved had OPEC+ not cut supply? This paper provides an answer to these questions through a counterfactual analysis based on two structural models of the global oil market. We find the impact of OPEC+ on the market was overall quite limited, owing to significant deviations from the assigned quotas. On average, without the OPEC+ cuts, the price of oil would have been 6 percent (4 USD) lower.

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Section: Relationship With the Existing Literaturementioning

confidence: 99%

The Influence of OPEC+ on Oil Prices: A Quantitative Assessment

Quint¹,

Venditti²

2023

The Energy Journal

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“…Pierru, Smith, and Zamrik (2018) introduced a simpler version of the model we use here that indicated the extent to which OPEC successfully deployed spare capacity to offset perceived shocks to global oil demand and supply during the period 2001-2014. Pierru, Smith, and Almutairi (2020) and Almutairi, Pierru, and Smith (2021) applied that model-still using parameter estimates based on the 2001-2014 data-to confirm OPEC's retreat from stabilization during the so-called Market Share Campaign. They also estimated the value of OPEC's spare capacity buffer by calculating the expected increment to global GDP generated by OPEC's attempt to stabilize the oil price.…”

Section: Literature Reviewmentioning

confidence: 99%

“…( 10a) is a generalized version of Eq. ( 4) in Almutairi et al (2021) that accounts for the support provided by OPEC's Allies. In its right-hand-side, the difference between the log terms can take any sign, which shows that the counterfactual scenario rules out not only upward production adjustments but also downward adjustments that would counter positive supply shocks or negative demand shocks.…”

Section: Counterfactual 1 (Only Allies Pitch In)mentioning

confidence: 99%

“…In its right-hand-side, the difference between the log terms can take any sign, which shows that the counterfactual scenario rules out not only upward production adjustments but also downward adjustments that would counter positive supply shocks or negative demand shocks. Therefore, as emphasized by Almutairi et al (2021), Counterfactual 1 truly represents the price that would have prevailed in the absence of OPEC's attempts to stabilize the price, as shown in Figure 3. The counterfactual volatility is calculated by differencing Eq.…”

Section: Counterfactual 1 (Only Allies Pitch In)mentioning

confidence: 99%

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Oil Market Stabilization: The Performance of OPEC and Its Allies

Almutairi¹,

Pierru²,

Smith³

2023

The Energy Journal

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We examine the influence of OPEC+ on the level and volatility of oil prices. By extending Pierru et al.'s (2018Pierru et al.'s ( , 2020 modeling framework, we are able to distinguish OPEC's particular role and impact from that of its Allies-those countries who joined with OPEC at the end of 2016 in the attempt to stabilize the market. In addition to corroborating earlier results regarding the impact of OPEC's management of spare capacity prior to 2017, we now present an analysis of how the concerted actions by the larger community of OPEC+ members have affected prices, including during the tumultuous period in which the COVID-19 pandemic took hold. We find that OPEC+'s efforts to stabilize the market reduced price volatility by up to one half, both before and during the pandemic. We attribute most of that reduction to OPEC's own actions whereas the impact of the Allies' efforts was mostly to support the price level. In that vein, OPEC+'s management of spare capacity barely impacted the average price over the pre-pandemic period, but, by countering the price collapse caused by the pandemic demand shock, lifted the average price by $35.70 from May 2020 through August 2021.

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“…Recently, few studies have attempted to quantify the impacts of spare capacity on price behaviour and welfare. Almutairi et al ., (2021) find that during 2001–2014, OPEC's management of spare capacity decreased price volatility by at least 25 per cent relative to what it otherwise would have been, and the impact could have been even higher depending on the assumptions made about the price elasticity of short‐run oil demand and non‐OPEC supply. The authors also find that a sudden and unexpected loss of 1.5 million barrels per day (mb/d) from global supply over a 6‐month period would generate cumulative GDP losses of $166 billion over the next 5 years.…”

Section: Introductionmentioning

confidence: 99%

OPEC at 60: the world with and without OPEC

Economou

Fattouh

2021

OPEC Energy Review

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This paper provides a historical perspective from 1990 to 2018 of the functioning of the world oil market with and without OPEC. The analysis builds on a new methodology simulating counterfactual (i.e. what‐if) outcomes in the rich context of state‐of‐the‐art structural VAR models of the world oil market to empirically assess OPEC's contribution to oil markets and the global economy by quantifying the impact of OPEC's balancing role via its spare capacity cushion on the historical evolution of oil production, oil prices and price volatility, the joint evolution of the supply and demand elasticities and global welfare. A counterfactual scenario is constructed of how global oil production would have evolved if OPEC had been producing at maximum capacity, held no spare capacity and did not play any balancing role since 1990. The analysis also employs a general equilibrium approach to determine the global welfare implications of a world without OPEC spare capacity across oil‐exporting and oil‐importing regions. The welfare effects are calculated based on regional GDP gains and losses following changes in oil production patterns globally. The methodology to determine the impact on GDP is based on a computable general equilibrium (CGE) framework which offers a high level of detail regarding the world economy in terms of economic sectors and regional interdependencies.

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The value of OPEC’s spare capacity to the oil market and global economy

Cited by 7 publications

References 12 publications

The Influence of OPEC+ on Oil Prices: A Quantitative Assessment

The Influence of OPEC+ on Oil Prices: A Quantitative Assessment

Oil Market Stabilization: The Performance of OPEC and Its Allies

OPEC at 60: the world with and without OPEC

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