Saudi Arabian Oil Production And Market Share College Essay Help

Table of Contents
Abstract Presentation The Body Conclusion Citations

Abstract

This paper is a rigorous investigation into the justification for Saudi Arabia's effort to preserve stability amid fluctuating oil prices and a diminishing market size. The fundamental principles of demand and supply in macroeconomics fail to justify how cutting production quotas may boost prices and revenue in the absence of other noisy variables.

Empirical evidence demonstrates that the price of oil has constantly fluctuated as a result of various market conditions, such as demand resulting from an improvement in the global economy, the influence of political factors such as an economic embargo on oil, a reduction in production as a result of the implementation of OPEC's production quotas, political unrest in Iraq and Iran, or simply low quantities.

Reducing the quantity does not justify a rise in price due to evidence of a large loss of Saudi Arabia's traditional consumers, such as South Korea, resulting in market contraction. Due to the unpredictability of the impacts of other variables than a drop in quantities on the price of oil, Saudi Arabia must prioritize retaining its market dominance, which is difficult to develop and implement with a market-driven pricing structure.

Introduction

The bleak economic prognosis due to low oil prices has resulted in a $146bn shortfall in Saudi Arabia's budget, compared to $313bn in expected expenditures (Alzomaia & Al-Khadhiri, 2013). According to Barnes, and Jaffe (2006), the dilemma is to raise the price of oil, which could compromise the market size, due to the compelling need depicted in the 2012 and 2014 survey, in which Saudi Arabia demanded a 10.4% increase in expenditure to address the region's political instability and domestic spending, which has placed the country in a dilemma over whether to reduce production quantities or maintain market share (Becken & Lennox, 2012).

The oil price has fallen from US$145 per barrel in July 2008 to US$30 per barrel on February 3, 2016, necessitating the adoption of a viable strategy (Mănescu & Nuo, 2015). A decline in production levels has direct effects on the price of crude oil (MacKenzie, 1996). For example, the price of oil increased from $14 in 1978 to $35 in 1981 as a result of a 2 to 2.5 million barrels per day decrease in supply between November 1978 and June 1979.

To increase the price of oil, however, solid macroeconomic principles of demand and supply cannot justify reducing the supply side's quantities to achieve the required equilibrium with the demand side (Magdoff, 2013) The 1973, 1979, 1990, and 2008 trends were deceptive due to the subsequent recession, decline in demand, and final decline in the size of Saudi Arabia's market (Malik & Awadallah, 2013). Naturally, the debate arises as to whether Saudi Arabia should reduce oil output to increase prices or concentrate on maintaining its market position.

Main Body

According to Lippi and Nobili (2012), the gloomy economic forecasts for Saudi Arabia's fiscal deficits raise the question of whether the world's largest oil producer should reduce the amount of oil it pumps into the global market in order to increase oil prices and address its fiscal deficits, which could scare away customers who may seek alternative sources of oil or concentrate on maintaining its market share.

The largest oil producer, Saudi Arabia, has the key to stabilizing oil prices by lowering the amount of oil it pours onto the market (Lipietz, 2013). Saudi Arabia cannot control the price of oil on its own, thus it must preserve its market dominance and let other market forces to determine oil prices. Reducing the quantity of oil might lead to a decrease in the supply of oil on the market and, theoretically, an increase in oil prices, which could force the market to contract.

Lahn and Preston (2013) demonstrate in a review that the significant increases in oil prices between 1973 and 2008 in response to the macroeconomic principle of demand and supply do not support evidence of stable market price levels due to the subsequent drops in demand. Saudi Arabia's refusal to cut the quantity of oil put into the market has allowed the country to preserve its market share without the advantage of an increase in the price of oil, which has remained stagnant at $30 per barrel in 2016. According to Kjarstad and Johnsson (2007), lowering the quantity of oil Saudi Arabia exports to the global market causes a temporary increase in the price of oil, but ultimately leads to a decline in market share as consumers seek other cheaper oil sources.

The process for reducing the amount of oil given to the market is rooted in conventional economics, but fails to account for other forces (Kilian, 2008). Increasing numbers of oil-producing nations entering the oil market, improved oil extraction technologies, cheaper oil shale extraction techniques, and political reasoning could mitigate the effects of quantity vs demand and its association with oil prices (Keohane & Victor, 2013). As evidenced by price increases between 1979 and 1980 and optimistic demand projections, the fundamental premise of cutting production in the short term may be favorable for Saudi Arabia (Gholz & Press, 2010).

However, a thorough examination reveals that demand was partially fueled by the rapid expansion of the world economy, especially China's, which is currently in recession (Harstad, 2012). Political unrest such as the Korean War in 1951-1953 led to a rise from $17 to $20. (Colgan, 2014). This is in addition to the Arab oil embargo of 1973, the Iranian Revolution of 1979, and the insulating period that led oil prices to peak at $103.76 per barrel in April 1980. (Finley, 2012). Despite the claim that the price of oil depends on demand and supply, this is the case.

The rise in oil prices and accompanying increase in demand do not reflect the full nature of the impacts of quantity on demand and supply (Esper, Ellinger, Stank, Flint, & Moon, 2010). Examples include the oil glut in the 1980s, which statistically explains the decline in price from US$35 per barrel ($101 per barrel presently) to US$10 per barrel ($58 to $22 today, adjusted for inflation) (Smith, 2009). This is despite the low output levels and weaker demand caused by the slowed economic growth of industrialized nations such as Japan (13% decreases) and the global economic recession (Finon & Locatelli, 2008).

The temporary surge in price that steadied at roughly $18 per barrel from 1987 and 1989 was the result of a robust US economy, thriving Asian markets, and a 3 million barrels per day cut in OPEC's output quotas (Nuruzzaman, 2013). Between 2010 and 2012, an increase in colder conditions in the Northern Hemisphere contributed to an increase in oil prices (Painter, 2012). The cycle that determines the behavior of commodity prices occurs every 29 years, excluding Saudi Arabia from the assumption of a link between quantity and price.

Unjustifiable is an interpretation of the discourse on the issues that prevent Saudi Arabia from focusing on reducing oil production to raise prices (Tverberg, 2012). As the oil cycle peaks and drops in accordance with a 29-year cycle, focusing on retaining market share instead justifies the latter against the former (Tabrizi & Santini, 2012). Between 1950 and 1960, the price of oil was very stable between $1.71 and $2.00. (Suganthi & Samuel, 2012).

After the formation of OPEC, prices were governed by production quotas, which grew steadily in accordance with the laws of demand and supply. Sharper production cuts were unproductive, resulting in a decrease of demand and the global economic slowdown that led to the 1973–1977 oil crisis (Hirsch, Bezdek, & Wendling, 2010). Other factors such as the Iran-Iraq conflict led to an increase in oil prices despite the oil shock that led to low oil prices from 1983 to 1995. Clearly, OPEC's low output quotas led to a variety of outcomes (Stern, 2007). A subsequent economic crisis precipitated a decline in oil prices, prompting a revision of Saudi Arabia's policy of retaining its market share.

GreenwoodNimmo, Nguyen, and Shin (2012) demonstrated that the elasticity of demand and supply cannot be regulated by reducing Saudi Arabia's output quotas without allowing competitors to penetrate its market. It is necessary to research a countermeasure that could preserve the nation's market position (Al-Saleh, 2009). The volatile variations of oil prices caused by external variables of economic growth and decline combined with regulated production quotas are a significant symptom of false hope and dependence on quantity controlled prices (Barnes & Jaffe, 2006).

Temporary increases, such as those that occurred in the early 1950s, do not reflect the rule of demand and supply (Bielecki, 2002). When a result, it rejects the reliance of pricing on production quotas, which were adopted by OPEC as prices tended to decline, resulting in the oil shock of 1978 to 1982 (Brémond, Hache, and Mignon, 2012). Before successive spikes and dips, the price of oil fluctuated between $11.58 and $14.02 per barrel, fluctuating by approximately $25 in August 2003 and $130 in mid-2008 before falling in later years (Bremmer, 2009). The market's behavior was determined not just by the quantity of oil but also by political conditions.

Maintaining market share is one of the methods advised by researchers to protect Saudi Arabia from volatile oil prices (Morse & Richard, 2002). This is owing to rivalry from oil-producing nations such as Russia and Iran, as well as the United States' oil shale output (Verbruggen & Van de Graaf, 2013). The motivation for focusing on maintaining its market share is supported by the fact that numerous nations, such as South Africa, have lowered their oil purchases from Saudi Arabia from over 53% to 22%. (Knox-Hayes, Brown, Sovacool, & Wang, 2013).

In addition to the drop in imports by the United States, which fell from 17 percent to nearly 14 percent (Tang & Xiong, 2012), what is the local output of oil from oil shale? Several western European nations, including South Korea, Thailand, and Taiwan, are among the additional markets Saudi Arabia has lost (Robertson, Al-Angari, & Al-Alsheikh, 2012). The worrying contraction of the country's global oil market and the decline in oil prices have compelled the government to continue preserving its market rather than cutting output, resulting in a major fall in revenue.

In addition, revenue from the sale of oil has decreased substantially due to the coupling impact of the decline in oil price and market size (Abbaszadeh, Maleki, Alipour, & Maman, 2013). According to Basher, Haug, and Sadorsky (2012), the problem with the price of oil is not as pervasive as the problem with the market's shrinking size. The rationale is that, as stated previously, prices might increase due to market and economic events such as wars, economic sanctions, and the effects of demand and supply (Cairns & Calfucura, 2012).

Strong indications that oil prices can always recover are a result of demand and supply factors (Colgan, Keohane & Van de Graaf, 2012). This resulted in the variations between 1950 and 2016 (McNally & Levi, 2011). It is apparent that oil prices rose over the course of many years, as seen by the 1973 oil shock (Gabbasa, Sopian, Yaakob, Zonooz, Fudholi, & Asim, 2013). Despite the succeeding years of energy efficiency, the post-1973 price hikes led to an increase in the price of oil, followed by a global recession and a reduction in the price of oil.

Conclusion

Empirical evidence strongly supports the necessity for Saudi Arabia to focus on retaining its market share while maintaining stable oil production limits due to the unpredictability of the global oil market, despite declining revenues due to dynamic market conditions. The economic concepts of demand and supply do not fully justify reducing production quotas in order to promote demand and raise the price of oil. Despite the continual level of variations and oil shocks, research indicates that there is no steady state that may be justified by a decrease in production levels.

In addition to market share, price hikes, and improved projections, the market size is a significant determinant and indicative of the amount of income earned. This is consistent with the observed trend since 1973. Post-1973 pricing, the consequences of OPEC actions that recommended production quotas, the low oil prices of 1986 to around 2002, the recovery in oil prices in 2002 and onwards, and a decrease in oil demand all contributed to the current oil market. This left Saudi Arabia pondering why conventional markets are considering alternate oil suppliers.

References

Abbaszadeh, P., Maleki, A., Alipour, M., & Maman, Y. K. (2013). The oil development scenarios for Iran by 2025. Energy Policy, 56, 612-622.

Al-Saleh, Y. (2009). Renewable energy prospects for major oil-producing nations: Saudi Arabia as one example. Futures, 41(9), 650-662.

Alzomaia, T. S., & Al-Khadhiri, A. (2013). Evidence from Saudi Arabia for Determination of Dividend Policy The fourth issue of the International Journal of Business and Social Science (1).

Barnes, J., and A. M. Jaffe (2006). survival, 48(1), pp. 143-162; The Persian Gulf and the geopolitics of oil.

Basher, S. A., A. A. Haug, and P. Sadorsky (2012). Oil prices, exchange rates, and emerging stock markets are all factors to consider. Energy Economics, volume 34, number 1, pages 227-240.

Becken, S., & Lennox, J. (2012). Tourism implications of a sustained increase in oil prices. Tourism Management, 33(1), 133-142

Bielecki, J. (2002). Is there a threat to our energy security? The quarterly review of economics and finance, volume 42, number 2, pages 235-250.

Bremmer, I. (2009). The maturation of state capitalism. Foreign Affairs, 88(3), 40-55.

Brémond, V., Hache, E., & Mignon, V. (2012). Does OPEC still exist as a cartel? A scientific research. 125-131. Energy Economics, 34(1).

Cairns, R. D., & Calfucura, E. (2012). Energy Policy, 50(1), 570-580. OPEC: Market failure or power failure?

Colgan, J. D. (2014). The emperor is naked: OPEC's limitations in the global oil market. International Organization, 68(03), 599-632.

Colgan, J. D., Keohane, R. O., & Van de Graaf, T. (2012). Complex energy regimes exhibit punctuated equilibrium. The international organizations review, 7(2), 117-143.

Esper, T. L., Ellinger, A. E., Stank, T. P., Flint, D. J., & Moon, M. (2010). Integration of demand and supply: a conceptual framework for the production of value through knowledge management. Journal of the Academy of marketing Science, 38(1), 5-18.

Fang, S., Jaffe, A. M., & Temzelides, T. (2012).

× How can I help you?