Stabilizing Oil Prices by strengthening OPECs Economic Alliance

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By Chinedu Okoye

Summary:

The recent surge in oil prices, has led to concerns about global stability, particularly due to inflationary pressures and policy dilemmas for central banks. 

OPEC is focused on improving global energy security without targeting a specific price, while reviewing output plans monthly. 

 To achieve energy price stability, OPEC nations may need to increase production and prioritize the interests and development goals of less developed OPEC countries. 

Acoordinated approach to stabilizing prices and retaining control could involve allowing lesser developed OPEC countries to sell more oil directly on the market or indirectly.

Eonomic diversification is crucial for OPEC's ability to influence global oil prices, and a deeper economic partnership witjin the Bloc might facilitate the process. 

Oil Prices Threaten Global Stability:

At the time of writing, both Brent Crude and West Texas Intermediate oil benchmarks have surged beyond $90 per barrel, prompting speculation of a $100 price point. OPEC plus continues its production cuts initiated in August 2022. Saudi Arabian Energy Minister, Abdulaziz Bin Salman, acknowledges the need to stabilize prices, as a 30% increase in Brent Crude since mid-June 2023 has led to inflationary pressures and policy dilemmas for central bankers. The focus is on improving global energy security without targeting a specific price, and output plans will be reviewed monthly.

Addressing Unsustainable Prices:

High energy prices strain consumers' disposable income and credit availability. Sustainability in oil prices is crucial for OPEC nations, where crude oil revenue significantly contributes to government income and exports. To achieve energy price stability, OPEC plus and more Advanced OPEC Countries may need to increase production. However, they must prioritize the interests and development goals of less developed OPEC countries by offering oil-backed loans to support their economies while maintaining oil prices.

Stabilizing Oil Prices through Coordination:

To stabilize prices and enhance compliance among member states, more developed OPEC countries within OPEC plus may need to cede market share to lesser developed members. This approach aligns with the priorities of these countries: a steady cash flow from oil sales and sustainable development.

A Coordinated Approach:

A coordinated approach to stabilizing prices and retaining control could involve allowing lesser developed OPEC countries to sell more oil directly on the market (lose control) or indirectly, to more developed OPEC countries, capable of increasing supply to meet market demand, whilst replacing their reserves with oil purchased from lessee OPEC members (tight control). 

Tight Control vs. Loose Control:

Tight Control: This strategy stabilizes the market, benefiting Advanced OPEC countries by maintaining market share. Lesser developed countries receive reliable FX earnings, bringing stability to global energy markets and mitigating inflation concerns.

Loose Control: Increasing the supply of Brent Crude from lesser developed OPEC countries exposes the global energy market to their production capacity, potentially introducing uncertainty and energy price volatility. 

Common Threat to Market Share, Sustainable Development and Growth:

OPEC countries share a common threat due to their dependence on global oil demand. Diversification away from oil dependency is essential. Dealing with this threat involves diversifying these economies away from Oil. To that effect, a fund could be established from oil sales during boom periods to finance key infrastructural projects. 

Multilateral Development Banks and more stable OPEC countries could provide loans and grants for development projects, fostering sustainable growth.

In attempt to consolidated its position in the oil market, OPEC plus has taken measures to exert control over oil prices through supply regulations, although OPEC countries remain dependent on oil prices. Non-OPEC countries however, have more complex economies and are less reliant on crude oil.

Aligning Economic Development Goals through Diversification with Energy Price Stability:

Economic diversification is crucial for OPEC's ability to influence global oil prices. A deeper economic alliance with common development goals, financed by oil-backed loans from multilateral banks and more developed OPEC countries, aligns energy price stability with the economic development goals of oil-producing nations.