Environmental Engineering Reference
In-Depth Information
market share only succeeded in slashing the oil price to less than $10 by
1986, causing a complete breakdown of the system of administered prices.
A system of market-related prices arose out of the final failure of
attempts to fix oil prices. Three main price benchmarks are used, and the
prices of other crudes are set in relation to them (usually much lower,
because the benchmarks are chosen for being relatively light and low-
sulphur). These benchmarks are: “West Texas Intermediate” (WTI) for
sales to the US; “Brent”, a North Sea blend, for sales in Europe and some
other areas; and a crude called “Dubai” for most sales to Asia and the
Middle East.
In theory, the benchmark price is the “spot price” of physical cargos
traded on any one day. The spot price is the price quoted for immedi-
ate payment and delivery. But the volume of at least Brent and Dubai is
shrinking, giving rise to fewer cargo shipments, fewer daily sales, and
therefore prices that may be unreliable. So the effective benchmarks have
become the prices derived from the far bigger futures markets - agree-
ments between two parties to buy or sell an asset at a given point in the
future - for these three crudes. Here liquidity, meaning the constant abil-
ity to buy, sell and trade, is guaranteed by speculators taking positions to
make money, and a proliferation of producers, refiners and consumers
hedging their bets on price. The volume of “financial” oil traded every day
has now increased to many times that of the “physical” oil.
If OPEC didn't exist, would we have to invent
something similar?
The short answer: yes, we probably would. The inherent instability of oil
prices requires some effort to smooth out their peaks and troughs. OPEC
does not try to fix the oil price directly (at least not since 1986), but instead
tries to influence its level by varying production - a practice that had a
precedent among producers when international commodity agreements
used to exist governing sugar, tin, coffee and rubber production. Eleven
of OPEC's oil-exporting member countries - all except Iraq, in fact, which
does not currently participate in the production quota system - routinely
cut their output to raise prices and increase their output to lower prices.
Particularly when criticized for high oil prices, OPEC often claims to
be a price-taker rather than price-setter - in other words, it has to take
as benchmarks the prices set by the future markets for WTI, Brent and
Dubai (see previous piece). This will strike many as a joke. But it is true
that the cartel only has indirect influence on price through the output
