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OPEC+ Cuts Effective In Reducing Oil Market Volatility

The study, OPEC's Pursuit of Market Stability, was conducted by the King Abdullah Petroleum Studies and Research Center (KAPSARC) and published by the International Association of Energy Economics.

The cartel's performance between 2001 and 2014—three years before the advent of OPEC+ as opposed to just OPEC, was still robust, reduced oil volatility by as much as 50%, and at least 25%. Further quantifying the group's actions, the study found that OPEC's efforts resulted in an average $175 billion annual increase in global GDP.

By country, those economic benefits are distributed $39.4 billion to the United States, $30.9 billion to China, $59.4 billion to the European Union, and $45.6 billion to everywhere else.

Our counterfactual analysis based on monthly data indicates that OPEC, in general, and Saudi Arabia in particular, has succeeded to a limited but important degree in its attempt to employ spare capacity to offset shocks and stabilize the price of oil," the report's executive summary reads in part.

The study went beyond quantifying OPEC +'s performance over the years. It also detailed the inelasticity of oil demand, which requires large price movements to shore up small gaps in the market between supply and demand. 

The report finds that shale oil has a "limited impact" on the elasticity of the demand for OPEC oil since it is such a small fraction of non-OPEC supply.

"Therefore, the development of shale oil has not significantly reduced the value of OPEC's buffer. Our results show that OPEC's spare capacity, as an institutional mechanism, plays a critical role in the well-functioning of the oil market, for the benefit of the global economy."

By Julianne Geiger for Oilprice.com

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  • Mamdouh Salameh on June 12 2020 said:
    I concur with the conclusions of the study conducted by King Abdullah Petroleum Studies and Research Centre (KAPSARC).

    Since its inception 60 years ago, Saudi-led OPEC has been the one constant and influential factor in stabilizing the global oil market and prices and also reducing price volatility using whatever spare capacity it had at the time to achieve these objectives.

    Luckily OPEC+ is continuing with this task underpinned by cooperation between the Saudi Arabia and Russia. This is very important because any friction between these two titans of the global oil market affects the stability of oil prices as we have seen during the oil price war between them.

    Even before the onset of the COVID-19 pandemic, The US shale oil industry had acted as a spoiler tending to undermine OPEC’s efforts to stabilize oil prices and yet benefiting from OPEC’s production cuts to enhance its share in the market at OPEC’s expense. The industry will emerge from the pandemic leaner but with hardly any influence in the global oil market. It will be kept alive on a life support machine paid for by US taxpayers.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Maxander on June 11 2020 said:
    To some extent they are helpful in reducing oil price volatility.
    But removal of production cut at such early period by July end when world is still in the midst of coronavirus crisis will be a foolish & will see all of the efforts made in controlling oil price volatility from Jan to July getting vanished .

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