A new study co-authored by KAPSARC researchers and published by the International Association of Energy Economics explores OPEC’s attempts to stabilize the oil market over the past 50 years. The research finds that:
- During the OPEC+ period considered (2017-2019), OPEC’s actions reduced monthly oil price volatility by 64%.
- From 2001-2014 OPEC’s attempts to stabilize the oil market reduced oil price volatility by at least 25% and as much as 50%.
- These actions provide value to the global economy. The authors find that OPEC’s spare capacity produces an annual increment to global GDP equivalent to some $175 billion.
- These economic benefits are distributed globally: $39.4 billion – United States; $30.9 billion – China; $59.4 billion – European Union; $45.6 billion – rest of world.
The peer-reviewed research paper “OPEC’s Pursuit of Market Stability” concludes that OPEC’s use of spare capacity has achieved a significant reduction in oil price volatility, especially during the more recent OPEC+ period.
The study highlights how difficult it is to stabilize the world oil market, with disruptions to demand and supply being both large and frequent and coming from many directions, including the likes of war, natural disasters, financial crises, and the uneven pace of global economic growth.
The research outlines how the market reaction to each shock is magnified by the highly inelastic nature of both crude oil demand and supply, which means that in the absence of market intervention, large price movements are required to close relatively small gaps in the market.
For many years, OPEC in general, and Saudi Arabia in particular, has sought to offset market shocks, the most recent example being Saudi Arabia’s attempts to respond to the COVID-19-induced oil market crisis, which eventually produced what may well be regarded as the largest oil pact in history.
During the OPEC+ period considered in the paper (2017-2019), OPEC’s actions reduced monthly oil price volatility from 19.3% to 7% (a two-third reduction). Additionally, OPEC’s attempt to stabilize the oil market between 2001-2014 reduced oil price volatility by at least 25% relative to what it otherwise would have been. In fact, the reduction may have been as much as 50%, depending on the assumed price elasticity of short-run global demand and non-OPEC supply of oil.
It is for this reason that investments in spare capacity provide value to the global economy, with the deployment of production held in response to disruptions saving costs that result from price volatility. According to the paper, OPEC’s spare capacity, the majority of which is held by Saudi Arabia, has been sufficient to avoid major outages for much of the group’s recent history.
The study provides an estimate of the economic benefits that result from OPEC’s spare capacity. It finds that, on average, OPEC’s attempt to stabilize the oil market increases global GDP by some $175 billion annually (around 0.2% of the world’s GDP). The distribution of these economic benefits was found to conform to the intuition that the value would be highest for economies that are oil-intensive and import a large share of their total oil consumption. For the USA, China and the European Union, the annual value of OPEC’s spare capacity buffer amounts to $39.4 billion, $30.9 billion and $59.4 billion, respectively.
The authors’ analysis also addresses the development of shale oil and its impact on the market, finding that it has not significantly reduced the need for OPEC’s spare capacity. Shale only accounts for a small amount of non-OPEC supply, 11% as of 2019, and so its impact on the elasticity of total non-OPEC supply is limited, despite the fact that its short-run price elasticity is much higher than that of conventional oil.
KAPSARC’s research continues in the face of global current events. Earlier in February, KAPSARC jumped 14 positions to place 15th in the MENA category according to the University of Pennsylvania 2019 Global Go To Think Tank Index Report. The center has also climbed up four places in the Energy and Resources Policy category, where now it ranks 13th globally.