Analysis of the U.S. Disclosure Policies about OPEC and Implication on Oil Market Volatility Implication on Oil Market Volatility

In an attempt to discuss the implications of OPEC disclosure policies about OPEC and its potential implication on the oil markets, we specifically analyse how the U.S. discloses not only the activities of OPEC, but also the resources in terms of reserves and operations in terms of oil supply to the oil markets.

In order to achieve this objective, this subsection begins with OPEC’s reserves and oil supply disclosure by the U.S. in relation to other credible Western databases (e.g. the BP, IEA) with a view to identifying any potential motive for the actions of the U.S. to promote speculation or obstruct OPEC’s market power. In this connection, figure 3.3 presents graphical analysis of OPEC’s reserves as disclosed by the U.S. and other parties.

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Figure 3.3: OPEC's Oil Reserves (1980 - 2011) Three Databases

Key:

OPEC (Home): OPEC reserves as disclosed by OPEC database OPEC (EIA): OPEC reserves as disclosed by Energy Information Administration

OPEC (BP): OPEC reserves as disclosed by British Petroleum

Figure 3.3 presents data used by the oil market analysts where BP and OPEC data seem to be closer to each other but with minor discrepancies, while the gap between disclosure from the two sources and that of the U.S. disclosure of OPEC reserves is very wide. There are various implications associated with the material gap in disclosure depending on the potential interpretation given for the motive. One possible interpretation of this behaviour, where the U.S.

is assumed to deliberately understate OPEC’s oil reserves might be that, the U.S. aspires for the leading position in the global energy markets. However, with the development in shale (see table 3.5) and renewable energy resources (despite their high costs) which could give the country some significant degree of energy independence, understating OPEC’s reserves might be a possible way to achieve this objective. Therefore, it will be a way to portray OPEC as politically irrelevant.

400,000 500,000 600,000 700,000 800,000 900,000 1,000,000 1,100,000 1,200,000 1,300,000

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

OPEC (Home) OPEC (EIA) OPEC (BP)

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TABLE 3:5: Ranking of Countries According to Shale Reserves Rankings in shale disclosures between two important data bases that are considered reliable in the oil markets.

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From figure 3.4, the left vertical axis shows scale from 3.30 3.65 of logged values of OPEC’S oil supply according to IEA and EIA data, the horizontal axis presents the periods from January 2000 to December 2012 over which the disclosure was made. the initial four years (from 2000 to 2003), which coincide with the relatively low oil price regime and official OPB period, discrepancy in disclosure of OPEC’S oil supply is observed to be minimal when compared with the remaining subsequent periods. In periods 4 to 12, which are found to be highly volatile and when implied OPB was in force, there is inconsistent variation in the disclosure between the two databases with two years from 2006 to 2008 experiencing widest variation. Within the two years, IEA data reported higher figures than the EIA data source.

Furthermore, to highlight closer effect of the discrepancies, data for a variable used in this study (i.e. OPEC production cheating) is plotted in figure 3.5.

Figure 3.5: Discrepancy between IEA and EIA in Disclosure of OPEC Production Cheating

Key

OPC (EIA): OPEC Production Cheating (Energy Information Administration) OPC (IEA): OPEC Production Cheating (International Energy Agency)

Figure 3.5 presents the discrepancy in the same variable employed in this study (i.e. OPC). The interpretations are almost similar to figure 3.4. The implications of these types of disclosure discrepancies are many, one of which

2 4 6 8 10 12 14

00 01 02 03 04 05 06 07 08 09 10 11 12

OPC (EIA) OPC (IEA)

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is speculative behaviour in the oil market. This evidence implies that the diverse views of the reporting might also misguide the market analysts’

decisions, and that absence of a unified and authentic reporting framework for the market could be a basis for speculation. This finding lends support to Sornette et al. (2009). It could also result in arriving at different conclusions depending on the data source employed by a particular study. For example, from IEA view-point, OPEC might be concluded to have performed fairly well at above logged value of 10 (i.e. in the last quarter of year 7) as shown in figure 3.5, while EIA might conclude that OPEC restricted production cheating or excess production to logged value less than 8 on the vertical axis.

Therefore, this might lead to a wrong conclusion that OPEC operated as a cartel in a period by a study using EIA data, while opposite conclusion might be reached by another study that employed the IEA database.

The implication of the entire disclosure of OPEC’s reserves and oil supply might promote speculation about OPEC and oil prices. By understating OPEC’s supply, the U.S. might be attempting to portray OPEC as a cartel responsible for the high oil prices. The growing evidence of anti-trust laws might have implication for OPEC in the long run. OPEC is accused of being a monopoly/cartel engaged in wealth transfer by punishing the Western economies. Given the provision of the Sherman Antitrust Act, one of the possible legal actions against OPEC will be detrimental to the members’

objectives in the event the Act becomes successful. Therefore, there is a high risk of portraying OPEC as an effective cartel coordinating high oil prices while the reality of the matter remains the opposite.

3.8 Summary and Conclusion

In this chapter, events affecting the operation of the oil market and prices were reviewed. The structure of the international oil market in relation to the developments in new reserves (both conventional and unconventional) and trends in the renewable energy were highlighted. Information disclosure literature and its effect on the oil prices in the light of the role played by various international organisations were also discussed with a view to assessing the degree of the transparency in oil markets. Whilst identifying the role of oil market speculation on oil prices, this chapter also reviewed empirical studies on speculative trading in oil futures markets and its

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influence on other markets and prices. In this connection, the need to conceptualise energy security and governance was also highlighted.

Furthermore, major factors influencing oil prices in addition to the role of OPEC were also reviewed. Although growing oil demand from the emerging economies such as China, India and Brazil has contributed to high oil prices, there was sufficient evidence to believe that U.S. led war had impeded OPEC’s ability to create adequate spare capacity to the satisfaction of increasing oil markets. Based on the review of energy governance issues relating to oil markets, many studies (e.g. Winzer, 2012; Goldthau and Sovacool, 2012) established strong need to conceptual important factors such as energy security, governance framework and many more other issues in the global oil market for stability in energy prices including oil and gas.

Classical examples establishing the potential effects of poor data and discrepancies in such data have been documented by JODI and Sornette et al. (2009) resepectively. U.S. stockpiling policy has been established to be another important area that requires a critical review for effective global energy regulatory framework to be achieved. An effective regulatory framework in the global energy requires actions from the relevant international regulatory authourities such as International Organisation of Securities Commissions (IOSCO), International Accounting Standards Board (IASB), JODI, United Nations, and WTO.

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