Study of oil cartels, oil pricing and the use of alternative fuels in India

Abstract

In today’s world of sky-rocketing oil prices, it appears very mundane to perform a study of the oil pricing and its trends, when so much of study has already been done in this field, yet it is one of the most alluring and fascinating contemporary topics to study. Through this study, we endeavor to understand the behavior of the oil pricing historically through the application of Microeconomic fundamentals and analyze the drivers of the demand and supply of oil in the global markets. We will then discuss alternative fuels that are available today and focus on ethanol as a fuel which has the potential to replace gasoline. The first half of this study deals with the analysis of the global demand/supply scenario for oil and the power of cartels in this sector. The oil markets historically have been commanded by OPEC (Organization of the Petroleum Exporting Countries). OPEC has 11 members, and seven out of them are middleeastern countries. The global demand for oil has been tremendously boosted by the extraordinary rate at which some of the global economies have been growing in the past few years. Surprisingly, OPEC is the only known cartel in the world which has been able to administer prices in the past over long periods of time and survived. Most other cartels (e.g.: IBA, Mercurio Europeo etc.) have perished over time. For a cartel to be successful a stable organization is a necessary pre-requisite; the OPEC also has its problems in this respect. Within OPEC, different countries have different political alignments and hence arriving on a supply and pricing agreement acceptable to all countries is difficult. In addition, there is a huge incentive for any one member of the cartel to cheat. This has also happened in the past; Saudi Arabia went against the cartel to increase its production and drove down the prices in 1986. Due to the reasons mentioned above, the power of OPEC has reduced significantly over the past many years. The report analyzes the major shocks in the oil prices over the past 40 years from a microeconomic perspective. The demand for oil has increased to such great extent that it is very difficult to meet, even if the oilproducing countries produce at their maximum possible production capacity. To compound the problems, the rate at which new discoveries are being made has also reduced and most of the oilfields are about to reach their peak output. Hence the world is looking to reduce its dependence on oil as the major energy source. The latter half of this study aims at the evaluation of ethanol as a substitute fuel for gasoline and what are the economic, environmental and political benefits associated with it. An evaluation of the Indian energy outlook in different scenarios on the use of blended ethanol has also been presented. Here, different sources of production of ethanol have been considered and a break even analysis has been performed for a blended ethanol and petrol fuel.