Power in the Oil Trade Network
Oil Trading Map of Select Countries
With the current state of global affairs and OPEC agreeing to cut oil production again, I thought it would be interesting to look at the network mechanics behind why certain oil producing countries wield so much power, and how they are able to collectively determine prices in the market.
If we look at the network diagram above, we see that node 7, The Middle East, has the most outgoing edges in the network. We can apply the concepts we learned in class about strength in networks to analyze this situation. We see that because The Middle East has so many outside options in terms of potential trading partners, they are able to dictate production and hence prices since there are many other countries that would be willing to trade with them.
This is in stark contrast to a node like node 12 (Japan), that only imports oil from The Middle East, when we analyze the level of bargaining power between these two nodes, it is clear that the Middle East has much higher power due to the presence of outside trading options.
Looking with the recent trade restrictions imposed on Russia and the possibility of Russia cutting oil exports, this poses a further threat to net oil importers. If we look at the network, Russia is primarily an oil exporter, which if removed, further concentrates power in other major exporters such as The Middle East, because importers now have fewer options for importing oil.
When we think about oil trading as a network with disparities in power, global events seem to make a lot more sense. Countries trying to boycott Russian exports reduce their own bargaining power and increases the relative power of major oil exporters. As a result, it made sense that OPEC was recently able to leverage its increase in relative power and cut oil production levels in order to increase profits.
References:
https://www.researchgate.net/figure/llustrates-the-international-oil-trade-network-between-14-countries-and-regions-As-we_fig2_311914205https://www.reuters.com/business/energy/oman-says-opec-decisions-based-purely-economic-considerations-tweet-2022-10-16/
https://www.researchgate.net/figure/llustrates-the-international-oil-trade-network-between-14-countries-and-regions-As-we_fig2_311914205https://www.reuters.com/business/energy/oman-says-opec-decisions-based-purely-economic-considerations-tweet-2022-10-16/