Organization ofthe Petroleum Exporting Countries (OPEC)Introduction A cartel is agroup of independent producers which try to increase their collective profitthrough fixing prices, limiting supply, or other restrictivepractices. Cartels usually control selling prices, but some controlthe prices of purchased inputs. Cartels usually occur in oligopolies, where there are a smallnumber of sellers and usually involve homogeneous products. OPEC is a verygood example of cartels in oil industry.Organization of the Petroleum ExportingCountries (OPEC) is an intergovernmentalorganization of 14 nations, founded in 1960 in Baghdad by the first five members (Iran, Iraq, Kuwait, SaudiArabia, Venezuela), and headquartered since 1965in Vienna.
OPEC’s mission statement is “tocoordinate and unify the petroleum policies of its member countries and ensurethe stabilization of oil markets, in order to secure an efficient, economic andregular supply of petroleum to consumers, a steady income to producers, and afair return on capital for those investing in the petroleum industry. It also providessignificant information on international oil market.The formation of OPEC markeda turning point toward national sovereignty over natural resources, and OPECdecisions have come to play a prominent role in the global oil market and internationalrelations. Issues motivated forchoosing the studyThere are many relatedissues that motivated me to choose OPEC as my project topic some of which are:ü Oil is importantsource of energy in today’s world and knowing that OPEC member countries holdnearly 73% of estimated oil reserves of the world.ü OPEC is known tohave significant power in setting oil prices as it provides 48% of oildemanded.ü OPEC was formedto stand against multinational oil companies from the USA.ü Delving into thetopic and learning issues related to countries in middle east.
Objectives of thestudyü To know about theorigin, history, members, mission of the oil cartel (OPEC)ü To learn aboutthe leadership and decision making power of the cartelü To look intoexisting scholarly works on OPECü To find out theadvantages and disadvantages of OPECü To giverecommendations regarding the future of the organization Literature Review (Colgan, 2014) Stated that OPEC has little or no impact on its members’production. The idea of OPEC as a cartel is a “rational myth” thatsupports the organization’s true principal function, which is to generatepolitical benefits for its members. One benefit it generates is internationalprestige.(Gately, 1995) Concluded that OPEC’s interests will beserved best by a policy of moderate output growth, at a rate no faster thanthat of world income growth. Slowing its output growth will allow OPECgradually to regain the market share lost after its disastrous 1979-80 pricedoubling, but without jeopardizing its revenue, as might a policy of more rapidincreases in output. (Vielhaber, 1994) Stated that thefuture of oil depends critically on the production decisions of OPEC, which inturn depend on a variety of factors internal and external to the cartel. Hecomputed the payoff to OPEC members of alternative price and production profiles,focusing on the incentives to cooperate as well as to cheat.
A”tit-for-tat” strategy by the Saudis significantly reduces theincentives to cheat, but the payoff for cheating is still positive for thesmaller OPEC producers. Accordingly, prices well below the cartel’s jointprofit maximizing level seem most likely.(Gately, OPEC’s Incentives for Faster Output Growth, 2004)Concluded that the projections made bythe International Energy Agency (IEA) and the U.S. Department of Energy (DOE)stating that “OPEC producers are likely to expand their oil outputsubstantially over the next two decades – more than doubling in the Gulfcountries by 2020” are implausible.(Pedro A. Almoguera, 2011) Founded thatalthough there were periods in which oil prices were measurably higher owing tocollusion among OPEC members, overall OPEC has not been effective insystematically raising prices above Cournot competition levels.
OPEC’s behavioris best described as Cournot competition in the face of a competitive fringeconstituted by non-OPEC producers.Current member countriesOPEC has 14 member countries: six inthe Middle East, six in Africa, and two in SouthAmerica.According to the US EnergyInformation Administration, OPEC’s combined rate of oil production (including gascondensate)represented 44 percent of the world’s total in 2016 and OPEC accounted for 73percent of the world’s “proven” oil reserves, including 48 percentfrom just the six Middle Eastern members. This gives OPEC a major influenceon global oil prices that were previouslydetermined by American-dominated multinational oil companies. Members are: Algeria, Angola,Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar,Saudi Arabia, UAE, and VenezuelaLapsed members There are many membercountries that fell they need to produce more oil than they are allowed underOPEC quota in order to pay membership costs and make profit. Therefore theyusually withdraw from OPEC and when the time comes they rejoin the cartel.Ecuador pulled back its membership from OPEC in December 1992 because it wasnot willing to pay annual US$2 million membership fee although it rejoinedin October 2007.
Similar concerns prompted Gabon and Indonesia to suspendmembership and rejoin.ObserversRepresentatives from Egypt, Mexico, Norway, Oman, Russia, and other oil-exporting nationshave attended many OPEC meetings as observers since the 1980s. This arrangementserves as an informal mechanism for coordinating policies.
Leadership and Decision-makingThe OPEC Conference is thesupreme authority of the organization, and consists of oil minister delegatorsof member countries. The chief executive of the organization is the OPEC Secretary General. The Conference isconducted at the Vienna headquarters, at least twice a year and in additionalextraordinary sessions when necessary. Decisions are made by agreement ofmember countries each having one vote and each country paying an equalmembership fee into the annual budget. However, since Saudi Arabia is by farthe largest and most-profitable oil exporter in the world, with enough capacityto function as the traditional swing producer to balance the globalmarket, it serves as “OPEC’s de facto leader”.Disadvantagesü OPEC members have displayed occasionallyapparent anti-competitive cartel behavior through theorganization’s agreements about oil production and price levels. ü OPEC has not been involved in anydisputes related to the competition rules of the WTO, even though the objectives,actions, and principles of the two organizations diverge considerably.
ü OPEC often has difficulty agreeingon policy decisions because its member countries differ widely in their oilexport capacities, production costs, reserves, geological features, population,economic development, budgetary situations, and political circumstances. Indeed,over the course of market cycles, oil reserves can themselves become a sourceof serious conflict, instability and imbalances.ü A further complication isthat religion-linked conflicts inthe Middle East are recurring features of the geopoliticallandscape for this oil-rich region. Internationally important conflicts inOPEC’s history have included the Six-DayWar (1967), YomKippur War (1973),a hostage siege directed by Palestinianmilitants (1975),the Iranian Revolution (1979), Iran–IraqWar (1980–1988), Iraqioccupation of Kuwait (1990–1991), September 11 attacks by mostly Saudi hijackers(2001), American occupation of Iraq (2003–2011), Conflict in the Niger Delta (2004–present), ArabSpring (2010–2012), LibyanCrisis (2011–present),and international Embargo against Iran (2012–2016). ü In OPEC, because of an economic”prisoner’s dilemma” that encourages each membernation individually to discount its price and exceed its production quota, widespreadcheating within OPEC often erodes its ability to influence global oil pricesthrough collective action.
ü A key US District Court decisionheld that OPEC consultations are protected as “governmental” acts ofstate by the ForeignSovereign Immunities Act, and are therefore beyond the legal reach of US competitionlaw governing”commercial” acts. Despite popular sentiment against OPEC,legislative proposals to limit the organization’s sovereign immunity, such asthe NOPEC Act, have so far beenunsuccessful. Advantagesü OPEC members have been able tocooperate productively over the decades to significantly improve the qualityand quantity of information available about the international oil market. Thisis especially helpful for a natural-resource industry whose smooth functioningrequires months and years of careful planning.ü In April 2001, OPEC collaboratedwith five other international organizations (APEC, Eurostat, IEA, OLADE, UNSD) to improve the availability andreliability of oil data. They launched the Joint Oil Data Exercise, which in2005 was joined by IEF and renamed the JointOrganisations Data Initiative (JODI), covering more than 90 percentof the global oil market. GECF joined as an eighth partnerin 2014, enabling JODI also to cover nearly 90 percent of the global market fornatural gas.
ü Since 2007, OPEC has published the”World Oil Outlook” (WOO) annually, in which it presents acomprehensive analysis of the global oil industry including medium- andlong-term projections for supply and demand. OPEC also produces an “AnnualStatistical Bulletin” (ASB), and publishes more-frequent updates in its”Monthly Oil Market Report” (MOMR) and “OPEC Bulletin”.ü A “crude oil benchmark”is a standardized petroleum product that serves as aconvenient reference price for buyers and sellers of crude oil, includingstandardized contracts in major futuresmarkets since1983. Benchmarks are used because oil prices differ (usually by a few dollarsper barrel) based on variety, grade, delivery date and location, and otherlegal requirements.
Crude oil benchmarksThe OPEC Reference Basket of Crudes has been an importantbenchmark for oil prices since 2000. It is calculated as a weightedaverage ofprices for petroleum blends from the OPEC member countries: Saharan Blend(Algeria), Girassol (Angola), Oriente (Ecuador), Rabi Light (Gabon), Iran Heavy(Islamic Republic of Iran), Basra Light (Iraq), Kuwait Export (Kuwait), EsSider (Libya), Bonny Light (Nigeria), Qatar Marine (Qatar), Arab Light (SaudiArabia), Murban (UAE), and Merey (Venezuela). North SeaBrent Crude Oil is the leading benchmark for Atlantic basin crudeoils, and is used to price approximately two-thirds of the world’s traded crudeoil. Other well-known benchmarks are West Texas Intermediate (WTI), DubaiCrude, Oman Crude, and Uralsoil. HistoryIn the 1960s, OPEC did not have much power. Thischanged in 1973 when the third Arab-Israeli war started. The UnitedStates and a few European countries supported Israel. Asa form of punishment, OPEC nations, influenced bythe Arab countries, stopped selling oil to the West.
Within the next six yearsoil prices rose to ten times theprice of the early 1970s. OPEC countries became rich with so-called petrodollars;the West sank into deep recession because theyneeded OPEC’s oil.In the aftermath of the energycrisis of the 1970s, western countries started looking for alternative formsof energy inorder to become more independent from OPEC andthe oil-producing nations. In 1986, oil prices dropped tothe lowest rate in history.Oil-producing nations lost much of their income.
In the 80s and90s OPEC’s power diminished, often because ofconflicts and internal arguments andbecause member states could not agree on production quotas.Some OPEC countries did not keep agreements and producedmore oil, thus lowering prices.After 2000, oil prices began to rise againand reached an all-time high in 2007.The financialcrisis of 2007 and 2008 hit world economy hard and oil pricesfell once again. Since the ArabSpring of 2011, prices have gone up and down several times.Today OPEC still controls about 60% of theworld’s oil reserves and produces 40%of the world’s oil.
Saudi Arabia is the most powerful member of the group,because it has the largest reserves. Even though there havebeen quarrels in the cartel inthe last 5 decades it remains a powerfulorganization. Current Situation (2010-now)This statistic depicts theaverage annual oil price for selected OPEC crude oils from 2010 to 2017. As canbe seen the average annual oil price per barrel was increasing from 2010 to2012 but since then it saw a decline. However in 2017 the price came up to51.
64 US dollars. The OPEC crude oil price is defined by the price of theso-called OPEC (Reference) Basket. This basket is an averageof prices of the various petroleum blends that are produced by the OPEC members. Year Average price in U.
S. dollars per barrel 2017 51.64 2016 40.68 2015 49.49 2014 96.29 2013 105.87 2012 109.45 2011 107.
46 2010 77.38 Sources: OPEC; IEALessons Learnedü OPEC is an organisation consistingof the world’s 14 major oil-exporting nations. ü It was founded in1960 to coordinate the petroleum policies ofits members.ü OPEC isconsidered as a cartel after its powerful demonstration effect in oil crisis of1973 however it does not operate as a cartel since it does not have any powerto restrict its members’ production.ü The member nation’s self interestto give discounts and increase production fades away the power of theorganisation.
ü Temporary conflicts in OPEC membercountries can disrupt oil supplies and elevate prices and the frequent disputesand instabilities tend to limit OPEC’s long-term cohesion and effectiveness. Recommendations for futureThe latest predictionsfrom the OPEC World Energy Model, OWEM, indicate that fossil fuels will remainthe world’s dominant energy source in the next two decades and that they willmeet more than 90 per cent of world energy requirements. As for non-fossilfuels, nuclear energy is forecast to continue its decline, while hydropower isexpected to grow rapidly in developing countries. Renewable energy will alsoincrease from its very low base, although at rates lower than those set out inthe EU green paper on energy security.Among the fossil fuels, oil and gas inparticular will continue to play the leading roles in meeting world energydemand. OWEM predicts that world oil demand will rise to 107 mb/d in 2020,compared with around 76 mb/d in 2000. As non-OPEC oil production reaches aplateau in the first two decades of the century, OPEC Member Countries — withmore than 75 per cent of global proven crude oil reserves — are expected to becalled on to satisfy most of the new demand.
Projections see OPEC producing 52mb/d of crude in 2020, which is more than 40 per cent of global supply.Of course, with the projected expansion inboth oil and gas use, there is a constant need for producers to not onlyreplace depleted reserves, but also expand production to meet the world’sincreasing energy needs. The level of investment Member Countries alone willneed to make is enormous. Projections estimate a figure of nearly $209 billionby 2020. However, for the high-cost, non-OPEC producers, investment forecastsare much greater than this — around $860 bn by 2020.In speaking of the future, it is alsonecessary to dispel another common, but mistaken notion that fossil fuels are adirty form of energy. Possibly this can be traced to the old days of coal.
OPEC should focuson developing and improving cleaner-burning form of energy and technologiessuch as CO2 sequestration that will allow gas and other hydrocarbons, such asoil, to be burned at even the zero emissions level.It is importantto remember that fossil fuels are a product and gift of nature. Technicaladvances will allow us to use this gift without damaging nature in return.Today, it is only a question of cost. References Colgan, J. D.
(2014). The Emperor Has No Clothes: The Limits of OPEC in the Global Oil Market. International Organization , 68 (3), pp.
599-632. Gately, D. (2004). OPEC’s Incentives for Faster Output Growth. The Energy Journal , 25, pp. 75-96.
Gately, D. (1995). Strategies for OPEC’s Pricing and Output Decisions. The Energy Journal , 16 (3), pp.
1-38. Pedro A. Almoguera, C.
C. (2011). Testing for the cartel in OPEC: non-cooperative collusion or just non-cooperative? Oxford Review of Economic Policy , 27 (1), pp.
144-168. Vielhaber, J. M. (1994). OPEC Production: The Missing Link. The Energy Journal , 15, pp. 115-132.