Petroleum

OPEC: Influencing Global Oil Production Since 1960

A Global Consortium of Oil Producers

The Organization of the Petroleum Exporting Countries (OPEC) is a consortium of 14 of the world’s largest oil-exporting countries. Often referred to as the OPEC cartel, the group of nations involved in OPEC work together as if they were a single producer, regulating the price and supply of oil on the global market. Setting the price of oil on the world market helps to safeguard against energy price fluctuations that would otherwise impact the economies of oil-producing countries as well as countries that import oil (Chen, 2019). OPEC currently has a stated objective to coordinate and unify oil policies among its member nations in order to secure acceptable and consistent prices for petroleum producers, while also delivering a reliable supply of oil to consuming nations (OPEC, 2019). Moreover, OPEC also has a secondary objective to provide a superior return on capital investments for nations that choose to participate in financial ventures related to the oil industry.

Following a series of meetings between Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela at the Baghdad Conference of September 1960, OPEC was established as a permanent intergovernmental organization. In addition to the five founding member nations, there are nine other countries throughout the Middle East, Africa, and South America that are OPEC members. The additional membership includes: Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Libya, Nigeria, the Republic of the Congo, and the United Arab Emirates. Moreover, Indonesia and Qatar are former members of OPEC.

OIL-G20-OPEC
Source: OPEC

A Turing Point is Initiated

The creation of OPEC signaled a major turning point for the global oil industry. In addition to having a significant impact on the world’s natural resources, decisions made by OPEC’s members have had a paramount role in shaping the oil industry and international relations in general. While OPEC was first founded in Iraq, the headquarters are currently located in Vienna, Austria, where the OPEC Secretariat carries out the organization’s day-to-day business operations (Chen, 2019). Mohammad Sanusi Barkindo of Nigeria is the chief executive officer (CEO) of OPEC and was appointed to the position for a three-year term beginning on August 1, 2016 but was then reelected for another three-year term that started on July 2, 2019. Despite the fact that OPEC membership is currently only comprised of 14 countries, the organization’s official statues state that OPEC membership is open to any nation that is deemed to be a significant exporter of oil and petroleum products.

It is noteworthy that Russia, China, and the United States are not OPEC members because they are among some of the world’s largest producers of oil. Countries that choose to produce and export oil on their own without OPEC membership, find greater flexibility to set their own prices for oil and pursue different objectives that may not be shared with the rest of the OPEC members. While Russia, China, and the United States may be able to engage in their own objectives outside the realm of OPEC, OPEC’s power over global crude reserves and the market in general has often been the subject of criticism by non-OPEC countries. According to OPEC’s official website, its member countries hold approximately 79.4% of global crude oil reserves (OPEC, 2019). As an organized cartel, OPEC members have a formidable incentive to keep oil prices as high as possible since they have control over the vast majority of the global supply of oil (Chen, 2019).

Control of the World’s Oil Supply

OPEC’s member countries produce over a third of the world’s supply of oil. On a daily basis, the cartel produces nearly 32 million barrels of oil, which gives it significant power over global oil production and the price of oil as a whole (Swarup, 2018). Through the process of either increasing oil production or reducing oil production, OPEC is able to increase or reduce the price of oil on the global market, regardless of the production from non-OPEC countries. Furthermore, when OPEC has partnered with non-OPEC members in the past, the organization has exuded even more power over the oil industry.

A prime example of this happening was seen in December 2018, when Russia (a major oil producer that is not a member of OPEC) made a deal with OPEC to cut the supply of oil in order to counteract increasing production from the United States. Since increasing production from the U.S. initiated a global oil supply glut, Russia and OPEC worked collaboratively to ensure that oil prices wouldn’t drop excessively low as a result of actions taken by the American oil industry. Because both Russia and the OPEC countries rely heavily on oil exports for economic growth, higher oil prices were seen as a way to safeguard their economies.

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Source: OPEC

The 1960s

When OPEC first started to gain strength during the 1960s, the world was undergoing a multitude of economic and political changes. The gradual transition from decolonization led to the development of many new oil-producing independent states. The international oil market was dominated by what became known as the “Seven Sisters,” which was a group of multinational companies and other centrally planned economies. During this period of time, OPEC started to solidify its collective vision and establish a series of financial and policy objectives that still remain roughly the same to this day. After a brief shakeup in which its headquarters were moved from Geneva, Switzerland to Vienna, Austria, OPEC adopted its Declaratory Statement of Petroleum Policy in Member Countries in 1968, which highlighted the inalienable right of all oil-producing nations to exercise permanent sovereignty over their petroleum resources in the interest of their national development (OPEC, 2019).

The 1970s

During the 1970s, OPEC continued to rise among the ranks of the international oil market. This was the decade that OPEC’s member countries were first able to take nearly full control over crude oil on the world market through modifications to domestic oil production. Oil prices became increasingly volatile during this decade as a result of the 1973 Arab Oil embargo and the 1979 Iranian Revolution. However, the 1970s also became known as a time when OPEC would shift its strategies to address international development needs. The 1975 Summit of Heads of State and Government in Algiers, Algeria marked a shift in international policy for OPEC. Following this summit, the oil cartel announced that it would attempt to address issues within less developed nations through a new era of collaborative international relations (OPEC, 2019). With OPEC shifting its interests toward efforts to enhance geopolitical stability and world economic development, the organization founded the Fund for International Development in 1976, which also helped to encourage an increasing number of oil-producing nations to join the oil cartel.

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Source: NPR

The 1980s

From 1973 to 1980, OPEC-related initiatives helped to raise global oil prices by nearly 10-fold (Danielsen, 2019). However, following the extremely volatile oil prices of the 1970s, oil markets crashed in 1986 following weak economic growth and analyst predictions that consumers would move away from petroleum products. The sharp rise in oil prices during the previous decade had influenced oil-importing countries to seek new investments in alternatives to oil, like coal, natural gas, and nuclear power. As a result of falling oil revenues, total oil profits dropped to a third of what they had been in the 1970s for OPEC’s oil-producing nations (OPEC, 2019). As oil dropped to less than 10 dollars per barrel, and the disruptive Iran-Iraq War (1980–88) started to undermine the unity of the oil cartel, policy shifts started to occur. As a result, OPEC members significantly reduced their oil production during the 1980s in an effort to raise prices back to levels seen in the 1970s.

The 1990s

Tensions continued to remain high during the 1990s as the Persian Gulf War disrupted Middle Eastern oil production. Geopolitical conflicts and tensions related to Saudi Arabia increasing its oil production as other members limited their production caused more price volatility during the 90s. While OPEC as a whole strived to emphasize production quotas throughout the 90s, oil prices collapsed near the end of the decade (Danielsen, 2019). However, following the post-Soviet Union era, which led to increased globalization and economic growth, oil prices were poised to make a comeback in the 2000s. Although, the 1990s also marked an increase in United Nations-sponsored climate change negotiations. Following the Earth Summit of 1992, some OPEC members became anxious about how future international environmental laws would impact the oil industry. As a result, one country abandoned OPEC and another suspended its relationship with the cartel (OPEC, 2019).

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Source: Wikipedia

The 2000s

Through the beginning of the 21st century, oil prices started to rebound due to sustained global economic growth, better cooperation with non-OPEC members like Mexico, Norway, Oman, and Russia, rising tensions in the Middle East related to the American invasion of Iraq, and a political crisis in Venezuela (Danielsen, 2019). Oil prices skyrocketed to record levels in mid-2008, prior to collapsing with the rest of the global markets following the financial crisis. Collaborative summits in Caracas and Riyadh during the 2000s sought to identify opportunities to stabilize energy markets, promote sustainable development, and achieve environmental sustainability (OPEC, 2019). Following international effort to reduce global warming and limit greenhouse gas emissions, OPEC attempted to draft a series of environmental policies in solidarity with the rest of the world (Danielsen, 2019). Although, many experts within the sustainable development industry have critiqued OPEC’s environmental efforts as a façade to appear to be environmentally conscious while continuing business as usual.

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Source: Wikipedia

Post-2010

Following the global financial crisis and the persistent macroeconomic uncertainties from earlier in the decade, the oil markets stabilized after 2010, and OPEC moved to enhance its resilience against future economic downturns. Between 2011 and mid-2014, oil prices were the most stable that they had been for decades. Nevertheless, speculation related to electric vehicles impacting oil demand and oversupply worries caused prices to fall sharply toward the end of 2014. Environmental concerns had also started to put more pressure on OPEC’s operations and had led some prominent financial institutions to divest their funds from fossil fuel investments. OPEC members continue to plan for additional United Nations-led climate change agreements that could further target their operations.

Throughout its history, OPEC has weathered numerous internal conflicts, a variety of global economic downturns, and geopolitical tensions. As a result of the abundant internal conflicts between OPEC members, some energy experts have labeled OPEC as an ineffective cartel that has had little to no influence over global oil production or price (Danielsen, 2019). Moreover, as the shale gas and fracking boom has transformed the U.S. into one of the world’s leading oil and natural gas exporters, OPEC’s efforts to reduce production to raise oil prices have largely failed. Additionally, enhanced efforts by OPEC’s member nations to raise oil prices have led the Industrial Organization for Economics and Competition Law and the Organization for Economic Cooperation and Development (OECD) to label OPEC as an international price-fixing cartel (Swarup, 2018). However, according to OPEC’s leaders, its membership was formed to defend oil-producers from oil giants like Exxon Mobil, Royal Dutch Shell, BP, and Chevron rather than to fix oil prices on the international market. In the future, OPEC will have to continue to defend itself from the environmental movement and persistent criticism related to price fixing.

Sources

Chen, J. (2019). “Organization of the Petroleum Exporting Countries (OPEC).” Investopedia.

Danielsen, A. (2019). “OPEC.” Encyclopedia Britannica.

Hanweld, C. (2017). “The Death of OPEC? The Displacement of Saudi Arabia as the World’s Swing Producer and the Futility of an Output Freeze.” Indiana Journal of Global Legal Studies.

OPEC. (2019). “Brief History.” Organization of the Petroleum Exporting Countries.

Razeka, N., and Michieka, N. (2019). “OPEC and non-OPEC production, global demand, and the financialization of oil.” Research in International Business and Finance: Volume 50, Pages 201-225.

Seth, S. (2016). “How OPEC (and Non-OPEC) Production Affects Oil Prices.” Investopedia.

Swarup, M. (2018). “What is OPEC?” Al Jazeera News.

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