Organization supply of petroleum to consumers, a steady

Organization of
the Petroleum Exporting Countries (OPEC)

Introduction

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A cartel is a
group of independent producers which try to increase their collective profit
through fixing prices, limiting supply, or other restrictive
practices. Cartels usually control selling prices, but some control
the prices of purchased inputs. Cartels usually occur in oligopolies, where there are a small
number of sellers and usually involve homogeneous products. OPEC is a very
good example of cartels in oil industry.

Organization of the Petroleum Exporting
Countries (OPEC)  is an intergovernmental
organization of 14 nations, founded in 1960 in Baghdad by the first five members (Iran, Iraq, Kuwait, Saudi
Arabia, Venezuela), and headquartered since 1965
in Vienna.

OPEC’s mission statement is “to
coordinate and unify the petroleum policies of its member countries and ensure
the stabilization of oil markets, in order to secure an efficient, economic and
regular supply of petroleum to consumers, a steady income to producers, and a
fair return on capital for those investing in the petroleum industry. It also provides
significant information on international oil market.

The formation of OPEC marked
a turning point toward national sovereignty over natural resources, and OPEC
decisions have come to play a prominent role in the global oil market and international
relations.

Issues motivated for
choosing the study

There are many related
issues that motivated me to choose OPEC as my project topic some of which are:

ü  Oil is important
source of energy in today’s world and knowing that OPEC member countries hold
nearly 73% of estimated oil reserves of the world.

ü  OPEC is known to
have significant power in setting oil prices as it provides 48% of oil
demanded.

ü  OPEC was formed
to stand against multinational oil companies from the USA.

ü  Delving into the
topic and learning issues related to countries in middle east.

Objectives of the
study

ü  To know about the
origin, history, members, mission of the oil cartel (OPEC)

ü  To learn about
the leadership and decision making power of the cartel

ü  To look into
existing scholarly works on OPEC

ü  To find out the
advantages and disadvantages of OPEC

ü  To give
recommendations 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” that
supports the organization’s true principal function, which is to generate
political benefits for its members. One benefit it generates is international
prestige.

(Gately, 1995) Concluded that OPEC’s interests will be
served best by a policy of moderate output growth, at a rate no faster than
that of world income growth. Slowing its output growth will allow OPEC
gradually to regain the market share lost after its disastrous 1979-80 price
doubling, but without jeopardizing its revenue, as might a policy of more rapid
increases in output.

(Vielhaber, 1994) Stated that the
future of oil depends critically on the production decisions of OPEC, which in
turn depend on a variety of factors internal and external to the cartel. He
computed 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 the
incentives to cheat, but the payoff for cheating is still positive for the
smaller OPEC producers. Accordingly, prices well below the cartel’s joint
profit maximizing level seem most likely.

(Gately, OPEC’s Incentives for Faster Output Growth,
2004)
Concluded that the projections  made by
the International Energy Agency (IEA) and the U.S. Department of Energy (DOE)
stating that “OPEC producers are likely to expand their oil output
substantially over the next two decades – more than doubling in the Gulf
countries by 2020” are implausible.

(Pedro A. Almoguera, 2011) Founded that
although there were periods in which oil prices were measurably higher owing to
collusion among OPEC members, overall OPEC has not been effective in
systematically raising prices above Cournot competition levels. OPEC’s behavior
is best described as Cournot competition in the face of a competitive fringe
constituted by non-OPEC producers.

Current member countries

OPEC has 14 member countries: six in
the Middle East, six in Africa, and two in South
America.
According to the US Energy
Information Administration, OPEC represented 44 percent of the world’s total in
2016 and accounted for 73 percent of the world’s “proven” oil
reserves, including 48 percent from just the six Middle Eastern members. This
gives OPEC a major influence on global
oil prices that
were previously determined by American-dominated multinational oil companies. Members are: Algeria, Angola,
Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar,
Saudi Arabia, UAE, and Venezuela

 

Lapsed members

There are many member
countries that fell they need to produce more oil than they are allowed under
OPEC quota in order to pay membership costs and make profit. Therefore they
usually withdraw from OPEC and when the time comes they rejoin the cartel.
Ecuador pulled back its membership from OPEC in December 1992 because it was
not willing to pay annual US$2 million membership fee although it rejoined
in October 2007. Similar concerns prompted Gabon and Indonesia to suspend
membership and rejoin.

Observers

Representatives from Egypt, Mexico, Norway, Oman, Russia, and other oil-exporting nations
have attended many OPEC meetings as observers since the 1980s. This arrangement
serves as an informal mechanism for coordinating policies.

Leadership and Decision-making

The OPEC Conference is the
supreme authority of the organization, and consists of oil minister delegators
of member countries. The chief executive of the organization is the OPEC Secretary General. The Conference is
conducted at the Vienna headquarters, at least twice a year and in additional
extraordinary sessions when necessary. Decisions are made by agreement of
member countries each having one vote and each country paying an equal
membership fee into the annual budget. However, since Saudi Arabia is by far
the largest and most-profitable oil exporter in the world, with enough capacity
to function as the traditional swing producer to balance the global
market, it serves as “OPEC’s de facto leader”.

Advantages

ü  OPEC members have been able to
cooperate productively over the decades to significantly improve the quality
and quantity of information available about the international oil market. This
is especially helpful for a natural-resource industry whose smooth functioning
requires months and years of careful planning.

ü  In April 2001, OPEC collaborated
with five other international organizations (APEC, Eurostat, IEA, OLADE, UNSD) to improve the availability and
reliability of oil data. They launched the Joint Oil Data Exercise, which in
2005 was joined by IEF and renamed the Joint
Organisations Data Initiative (JODI), covering more than 90 percent
of the global oil market. GECF joined as an eighth partner
in 2014, enabling JODI also to cover nearly 90 percent of the global market for
natural gas.

ü  Since 2007, OPEC has published the
“World Oil Outlook” (WOO) annually, in which it presents a
comprehensive analysis of the global oil industry including medium- and
long-term projections for supply and demand. OPEC also produces an “Annual
Statistical 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 a
convenient reference price for buyers and sellers of crude oil, including
standardized contracts in major futures
markets since
1983. Benchmarks are used because oil prices differ (usually by a few dollars
per barrel) based on variety, grade, delivery date and location, and other
legal requirements.

Disadvantages

ü  OPEC members have displayed sometimes
apparent anti-competitive cartel behavior through the
organization’s agreements about oil production and price levels.

ü  OPEC has not been involved in any
disputes related to the competition rules of the WTO, even though the objectives,
actions, and principles of these two organizations differ considerably.

ü  OPEC often has difficulty agreeing
on policy decisions because its member countries differ widely in their oil
export 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 source of serious conflict, instability and imbalances.

ü  Religion-linked conflicts in
the Middle East are recurring features of the geopolitical
landscape for this oil-rich region. Internationally important conflicts in
OPEC’s history have included the Six-Day
War (1967), Yom
Kippur War (1973),
a hostage siege directed by Palestinian
militants (1975),
the Iranian Revolution (1979), Iran–Iraq
War (1980–1988), Iraqi
occupation 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), Arab
Spring (2010–2012), Libyan
Crisis (2011–present),
and international Embargo against Iran (2012–2016).

ü  In OPEC, because of an economic
“prisoner’s dilemma” that encourages each member
nation individually to discount its price and exceed its production quota, widespread
cheating within OPEC often erodes its ability to influence global oil prices
through collective action.

ü  A US District Court states that
OPEC consultations are protected as “governmental” acts of state by
the Foreign
Sovereign Immunities Act, and are therefore beyond the legal reach of US competition
law governing
“commercial” acts. Despite popular sentiment against OPEC,
legislative proposals to limit the organization’s sovereign immunity, such as
the NOPEC Act, have so far been
unsuccessful.

 

 

 

 

Crude oil benchmarks

The OPEC Reference Basket of Crudes has been an important
benchmark for oil prices since 2000. It is calculated as a weighted
average of
prices 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), Es
Sider (Libya), Bonny Light (Nigeria), Qatar Marine (Qatar), Arab Light (Saudi
Arabia), Murban (UAE), and Merey (Venezuela).

North
Sea Brent Crude Oil is the leading benchmark for Atlantic basin crude
oils, and is used to price approximately two-thirds of the world’s traded crude
oil. Other well-known benchmarks are West Texas Intermediate (WTI), Dubai
Crude, Oman Crude, and Urals
oil.

History

In the 1960s, OPEC did not have much power. This
changed in 1973 when the third Arab-Israeli war started. The United
States and a few European countries supported Israel.  As
a form of punishment, OPEC nations, influenced by
the Arab countries, stopped selling oil to the West. Within the next six years
oil prices rose to ten times the
price of the early 1970s. OPEC countries became rich with so-called petrodollars;
the West sank into deep recession because they
needed OPEC’s oil.

In the aftermath of the energy
crisis of the 1970s, western countries started looking for alternative forms
of energy in
order to become more independent from OPEC and
the oil-producing nations. In 1986, oil prices dropped to
the lowest rate in history.
Oil-producing nations lost much of their income.  In the 80s and
90s OPEC’s power diminished, often because of
conflicts and internal arguments and
because member states could not agree on production quotas.
Some OPEC countries did not keep agreements and produced
more oil, thus lowering prices.

After 2000, oil prices began to rise again
and reached an all-time high in 2007.
The financial
crisis of 2007 and 2008 hit world economy hard and oil prices
fell once again. Since the Arab
Spring of 2011, prices have gone up and down several times.

Today OPEC still controls about 60% of the
world’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 have
been quarrels in the cartel in
the last 5 decades it remains a powerful
organization.

 

 

 

Current Situation (2010-now)

This statistic depicts the
average annual oil price for selected OPEC crude oils from 2010 to 2017. As can
be seen the average annual oil price per barrel was increasing from 2010 to
2012 but since then it saw a decline. However in 2017 the price came up to
51.64 US dollars. The OPEC crude oil price is defined by the price of the
so-called OPEC (Reference) Basket. This basket is an average
of 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; IEA

Lessons Learned

ü  OPEC is an organisation consisting
of the world’s 14 major oil-exporting nations.

ü  It was founded in
1960 to coordinate the petroleum policies of
its members.

ü  OPEC is
considered as a cartel after its powerful demonstration effect in oil crisis of
1973 however it does not operate as a cartel since it does not have any power
to restrict its members’ production.

ü  The member nation’s self interest
to give discounts and increase production fades away the power of the
organisation.

ü  Temporary conflicts in OPEC member
countries can disrupt oil supplies and elevate prices and the frequent disputes
and instabilities tend to limit OPEC’s long-term cohesion and effectiveness.

Recommendations for future

The latest predictions
from the OPEC World Energy Model (OWEM) indicate that fossil fuels will remain
the world’s dominant energy source in the next two decades and that they will
meet more than 90 per cent of world energy requirements. As for non-fossil
fuels, nuclear energy is forecast to decline further, while hydropower is
expected to grow fast in developing countries. Renewable energy will also
increase from its very low base as more countries are becoming environment
conscious.

Among the fossil fuels, oil and gas in
particular will continue to play the leading roles in meeting world energy
demand. 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 a standstill
 in the first two decades of the century,
OPEC Member Countries — with more than 75 per cent of global proven crude oil
reserves — are expected to be called on to satisfy most of the new demand. Projections
see OPEC producing 52 mb/d of crude in 2020, which is more than 40 per cent of
global supply.

Of course, with the projected expansion in
both oil and gas use, there is a constant need for producers to not only
replace depleted reserves, but also expand production to meet the world’s increasing
energy needs. The level of investment Member Countries alone will need to make
is enormous. Projections estimate a figure of nearly $209 billion by 2020. However,
for the high-cost, non-OPEC producers, investment forecasts are much greater than
this — around $860 bn by 2020.

In speaking of the future, it is also
necessary to dispel another common, but mistaken notion that fossil fuels are a
dirty form of energy. Possibly this can be traced to the old days of coal.

OPEC should focus
on developing and improving cleaner-burning form of energy and technologies
such as CO2 sequestration that will allow gas and other hydrocarbons, such as
oil, to be burned at even the zero emissions level.

It is important
to remember that fossil fuels are a product and gift of nature. Technical
advances 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.