Download DSI03 Organisation of Petroleum Exporting Countries (OPEC)

Energy Institute Knowledge Service
Energy Institute, 61 New Cavendish Street, London, W1G 7AR
t: +44 (0)20 7467 7100 f: +44 (0)20 7255 1472
e: [email protected] www.energyinst.org
Updated September 2010
EI Data Service useful information: DSI03
Organisation of Petroleum Exporting Countries (OPEC)
1. Membership
The Organisation of Petroleum Exporting Countries (OPEC) was created in September 1960. The five founder member
countries, all significant crude oil exporters, were Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Since then these
founder members have been joined by the following: Qatar (January 1961), Indonesia (June 1962), Libya (June 1962),
Abu Dhabi (November 1967), Algeria (July 1969), Nigeria (July 1971), Ecuador (November 1973) and Gabon (June
1975). The membership of Abu Dhabi was subsequently transferred to the United Arab Emirates. In 1992 Ecuador left
OPEC but rejoined in 2007 while Indonesia left in 2008. Angola joined in 2007.
According to the OPEC statutes, any country which is a net exporter of crude oil in large quantities and whose
petroleum interests are similar to those of the founder members can become a full member of OPEC providing it is
accepted by a three-fourths majority of full members, including the five founder members. In some instances a country
may only be eligible as an associate member.
Current members of OPEC are:-
Country
Algeria
Angola
Ecuador
Iran
Iraq
Kuwait
Libya
Nigeria
Qatar
Saudi Arabia
United Arab Emirates
Venezuela
Year Joined
1969
2007
1973 / 2007
1960
1960
1960
1962
1971
1961
1960
1967
1960
Country
Gabon
Indonesia
Year Joined
1975
1962
Former members
Year Left
1995
2008
2. Purpose
Article 2 of the Statute relating to OPEC gives the following summary of its objectives:
(a) The principal aim of the organisation shall be the co-ordination and the determination of the best means for
safeguarding their interests, individually and collectively.
Energy Institute Knowledge Service
Energy Institute, 61 New Cavendish Street, London, W1G 7AR
t: +44 (0)20 7467 7100 f: +44 (0)20 7255 1472
e: [email protected] www.energyinst.org
(b) The organisation shall devise ways and means of ensuring the stabilisation of prices in international oil
markets with a view to eliminating harmful and unnecessary fluctuations.
(c) Due regard shall be given at all times to the interests of the producing nations and the necessity of securing
a steady income to the producing nations; and a fair return on their capital to those investing in the petroleum
industry.
3. Organisation
The OPEC headquarters were transferred from Geneva to Vienna in 1965. The organisation has a ministerial
conference with one delegate from each country, an executive council and a general secretary, who holds office for two
years.
The current address is:
OPEC
Helferstorferstrasse 17
A-1020 Vienna Austria
Tel 00 43 1 21112/0
Fax: 00 43 1 2164320
E-mail: [email protected]
Web: http://www.opec.org
4. Activities
Between 1960 and 1973 there were no unilateral changes to posted prices imposed by OPEC. There were, however,
tax increases, introduction of measures on participation, and price changes. Events in 1973 showed the growing
dissatisfaction of OPEC countries with foreign control of their oil industries. Because oil is a finite resource, OPEC
countries saw the then rapid rate of extraction as economically irresponsible and politically degrading.
1973 saw an OPEC agreement (the General Agreement on Participation - the Riyadh Agreement, January 1973) for
government participation in concessions at 25%. It was planned that there should be a yearly increase in government
share, taking it to 51% by 1982. This rate of increase was changed several times so that by 1974 many countries had
60% and by 1982 most countries had 100% government ownership of oil and gas resources.
In October 1973 OPEC set its first unilateral posted price change. This was an increase of roughly 70%. As can be seen
from EI Data Service Stats datasheet DSS13, prices continued to increase dramatically over the next few years, for
example from $2.59 a barrel at the beginning of 1973 to over $12.38 at the beginning of 1975.
During this time the way that oil was priced also changed. Up until producing governments began to take control of their
oil, prices were set by the companies as "posted prices" (i.e. the highest price the company was prepared to pay for
crude). By the end of 1974 crude was priced at the "government selling price" (the price at which the producing
governments sold oil to companies or other customers).
The First Oil Crisis 1973
The day after OPEC set its first unilateral price change, OAPEC - The Organisation of Arab Petroleum Exporting
Countries - announced an embargo of oil exports to the USA and to the Netherlands in retaliation for their support of
Israel in the Arab-Israel war. They also announced a cutback in production.
In the ensuing environment of tight supply OPEC almost trebled its price - to a level that was seen by OPEC as relating
the government take to the average cost of other sources of energy.
The Second Oil Crisis 1979
In December 1978 strikes and riots leading to the overthrow of the Shah curtailed production in Iran. With world oil
consumption still climbing, the Middle East cutback in production resulted in panic concerning the ability of production to
meet demand. This in turn produced vigorous trading on the Spot Market resulting in steeply rising prices. However,
other OPEC members (in particular Saudi Arabia) increased their production to compensate for Iran. Exports from Iran
were resumed after the revolution in March 1979 (but at a greatly reduced level).
Energy Institute Knowledge Service
Energy Institute, 61 New Cavendish Street, London, W1G 7AR
t: +44 (0)20 7467 7100 f: +44 (0)20 7255 1472
e: [email protected] www.energyinst.org
From 1979 to 1981 OPEC did not have a unified price structure. With the high degree of activity on the Spot Market,
some OPEC governments decided to price their crudes at the highest rate the market would allow, while others such as
Saudi Arabia stuck to their (albeit constantly increasing) official prices.
1986
EI Data Service Stats datasheet DSS13 (OPEC spot prices) neatly outlines OPEC's history since 1981. Prices rose to
an all time high in 1981 and then fell. The drop in prices was due to the world oil glut which was itself due to several
factors. Firstly, the high level of $US (in which oil is traded) increased the cost of oil in non-$US countries. Secondly, the
world economic recession reduced demand as did the conservation measures taken by many countries. There were
several other factors, including the Saudi Arabian Oil Minister - Sheik Yamani's - engineering of the glut in an attempt to
bring about more realistic prices for crude.
In an attempt to halt oil price decline, OPEC set itself lower and lower production quotas, OPEC members were by no
means united in their opinions about the best way to deal with their problems. The years 1981 to 1985 saw many
confrontations particularly over cheating on production quotas. The Saudi Arabian Oil Minister changed tactics early in
1986. Instead of pressing for a higher price for crude oil by limiting supply (with the OPEC quota system) he decided to
flood the market with cheap crude in an attempt to raise his country's market share. (Saudi Arabia's market share had
gradually decreased in recent years.)
Consequently the price of crude oil dropped dramatically. Instead of lowering the official selling price the Saudis made
deals at discount prices so that the official Selling Price became nonsensical. These discount prices (that came to be
known as "netback prices") were decided upon by calculating the profit on a unit of product after refining and
transportation costs had been taken out. This meant that instead of prices being set in relation to other energy forms or
being dictated by the producer, the deciding factor was the profit margin of the refiner.
After several months of low prices OPEC members again assembled in an attempt to settle on production quotas in
order to limit supply and therefore raise prices. OPEC members had difficulty deciding how to arrive at production
quotas. Many different parameters were suggested as pertinent, including a country's population, former market share,
reserves, percentage of gross national product made up by oil earnings etc. In late October 1986 when Sheikh Yamani
was replaced by Hisham Nazer as Oil Minister, OPEC had still not come to a decision. (King Fahed is said to have
removed Yamani because he wanted Yamani to push for an increase in price as well as production which Yamani did
not do.)
At the end of December 1986 OPEC finally agreed on both production quotas and official prices, effective from 1st
February. This had the effect of raising oil prices generally - from the all time low of $9.00 for Brent crude in August 1986
to £18.20 in January 1987.
1990
Following the invasion of Kuwait by Iraq on 2 August 1990 a UN oil embargo was put in place and oil exports from both
countries were suspended. World oil supplies were reduced by more than 3.5 mbpd and for a short period oil prices
rose from $20 to more than $30. By January 1991 prices had stabilized to around $20 due to increased production from
OPEC members. At an emergency meeting at the end of August OPEC decided to suspend production limitation
arrangements. As a result OPEC countries with spare capacity rapidly stepped up production for example Saudi Arabia
increased its production by about 3 mbpd in 1990.
The problem for the medium term will be how OPEC will distribute the required cut in production amongst its members
when Iraq is finally allowed to recommence exporting oil onto the world market.
Energy Institute Knowledge Service
Energy Institute, 61 New Cavendish Street, London, W1G 7AR
t: +44 (0)20 7467 7100 f: +44 (0)20 7255 1472
e: [email protected] www.energyinst.org
OPEC Crude Oil Production Quotas
These were first introduced in 1982 when there was considerable pressure on most OPEC members to maximise their
production of oil in weak market conditions. Saudi Arabia bore the brunt of the cutback in production, but most
members did not strictly observe the quotas.
Algeria
Ecuador
Gabon
Indonesia
Iran
Iraq
Kuwait
Libya
Nigeria
Qatar
Saudi Arabia
UAE
Venezuela
TOTAL OPEC
Mar-82
650
200
150
1300
1200
1200
800
750
1300
300
7150
1000
1500
17500
May-83
725
200
125
Oct-84
663
183
137
Aug-86
663
183
137
Dec-86
669
221
160
Jan-June July-Dec Jan-June
1987
1987
1988
635
667
695
210
221
230
152
159
166
See EI Data Service stats datasheet DSS03 (OPEC Production and Reserves) for current production/reserves figures,
updated annually.