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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.