Download Economics - Assignment Point

Organization of the Petroleum
Exporting Countries (OPEC)
www.AssignmentPoint.com
www.AssignmentPoint.com
Organization of the Petroleum Exporting Countries (OPEC)
The Organization of the Petroleum Exporting Countries (OPEC) is a cartel of
twelve countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya,
Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. The cartel
has maintained its headquarters in Vienna since 1965, and hosts regular meetings
among the oil ministers of its Member Countries. Indonesia withdrew its
membership in OPEC in 2008 after it became a net importer of oil, but stated it
would likely return if it became a net exporter in the world again.
According to its statutes, one of the principal goals is the determination of the best
means for safeguarding the cartel's interests, individually and collectively. It also
pursues ways and means of ensuring the stabilization of prices in international oil
markets with a view to eliminating harmful and unnecessary fluctuations; giving
due regard at all times to the interests of the producing nations and to the necessity
of securing a steady income to the producing countries; an efficient and regular
supply of petroleum to consuming nations, and a fair return on their capital to those
investing in the petroleum industry.
OPEC's influence on the market has been widely criticized. Several members of
OPEC alarmed the world and triggered high inflation across both the developing
and developed world when they used oil embargoes in the 1973 oil crisis. OPEC's
ability to control the price of oil has diminished somewhat since then, due to the
subsequent discovery and development of large oil reserves in Alaska, the North
Sea, Canada, the Gulf of Mexico, the opening up of Russia, and market
modernization. OPEC nations still account for two-thirds of the world's oil
reserves, and, as of April 2009, 33.3% of the world's oil production, affording them
considerable control over the global market. The next largest group of producers,
www.AssignmentPoint.com
members of the OECD and the Post-Soviet states produced only 23.8% and 14.8%,
respectively, of the world's total oil production. As early as 2003, concerns that
OPEC members had little excess pumping capacity sparked speculation that their
influence on crude oil prices would begin to slip.
History
Venezuela was the first country to move towards the establishment of OPEC in the
1960's by approaching Iran, Gabon, England, Kuwait and Saudi Arabia in 1949,
suggesting that they exchange views and explore avenues for regular and closer
communication among petroleum-producing nations. In 10-14 September 1960, at
the initiative of the Venezuelan Energy and Mines minister Juan Pablo Pérez
Alfonzo and the Saudi Arabian Energy and Mines minister Abdullah al-Tariki, the
governments of Iraq, Iran, Kuwait, Saudi Arabia and Venezuela met in Baghdad to
discuss ways to increase the price of the crude oil produced by their respective
countries. OPEC was founded in Baghdad, triggered by a 1960 law instituted by
American President Dwight Eisenhower that forced quotas on Venezuelan and
Persian Gulf oil imports in favor of the Canadian and Mexican oil industries.
Eisenhower cited national security, land access to energy supplies, at times of war.
When this led to falling prices for oil in these regions, Venezuela's president
Romulo Betancourt reacted seeking an alliance with oil producing Arab nations as
a preemptive strategy to protect the continuous autonomy and profitability of
Venezuela's oil.
As a result, OPEC was founded to unify and coordinate members' petroleum
policies. Original OPEC members include Iran, Iraq, Kuwait, Saudi Arabia, and
www.AssignmentPoint.com
Venezuela. Between 1960 and 1975, the organization expanded to include Qatar
(1961), Indonesia (1962), Libya (1962), the United Arab Emirates (1967), Algeria
(1969), and Nigeria (1971). Ecuador and Gabon were members of OPEC, but
Ecuador withdrew on December 31, 1992 because they were unwilling or unable to
pay a $2 million membership fee and felt that they needed to produce more oil than
they were allowed to under the OPEC quota. Similar concerns prompted Gabon to
follow suit in January 1995 [4]. Angola joined on the first day of 2007. Norway
and Russia has attended OPEC meetings as observers. Indicating that OPEC is not
averse to further expansion, Mohammed Barkindo, OPEC's Secretary General,
recently asked Sudan to join. Iraq remains a member of OPEC, though Iraqi
production has not been a part of any OPEC quota agreements since March 1998.
In May 2008, Indonesia announced that it would leave OPEC when its membership
expired at the end of that year, having become a net importer of oil and being
unable to meet its production quota. A statement released by OPEC on 10
September 2008 confirmed Indonesia's withdrawal, noting that it "regretfully
accepted the wish of Indonesia to suspend its full Membership in the Organization
and recorded its hope that the Country would be in a position to rejoin the
Organization in the not too distant future."
The persistence of the Arab-Israeli conflict finally triggered a response that
transformed OPEC into a formidable political force. After the Six Day War of
1967, the Arab members of OPEC formed a separate, overlapping group, the
Organization of Arab Petroleum Exporting Countries, for the purpose of centering
policy and exerting pressure on the West over its support of Israel. Egypt and
Syria, though not major oil-exporting countries, joined the latter grouping to help
articulate its objectives. Later, the Yom Kippur War of 1973 galvanized Arab
opinion. Furious at the emergency re-supply effort that had enabled Israel to
www.AssignmentPoint.com
withstand Egyptian and Syrian forces, the Arab world imposed the 1973 oil
embargo against the United States and Western Europe.
After 1980, oil prices began a six-year decline that culminated with a 46 percent
price drop in 1986. This was due to reduced demand and over-production that
produced a glut on the world market. This caused OPEC to lose its unity. OPEC
net oil export revenues fell in the 1980s.
Responding to war and low prices
Leading up to the 1990-91 Gulf War, Iraqi President Saddam Hussein advocated
that OPEC push world oil prices up, thereby helping Iraq, and other member states,
service debts. But the division of OPEC countries occasioned by the Iraq-Iran War
and the Iraqi invasion of Kuwait marked a low point in the cohesion of OPEC.
Once supply disruption fears that accompanied these conflicts dissipated, oil prices
began to slide dramatically.
After oil prices slumped at around $15 a barrel in the late 1990s, concerted
diplomacy, sometimes attributed to Venezuela’s president Hugo Chávez, achieved
a coordinated scaling back of oil production beginning in 1998. In 2000, Chávez
hosted the first summit of heads of state of OPEC in 25 years. The next year,
however, the September 11, 2001 attacks against the United States, the following
invasion of Afghanistan, and 2003 invasion of Iraq and subsequent occupation
prompted a surge in oil prices to levels far higher than those targeted by OPEC
during the preceding period. Indonesia withdrew from OPEC to protect its oil
supply interests.
www.AssignmentPoint.com
On November 19, 2007, global oil prices reacted strongly as OPEC members
spoke openly about potentially converting their cash reserves to the euro and away
from the US dollar.
On October 10, 2008, oil traded below $85 on the New York Mercantile Exchange.
In response OPEC has stated that it will meet November 18, 2008, a month ahead
of their regularly scheduled meeting to discuss cutting production as oil
experiences declining world demand.
Production disputes
The economic needs of the OPEC member states often affect the internal politics
behind OPEC production quotas. Various members have pushed for reductions in
production quotas to increase the price of oil and thus their own revenues. These
demands conflict with Saudi Arabia's stated long-term strategy of being a partner
with the world's economic powers to ensure a steady flow of oil that would support
economic expansion. Part of the basis for this policy is the Saudi concern that
expensive oil or oil of uncertain supply will drive developed nations to conserve
and develop alternative fuels. To this point, former Saudi Oil Minister Sheikh
Yamani famously said in 1973: "The stone age didn't end because we ran out of
stones."
One such production dispute occurred on September 10, 2008, when the Saudis
reportedly walked out of OPEC negotiating session where the cartel voted to
reduce production. Although Saudi Arabian OPEC delegates officially endorsed
the new quotas, they stated anonymously that they would not observe them. The
New York Times quoted one such anonymous OPEC delegate as saying “Saudi
www.AssignmentPoint.com
Arabia will meet the market’s demand. We will see what the market requires and
we will not leave a customer without oil. The policy has not changed.”
Membership
Current members
OPEC has twelve member countries: six in the Middle East, four in Africa, and
two in South America.
Region
Joined OPEC
Population
(July 2008)
Area (km²)
Algeria
Africa
1969
33,779,668
2,381,740
Angola
Africa
2007
12,531,357
1,246,700
Ecuador
South America 2007
13,927,650
283,560
Iran
Middle East
1960
65,875,224
1,648,000
Iraq
Middle East
1960
28,221,180
437,072
Kuwait
Middle East
1960
2,596,799
17,820
Libya
Africa
1962
6,173,579
1,759,540
Country
www.AssignmentPoint.com
Nigeria
Africa
1971
146,255,312
923,768
Qatar
Middle East
1961
824,789
11,437
Saudi Arabia
Middle East
1960
28,146,656
2,149,690
United Arab Emirates Middle East
1967
4,621,399
83,600
26,414,816
912,050
369,368,429
11,854,977 km²
Venezuela
Total
South America 1960
Economics
OPEC decisions have had considerable influence on international oil prices. For example, in the
1973 energy crisis OPEC refused to ship oil to western countries that had supported Israel in the
Yom Kippur War or 6 Day War, which they fought against Egypt and Syria. This refusal caused
a fourfold increase in the price of oil, which lasted five months, starting on October 17, 1973,
and ending on March 18, 1974. OPEC nations then agreed, on January 7, 1975, to raise crude oil
prices by 10%. At that time, OPEC nations — including many whom had recently nationalized
their oil industries — joined the call for a new international economic order to be initiated by
coalitions of primary producers. Concluding the First OPEC Summit in Algiers they called for
stable and just commodity prices, an international food and agriculture program, technology
transfer from North to South, and the democratization of the economic system. Overall, the
evidence suggests that OPEC did act as a cartel, when it adopted output rationing in order to
maintain price.
Since currently worldwide oil sales are denominated in U.S. dollars, changes in the value of the
dollar against other world currencies affect OPEC's decisions on how much oil to produce. For
www.AssignmentPoint.com
example, when the dollar falls relative to the other currencies, OPEC-member states receive
smaller revenues in other currencies for their oil, causing substantial cuts in their purchasing
power. After the introduction of the euro, pre-invasion Iraq decided it wanted to be paid for its
oil in euros instead of US dollars causing OPEC to consider changing its oil exchange currency
to euros, although after Iraq's invasion, the interim government reversed this policy, and the
subsequent Iraq governments stuck to the US dollar. Member states Iran and Venezuela have
undergone similar shifts from the dollar to the Euro.
Using quotas to help mitigate global warming
As fossil fuel consumption produces large amounts of CO2 and other greenhouse gases, it has
been proposed that if OPEC and the IEA established the proper production quota system, global
warming effects could be reduced. While OPEC is indeed drastically reducing its output, this is
due to financial reasons, not social ones.
www.AssignmentPoint.com