Role and Function of OPEC in the Petroleum Politics of the World

By: Dr. Pranab Kr. Das, Assistant Professor, Department of Geography, Sree Chaitanya College, Habra

Background of OPEC formation:

In 1949, Venezuela and Iran took the earliest steps in the direction of OPEC, by inviting Iraq, Kuwait and Saudi Arabia to improve communication among petroleum-exporting nations as the world recovered from World War II. At the time, some of the world’s largest oil fields were just entering production in the Middle East. The United States had established the Interstate Oil Compact Commission to join the Texas Railroad Commission in limiting overproduction. The US was simultaneously the world’s largest producer and consumer of oil, and the world market was dominated by a group of multinational companies known as the seven sisters five of which were headquartered in the US. In February 1959, as new supplies were becoming available, the multinational oil companies unilaterally reduced their posted prices for Venezuelan and Middle Eastern crude oil by 10 percent. Weeks later, the Arab League’s first Arab Petroleum Congress convened in Cairo, Egypt, where Saudi Arabia and Venezuela’s oil ministers were angered by the price cuts, and the two led their fellow delegates to establish the Maadi Pact or Gentlemen’s Agreement, calling for an “Oil Consultation Commission” of exporting countries, to which MOCs should consider price-change plans. The MOCs which used to control the international oil price In August 1960, ignoring the warnings of producing countries, the US favoured Canadian and Mexican oil for strategic reasons; the MOCs again unilaterally announced significant cuts in their posted prices for Middle Eastern crude oil. After this incident, the oil-exporting countries were eventually motivated to form OPEC as a counterweight to this concentration of political and economic power. In 1963, the seven big oil companies used to control 86% of the oil produced by OPEC countries, but by 1970 decreased their share to 77%.

Formation and Members of OPEC:

The Organization of the Petroleum Exporting Countries (OPEC) is a permanent, intergovernmental Organization, created at the Baghdad Conference on September 10–14, 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The five Founding Members were later joined by: Qatar (1961) – terminated its membership in January 2019; Indonesia (1962) – suspended its membership in January 2009, reactivated it in January 2016, but decided to suspend it again in November 2016; Libya (1962); United Arab Emirates (1967); Algeria (1969); Nigeria (1971); Ecuador (1973) – suspended its membership in December 1992, reactivated it in October 2007, but decided to withdraw its membership effective 1st January 2020; Angola (2007); Gabon (1975) – terminated its membership in January 1995 but rejoined in July 2016; Equatorial Guinea (2017); and Congo (2018). OPEC had its headquarters in Geneva, Switzerland, in the first five years of its existence. This was moved to Vienna, Austria, on September 1, 1965.

Objectives of OPEC:

   Before the formation of OPEC the seven multinational companies, commonly known as ‘Seven Sisters’ from West Europe and North America were accused for their monopoly in petroleum distribution throughout the world and providing low prices to the producer countries. This unfair practice instigated a few countries to form an organization to deal with these multinational corporations of the core countries. OPEC’s objective was to coordinate and unify petroleum policies among Member Countries, to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry. Now the common objectives of OPEC as stated by this organization are;

1. To secure a high stability of oil prices.
2. To secure a complete regulation and control of the supply of petroleum to the world market.
3. To secure a common petroleum policy among member states.
4. To raise funds for the development of the economy of member states.
5. To control production level of member states in order to ensure that oil is not excessively produced.
6. To secure suitable markets for oil produced by member states.
7. To fight for the interest of its members.

However, the majority of the critics argued that the most important objective of this organization is only to protect the interest of the member nations without considering the suffering of the Global mass. The excellent bargaining power of OPEC has made it one of the influential intergovernmental organizations in the world.  

 

Role of OPEC in Global Petro-Politics and Economies:

1973–1974 Oil Embargo

The 1973 oil crisis or first oil crisis began in October 1973 when the members of the Organization of Arab Petroleum Exporting countries led by Saudi Arabia proclaimed an oil embargo. The embargo was targeted at nations that had supported Israel during the Yom Kippur War, commonly known as Arab-Israel conflicts. The initial nations targeted were Canada, Japan, the Netherlands, the United Kingdom and the United States with the embargo also later extended to Portugal, Rhodesia and South Africa. By the end of the embargo in March 1974, the price of the oil had risen nearly 300%, from US$3 per barrel to nearly $12 per barrel globally; US prices were significantly higher. The embargo caused an oil crisis, or “shock”, with many short- and long-term effects on global politics and the global economy. However, the previous embargo was largely ineffective in response to the Six-Day War in 1967. But in 1973, the result was a sharp rise in oil prices and OPEC revenues, from US$3/bbl to US$12/bbl, and an emergency period in the energy sector. Various western countries started energy rationing; the UK imposed an emergency three-day workweek, seven European nations banned non-essential Sunday driving,  US gas stations limited the amount of gasoline per car based on number plates. Even after the embargo ended in March 1974, prices continued to rise despite various diplomatic measures. So the world experienced a global economic recession and rise of unemployment, inflation, trade imbalances; the world experienced a panic situation after post World War II economic recoveries.  The 1973–1974, oil embargo had lasting effects on the United States and other industrialized nations, which established the International Energy Agency in response, as well as national energy stockpiles designed to withstand months of future supply disruptions. Several oil conservation efforts included lower speed limits on highways, smaller and more energy-efficient cars and appliances, increased support of mass transit and greater emphasis on coal, natural gas, ethanol, nuclear and other alternative energy sources. These long-term efforts became effective enough that US oil consumption rose only 11 percent during 1980–2014, while real GDP rose 150 percent. But in the 1970s, OPEC nations demonstrated convincingly that their oil could be used as both a political and economic weapon against other nations, at least in the short term.

1975–1980, Increasing Influence of OPEC in World Economics and Politics: The Checkbook Diplomacy:

The price rise created an economic boost in the OPEC countries, mostly for the Arab members. These countries started showing their economic supremacy with ‘Petro-Dollars’. They gave huge loans, aid and concessions to the other comparatively poor Muslim countries. However, various Arab countries formed different aid agencies well before the 1973 oil embargo, for example, the Kuwait Fund for Arab Economic Development in 1961. But the changing situation after the oil embargo made them new faces of International Aid. This event is known as ‘Checkbook diplomacy’. Certain Arab countries have become the world’s largest providers of foreign. The Fund of OPEC became an official international development agency in May 1980 and was renamed the OPEC Fund for International Development or OFID with Permanent Observer status at the United Nations. The formation of OFID gave OPEC a diplomatic boost in International politics.

1979–1980 oil crisis and 1980s oil glut

In response to a wave of oil nationalization and the high prices of the 1970s, industrial nations took steps to reduce their dependence on OPEC oil, especially after prices reached new peaks approaching US$40/bbl in 1979–1980 during Iraq- Iran War. Greater emphasis was given to coal, natural gas, ethanol, nuclear and other alternative energy sources. Commercial exploration developed major non-OPEC oilfields in Siberia, Alaska, the North Sea, and the Gulf of Mexico. By 1986, daily worldwide demand for oil dropped by 5 million barrels, non-OPEC production rose by an even-larger amount. OPEC’s market share sank from approximately 50 percent in 1979. To combat falling revenue from oil sales, in 1982 Saudi Arabia pressed OPEC for audited national production quotas in an attempt to limit output and boost prices. When other OPEC nations failed to comply, Saudi Arabia first cut its own production from 10 million barrels daily in 1979–1981, one-third of its capacity. When even this proved ineffective, Saudi Arabia reversed course and flooded the market with cheap oil, causing prices to fall below US$10/bbl and higher-cost producers to become unprofitable. Then other OPEC members agreed to reduce the oil production and obeyed the quota system and crude oil prices started to increase. After this event, the unity among them had increased as they often used it as a weapon.

1990–2003 ample supply and modest disruptions:

    In the 1990s, OPEC lost its two newest members. In December 1992, Ecuador withdrew because it was unwilling to pay the annual membership fees felt that it needed to produce more oil than it was allowed under the OPEC quota and Gabon in January 1995for the same reasons. Iraqi President Saddam Hussein invaded Kuwait in August 1990 due to a dispute about offshore oil drilling. He pressured OPEC to cut oil production for obtaining higher pricing. The supply of oil was interrupted during this time as it was in Iran-Iraq War in the 1980s.  These two Iraqi wars against fellow OPEC founders marked a low point in the cohesion of the organization, and oil prices subsided quickly after the short-term supply disruptions. The September 2001 attack on the US by Al Qaeda attack and the March 2003 US invasion of Iraq had even milder short-term impacts on oil prices, as Saudi Arabia and other exporters again cooperated to keep the world adequately supplied. However, in spite of being a member of OPEC, Iraqi production was not a part of OPEC quota agreements from 1998 to 2016, due to its political difficulties.

2003–2011 volatility in Oil Price:

    Several insurgencies and sabotage occurred in Iraqi oil fields between 2003-2008 during the American invasion of Iraq. The violence against the Nigerian oil industry at that time create a shortfall in crude oil production.   The economic boom in China and India increased the oil demand.  This combination of forces prompted a sharp rise in oil prices to levels far higher than those previously targeted by OPEC. Price volatility reached an extreme in 2008, during the worst global recession since World War –II. OPEC’s annual oil export revenue also set a new record in 2008, estimated at around US$1 trillion. However, 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. By the time of the 2011 Libyan Civil war and Arab Spring, the oil market was very volatile. The OPEC gave explicit statements to counter the situations and increase production.

2014–2017 Oil Gluts:

 During 2014–2015, OPEC members consistently exceeded their production ceiling, and China experienced a slowdown in economic growth. At the same time, US oil production nearly doubled from 2008 levels. These developments led in turn to a decline in US oil import requirements a record volume of worldwide oil inventories and a collapse in oil prices that continued into early 2016. Despite global oversupply, on 27 November 2014 in Vienna, Saudi oil blocked appeals from poorer OPEC members for production cuts to support prices. He argued that the oil market should be left to rebalance itself due to high-cost US shale oil production. A year later, when OPEC met in Vienna in December 2015, the organization had exceeded its production ceiling for 18 consecutive months. So the US oil production had declined slightly from its peak, world markets appeared to be oversupplied by at least 2 million barrels per day. As 2016 continued, the oil glut was partially trimmed with significant production cuts in the US, Canada, Libya, Nigeria and China, and the price gradually rose back into the $40s. OPEC regained a modest percentage of market share, saw the cancellation of many competing drilling projects, maintained the status quo at its June conference. That was suitable for both producers and consumers, although many producers were still experiencing serious economic difficulties.

2017–2020 Production Cut: 

As OPEC members grew up, the organization finally attempted its first production cut since 2008 after a multi-year supply contest. Despite many political obstacles, a September 2016 decision to trim approximately 1 million barrels per day was codified by a new quota agreement at the November 2016 OPEC conference. In 2017, an agreement was signed by all OPEC members (excluding exempted members Libya and Nigeria), Russia and ten other non-members to cut production and in considering the growth of the US shale sector. This production cut deals with non-OPEC countries are generally referred to as OPEC+. In December 2017, Russia and OPEC agreed to extend the production cut of 1.8 million barrels/ day until the end of 2018. Qatar announced it would withdraw from OPEC effective 1 January 2019 in protest of diplomatic banned announced by Saudi Arabia, UAE, Bahrain and Egypt. On 29th June 2019, Russia again agreed with Saudi Arabia to extend by six to nine months the original production cuts of 2018. In December 2019, OPEC and Russia agreed on one of the deepest output cuts so far to prevent oversupply due to worldwide lockdown due to Covid-19.

2020 Saudi Arab –Russia Price War and 2021 Energy Crisis:

In early March 2020, OPEC officials presented an ultimatum to Russia to cut production by 1.5% of world supply to promote US Shale oil. Russia rejected the demand the three-year partnership between OPEC and major non-OPEC providers ended up. The Covid-19 pandemic created worldwide poor demand for crude oil and all OPEC members experienced a huge loss in the energy market. This also resulted in ‘OPEC plus’ failing to extend the agreement cutting 2.1 million barrels per day. Saudi Arabia increased production to fall the Russian crude oil price and pressurized Russia to stay in the agreement. At this time Saudis produced oil at as low a price as $3 per barrel, whereas Russia needs $30 per barrel to cover production costs which lead to debt to GDP ratio15% in Russia. In April 2020, OPEC and a group of other oil producers, including Russia agreed to extend production cuts by 9.7 million barrels a day, equal to around 10% of global output, in an effort to prop up prices. The economic boost after prolonged lockdown during the first wave of the Covid-19 pandemic creates huge demand in the energy sector. But this excessive production cut of OPEC and others has created an energy crisis in the entire world. The US president urged the OPEC plus to increase the global production and they are busy recovering their financial loss. The price of oil was about US$80 by October 2021, the highest since 2014. To prevent this price hike US, China, European Nation and India released a good amount of their strategic reserve of oil in the open market.