Organization of the Petroleum Exporting Countries

According to its statute, the principal goal is the determination of the best means for safeguarding their interests, individually and collectively; devising 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, economic and regular supply of petroleum to consuming nations, and a fair return on their capital to those investing in the petroleum industry."^[5]

OPEC's influence on the market has been negatively 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 the Gulf of Mexico and the North Sea, the opening up of Russia, and market modernization. OPEC nations still account for two-thirds of the world's oil reserves, and, as of March 2008, 35.6% of the world's oil production, affording them considerable control over the global market. The next largest group of producers, members of the OECD and the Post-Soviet states produced only 23.8% and 14.8%, respectively, of the world's total oil production.^[6] 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.^[7]^[8]

History

Venezuela was the first country to move towards the establishment of OPEC by approaching Iran, Iraq, Kuwait and Saudi Arabia in 1949, suggesting that they exchange views and explore avenues for regular and closer communications between them. In 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 the reduction in price of 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 oil imports in favor of the Canadian and Mexican oil industries. Eisenhower cited national security, land access to energy supplies, at times of war. 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 natural resource: oil.

As a result, OPEC was founded to unify and coordinate members' petroleum policies. Original OPEC members include Iran, Iraq, Kuwait, Saudi Arabia, and 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^[2] 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. ^[9] Similar concerns prompted Gabon to follow suit in January 1995 [2]. Angola joined on the first day of 2007. ^[10]) Indonesia reconsidered its membership having become a net importer and being unable to meet its production quota. The United States was a member during its formal occupation of Iraq via the Coalition Provisional Authority.^[11] Indicating that OPEC is not averse to further expansion, Mohammed Barkindo, OPEC's Secretary General, recently asked Sudan to join.^[12] 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 left the OPEC group because of the soaring prices and the rising oil demand in East Asia. Economists think that the withdrawal of Indonesia will have little effect on OPEC and on the oil prices even though it has a high percentage in world oil production.^{citation needed}

The oil weapon

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 withstand Egyptian and Syrian forces, the Arab world imposed the 1973 oil embargo against the United States and Western Europe. In the 1970s, the great Western oil conglomerates suddenly faced a unified block of producers.

This Arab-Israeli conflict triggered a crisis already in the making. The West could not continue to increase its energy use 5% annually, pay low oil prices, yet sell inflation-priced goods to the petroleum producers in the Third World. This was stressed by the Shah of Iran, whose nation was the world's second-largest exporter of oil, and one of the closest allies of the United States in the Middle East at the time. "Of course [the world price of oil] is going to rise," the Shah told the New York Times in 1973. "Certainly! And how...; You [Western nations] increased the price of wheat you sell us by 300%, and the same for sugar and cement...; You buy our crude oil and sell it back to us, refined as petrochemicals, at a hundred times the price you've paid to us...; It's only fair that, from now on, you should pay more for oil. Let's say 10 times more."^[13]

The threat and use of embargo as a weapon, however, triggered a decline in OPEC's power. Western nations developed closer ties to the Soviet Union and rapidly built up their offshore drilling in the North Sea and the Gulf of Mexico, greatly lessening the potential impact of future price shocks induced by OPEC. The effect was not immediate, however. When the Shah of Iran fell in 1979, during the Iranian Revolution, another oil crisis (1979 oil crisis) ensued.

The 1980s oil gluts

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 $10 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 and the subsequent 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.

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. ^[15]

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 October 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 who 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.^{citation needed} Overall, the evidence suggests that OPEC did act as a cartel, when it adopted output rationing in order to maintain price.^[16]

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 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.^[17] Member states Iran^[18] and Venezuela^[19] have undergone similar shifts from the dollar to the Euro.

Current quotas

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^[21].

Membership

The organization now has 12 member states. They are listed below with their affiliation dates. Note that although the effective official language of a 7-nation majority of OPEC member-states is Arabic, OPEC's official language is English. OPEC started out with 5 founding countries, but has since then added 9.

Contents

History

The oil weapon

The 1980s oil gluts

Responding to war and low prices

Economics

Current quotas

Using quotas to help mitigate global warming

Membership

See also

Petroleum industry writers/commentators

Articles from the Secretaries General of OPEC

Books covering aspects of the subject

Notes

External links