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Petroleum Exporting Countries Organization

Introduction

The purpose of this paper is to regard the history of OPEC as the organization of petroleum suppliers, represent this alliance as the political power and provide the models of its further development from the context of its necessity and usefulness for the development of the world economy.

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To begin with, it is necessary to mention that the OPEC (Organization of Petroleum Exporting Countries) was created at the conference in Baghdad in September 1960. It is stated that the founding members of the organization were Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Later, the other States joined the organization: Qatar (1961), Indonesia (1962), Libya (1962), United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), and Gabon (1975) (Araim, 2002)

The main purpose of the organization was to restrict the amounts of the oil export for keeping the prices on the high levels. The fact is that this period was featured with the increased industries and the production booms. Thus, the falling prices of the oil exports could cause essential losses for the exporters. The members of OPEC agreed to meet on a regular basis for setting the production levels for keeping the prices. It should be emphasized that the nature of oil as the exported unit (crude oil is meant) joined with the restricted amount of exporters is the perfect product for the cartelization, and helps to keep the prices on the high levels and regulate the volumes of oil supply, making it more or less available, depending on the current situation in the world.

History of OPEC

Firstly, it should be stated that soon after the foundation of the organization, it experienced the rise. Originally, this rise is attributed to the shifting balance of power from multinational oil corporations and the countries – the producers and exporters of oil. The fact is that it was too difficult (almost impossible) to challenge the dominance of the oil exporters even in spite of the essential lack of the exploration and extraction skills, the imperfectness of the production technologies and the shortage of the distribution networks.

Therefore, the history of oil production and export system is rather confused and multi-angled. Thus there were several exceptions from the mentioned above rule. Mexico gained control over the oil extraction and petroleum production industries in 1938 (foreign companies owned all the companies before this time), and quickly abandoned the profitable international market because of the lack of investment resources.

Nevertheless, the World War II changed thethe situation essentially. Petroleum was in the greatest ever necessity, and the oil exporters started seeking for more favorable contracts. Shojai and Bernard (2001) stated the following: “In 1943 Venezuela signed the first “fifty-fifty principle” agreement which provided oil producers with a lump sum royalty plus a fifty-fifty split of profits (i.e., selling price minus production cost). In the late 1940’s Venezuela revised their tax system to capture a greater share of the oil profits. The oil companies responded to this move by shifting oil purchases to countries with cheaper contracts. In response, Venezuela contacted Arab producers and encouraged them to demand similar “fifty-fifty” deals and reform their tax systems. Saudi Arabia, seeing the value of the fifty-fifty contract and understanding the power of acting collectively, quickly demanded and received a similar contract from Aramco”

Some researchers emphasize that the very creation of OPEC was just the formalization of oil exporters’ relations, as lots of countries started adjusting specific rules much before the 1960s. Thus, in 1947 the parliament of Iran adopted the law, which claimed for the termination of previous treaty with Anglo-Iranian company British Petroleum.

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Shojai (2006) emphasizes that “when the negotiations failed to lead to a compromise, Iranian Prime Minister Mossadegh nationalized oil operations by the in May 1951. The collapse of the oil industry pushed the economy into chaos. Domestic opponents, aided by the American Central Intelligence Agency, were able to topple Mossadegh in 1953. A new British-Iranian agreement was signed the following year. The newly restored Shah of Iran became a pillar of American middle east policy until the Iranian Revolution in 1979.”

Moreover, this period was featured with the increased oil demand, and the growth of production. The allover problem was reinforced by the fact that all the “Fifty-Fifty” contracts were concluded on the basis of the fixed (posted) prices but not on the basis of market prices. The posted prices were fixed only with the aim of increased profits for the oil exporters, thus, they had an incentive to grant additional concessions to expand oil revenue. All the increases of the supply levels caused an essential fall of the market prices, which lowered the profits of the multinational oil corporations.

After the creation of OPEC, and the foundation of nominal oil relations, the situation was not subjected to only marketing factors, as the political and ethnic conflicts were the main factors information of the prices. Thus, the outbreak of the Arab-Israeli conflict not only caused the increased the export prices for oil and oil-based fuels, but also transformed OPEC into a solid political power, which could influence the political issues.

Clark (2003) states the following: “After the Six-Day War of 1967, all the Arab members of OPEC decided to create a separate group, the Organization of Arab Petroleum Exporting Countries. The main purpose of this organization was to form a separate group of Arab oil suppliers for imposing pressure on Western countries for their support of Israel. Egypt and Syria, the countries which could not be regarded as the major oil-exporters, joined this grouping to help articulate its objectives. 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.

The further history of OPEC was not featured with extensive changes in pricing, however, these occasions had fixed the position of OPEC, and all the oil exporters as the powerful political force, able to manipulate the rest of the world which requires oil for the industrial, and not only, needs.

The dynamics of the prices is shown on the graph. Originally, these fluctuations can not be regarded as essential, as the peaks were caused by the Arab Israeli conflict and the Iraq war, when the Arab exporters restricted the amounts of oil exports to the western countries.

Future of the Organization

Firstly, taking into account the politicization of the oil supplying international organization, it should be stated that the world politics and the essence of the international relations can not be controlled by those who simply has this resource. It is often emphasized that the time of the OPEC as it is represented in the world arena has already expired, and principally new organization should be created. The confirmation of these words is stated in numerous researches.

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One of them states the following: “Without OPEC’s control of oil export and supply there could be essential changes in oil price volatility with serious effects on increase of the oil industry and on the world economy at large. In the past, when the major oil companies used to control the industry, their highly efficient supply regulations fostered greater price stability in the oil market. Nevertheless, OPEC supply regulations, although less efficient, stay necessary as a mechanism of oil supply control, for relative price stability.” (Cuervo, 2008)

Originally, it is considered paradoxical that during the era of oil supply regulation bay the oil companies, but not by the rules and conditions of the market economy, the oil industry of OPEC countries, especially the States of the Arab world, benefited from the essential growth of the incomes and the industry in general. However, when the countries of OPEC took the control over the whole industry, and adopted the regulation policy presupposing the high price levels, the center of oil industry growth moved to the other areas: the North Sea, West Africa, the Caspian region, Russia and other non-OPEC supply reserves.

Taking this fact into account, it is necessary to give the conclusion made by Dorraj (2001): “The increase of new high-cost oil will go on being dependent on OPEC’s maintaining the principles of being the last-resort supplier and promoter of high prices, and thus losing its market share to the benefit of the non-OPEC suppliers. OPEC production control through its quota system, devised to defend high price levels, has secured very high profit margins for the oil companies, aiding their investments in high cost areas.”

This fact only emphasizes the notion that the time of OPEC has already expired, nevertheless, the dependence on the oil supply is rather high, consequently, the countries will go on buying Arabian oil, as the reserved of the North shelves and reservoirs are not unlimited, thus, the OPEC countries will have their consumers. However, if the mentioned non-OPEC countries will increase the volumes of oil extraction, it will automatically cause the lowering of OPEC exports, and they will have to adopt a principally new structure and price regulation system for staying competitive.

Therefore, the fact is that the quota system of the OPEC countries had been based on the principle of Swing Producer (Dorraj, 2001) for the last 20 years. The main idea of this principle is that the countries got used to purchase almost all the required oil from non-OPEC countries, and the gap of the demand was compensated by purchasing the rest of the required oil from OPEC suppliers. Taking into account the differences in the growth of the world demand and non-OPEC extraction, OPEC countries experienced the increased demand for their oil.

Thus, it should be emphasized that OPEC had been supported their competitors indirectly. Nevertheless, the OPEC production was about 32mn b/d 25 years ago, when the principle of Swing Producer became the prevailing on the oil market. Currently, the OPEC extraction has essentially lowered (27mn b/d), while the world demand has grown by 14mn b/d.

From the point of view of these numbers, Ghosh (2004) emphasized the following: “Since the slow re-nationalization of Russia’s oil and gas sector, other producers have shown a willingness to confront operators with new financial facts. Chad’s confrontation with international operators Chevron, Exxon Mobil, and Petronas has shown the willingness to increase overall revenue share in general. Thus, the future of the OPEC countries is regarded to be not very profitable. Thus, the further decrease of extraction is forecasted; nevertheless, the rapid growth of the prices for oil will cease essential lowering of the profits”.

Another variant of the future for OPEC as the organization is regarded to be purely economic. If the demand for the OPEC oil essentially falls, all the explorations and production ventures may be sold. At the same time, a windfall tax of between 5%-50% will be put on revenues if crude oil (Brent) will be above $50. The analysts emphasize that numerous oil extracting countries will have to nationalize their resources, especially, if Chad and Algeria decrease the volumes of extraction. Great Britain, Bolivia, Argentina, and some other states have already started the nationalization process, nevertheless it is rather slow.

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Conclusion

The history of OPEC and the countries participating in this organization has shown that this world is highly dependent on the oil and oil based fuels. Consequently, the organization was condemned to success and growth. Originally, the prices were controlled artificially, and they were not subjected to market rules. Thus, when the non-OPEC countries started appearing on the oil market and could provide serious competency to OPEC, they became rather popular among industrialized countries.

The future of the organization will not be the same as the past, as the situation has changes essentially, and the countries wish to buy oil cheaper, so, non-OPEC countries are going to become the leaders on the oil market.

References

Araim, Amer Salih. Intergovernmental Commodity Organizations and the New International Economic Order. New York: Praeger Publishers, 2002.

Clark, John G. The Political Economy of World Energy: A Twentieth-Century Perspective. Chapel Hill, NC: University of North Carolina Press, 2003.

Cuervo, Luis E. “OPEC from Myth to Reality.” Houston Journal of International Law 30.2 (2008): 433.

Dorraj, Manochehr. “Will OPEC Survive?.” Arab Studies Quarterly (ASQ) 15.4 (2001): 19.

Ghosh, Arabinda. OPEC, the Petroleum Industry, and United States Energy Policy. Westport, CT: Quorum Books, 2004.

Shojai, Siamack, and Bernard S. Katz, eds. The Oil Market in the 1980’s: A Decade of Decline. New York: Praeger Publishers, 2001.

Shojai, Siamack, ed. The New Global Oil Market: Understanding Energy Issues in the World Economy. Westport, CT: Praeger Publishers, 2006.

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StudyCorgi. (2021, November 11). Petroleum Exporting Countries Organization. Retrieved from https://studycorgi.com/petroleum-exporting-countries-organization/

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