Outline
This essay aims to explain the workings of the OPEC cartel and its activities in the past year.
The essay first provides a basic definition of what a cartel is and then gives a short description of the constituent members of the OPEC cartel.
The essay then explains the basic workings of the cartel and how it regulates the oil market through manipulation of the supply and demand parameters of the market.
The essay provides a basic diagram to explain the workings of the cartel and states that other than market forces, geo-political factors and domestic issues are the other important drivers for the cartel’s policies.
The essay then gives a brief overview of how the cartel has used oil as a weapon to serve its geopolitical imperatives.
The essay then explains the performance of the cartel in the last year and how it has been ineffective in keeping the oil prices regulated because of external factors of global recession based on drivers other than oil.
The essay concludes that despite the current dynamics, the cartel will continue to hold a central position in global power politics for the foreseeable future.
Introduction
The Merriam-Webster Online Dictionary defines a Cartel as a “combination of independent commercial or industrial enterprises designed to limit competition or fix prices” (2009). Oil often called the ‘Black Gold’, is the main engine for the global economy. The first massive finds of oil in the Arabian deserts transformed the geostrategic importance of the Middle East. Western nations scrambled to form alliances and obtain special privileges leading to unstable pricing regimes, which were detrimental to the producer nations’ economies.
Hence, to bring stability in the trade of oil, reduce western exploitation and regulate the global oil economy, The Organisation of Petroleum Producing Countries (OPEC), was formed in September 1960 by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Since its inception, seven other countries namely Algeria, Angola, Ecuador, Nigeria, Qatar, Libya, and the United Arab Emirates joined the grouping taking its membership to 12 countries (Indonesia and Gabon have been suspended). This essay aims to explain the workings of the OPEC cartel and its activities in the past year.
OPEC principles
The OPEC cartel works on the principles of supply and demand. To maintain a fair price for their oil, OPEC countries through their organization maintains the production levels at the optimum levels to maintain or hike up their prices. Depending upon the capacity of its member countries, OPEC decides the oil quota that each member is allowed to produce. Members have to take the permission from the OPEC conference to increase their quotas if they wish to increase their oil revenues. The decision to increase or decrease the production of oil is taken after due deliberation of the OPEC conference. The OPEC carefully calculates the prevailing market conditions and the ‘push-pull’ imperatives of the oil market. The diagram below shows how the cartel manages the oil market.
When the demand is high, it leads to high oil prices, which then is deliberated at the OPEC Conference. The Conference may then decide to increase the quotas and the production to keep in line with the demand. The OPEC watchdogs monitor the markets very carefully to ensure that no oversupply takes place which can then drive down the prices to the detriment of their own countries. In case the demand is low, the cartel reduces the production to shore up the prices.
OPEC also tries to ensure that oil prices do not reach astronomical highs that may lead to worldwide recession and thus drastically reduce the demand and thus hurt themselves in the process. However, in the recent past, this track record of OPEC has been patchy. This basic model has many dynamic factors. The main factors are geopolitical factors which include competitors like non-OPEC oil producers and domestic factors prevailing in the member countries. Both these factors have played a large role in the workings of the cartel.
The role in global politics
Since its inception, the organization has been a major geopolitical player in global politics. OPEC’s first demonstration of its power came in 1973 when the cartel declared an oil embargo against the U.S. in response to the U.S. support to the Israelis in the Arab-Israeli War 1973 and increased the price of oil. “The price increase was without precedent in the oil history, from $3/barrel to 11.65/barrel” (Ilie, 2006 p. 1) causing a deep economic world recession. Consequently, every conflict in the Middle East is it the Iranian revolution in 1979, the First Gulf War 1990, or the beginning of the second Intifada in 2000 has to lead to sharp increases in oil prices causing or contributing “ to the U.S. and global recession in the last thirty years” (Roubini &Setser, 2004 p. 5).
The cartel has, however, understood that every political response also adversely affects their viability as it encourages non-OPEC petroleum countries to offset their control and gain profits. The OPEC countries have recognized that stability of the oil markets is in their interest and this is reflected in their long term strategic plan which states that “OPEC will continue to expand its production capacity, both to meet the increased demand for its oil and to offer an adequate level of spare capacity” (OPEC, 2006 p. 25). Despite the laudable strategy, OPEC has resorted to opportunism such as not regulating the market when oil prices rose to over $140 a barrel recently.
This opportunism, coupled with the global recession has led to a major slump in the oil market with prices dropping to less than $50 to a barrel. The main swing producer Saudi Arabia has, however, threatened to cut production to shore up the oil prices. This strategy has not worked as the Global recession this time has other drivers than just the oil shock. Nonetheless, the cartel will continue to hold a central position in global power politics for the foreseeable future.
References
Llie, L, 2006, Economic Considerations Regarding the First Oil Shock, 1973 – 1974.
Munich Personal RePEc Archive website. Web.
Merriam-Webster. (2009). Cartel. Web.
Organisation of Petroleum Exporting Countries, 2006, OPEC Long-Term Strategy, OPEC Secretariat, Vienna.
Roubini, N and Setser, B. 2004. The Effects of the Recent Oil Price Shock on the U.S. and Global Economy. Web.