Know all you need to know about the OPEC. You will get all the information about It’s history, purpose, its relevance and more …
In the wake of the technological age we dwell in, most of our daily activities consist of the usage of oil/petroleum as a form of energy. This means from an economic standpoint that the demand in the market for oil is highly constant. This gives oil producers high incentive to produce more and more so they can achieve large profits. Unfortunately supply for this industry is also constant and due to the nature of oil as a natural resource there is a limit to how much producers can create. Due to its worldwide requirement, the exporting and production of oil is done at a worldwide level. Hence the suppliers in the oil industry are the countries themselves, which creates an oligopoly. Oligopoly’s are known for having created demand curves meaning that when left to the free market, competitors will keep undercutting each other until neither of them are making the large revenue’s they projected when they entered. It is at this point that OPEC, the Organization for Petroleum Exporting Countries steps in. Using strategy following game theory they control oil/petroleum supply so that they can maintain prices at a level where the member countries of OPEC can increase their individual revenue as a group. In the short term, OPEC’s pricing policies increase all revenues for its member countries, protect and maintain the prices of oil, and reduce the rate of depletion of oil reserves.
According to the board, The purpose of OPEC members is to “coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady, non fluctuating income to producers and a fair return on capital for those investing in this industry.”
The Organization of Petroleum Exporting Countries has a membership of a total of 11 countries ranging from United Arab Emirates to the Socialist People’s Libyan Arab. The members of OPEC currently supply more than 40 percent of the world oil and they possess about 78 per cent of the world’s total proven crude oil reserves.
Oil and energy ministers from OPEC member countries usually meet twice a year in March and September to determine OPEC’s output level. They also meet if situation demands whenever required.
Current members of OPEC:
- Algeria – 1969-present
- Angola – 2007-present
- Ecuador – 1973-1992, 2007-present
- Iran – 1960-present
- Iraq – 1960-present
- Kuwait – 1960-present
- Libya – 1962-present
- Nigeria – 1971-present
- Qatar – 1961-present
- Saudi Arabia – 1960-present
- United Arab Emirates – 1967-present
- Venezuela – 1960-present.
- Gabon – 1975-1994
- Indonesia – 1962-2009.
Facts with their timeline –
- September 14, 1960 – founding members Iraq, Kuwait, Iran, Saudi Arabia and Venezuela form OPEC in Baghdad, Iraq.
- November 6, 1962 – OPEC is registered with the United Nations
- 1973-1974 – Due to United States support to Israel in the Arab-Israeli conflict, the members of OPEC decide to raise the cost of oil from $3/barrel to around $12/barrel.
- October 1973 – OPEC issues an embargo against the United States, halting oil exports. Customers across the United States experience long lines at gas stations and at times couldn’t find gas at all.
- Prices go from 36 cents per gallon in 1972 to over 50 cents per gallon in 1973.
- March 18, 1974 – At an OPEC meeting, seven members lift the ban on exports to the United States: Algeria, Saudi Arabia, Kuwait, Qatar, Bahrain, Egypt and Abu Dhabi. Libya and Syria refuse to drop the ban, and Iraq boycotts the talks.
- December 31, 1974 – Libya lifts its 14-month-old oil embargo against the United States.
- November 2007 – Ecuador rejoins OPEC after a 15-year absence.
- May 2008 – Indonesia announces that it will leave OPEC in 2009. The country is currently a net importer of oil, due to falling production from aging wells.
- January 1, 2009 – Indonesia revokes its membership in OPEC.
Failures of OPEC:
Saudi Arabia has been at the dominant position in OPEC ever since its creation. It’s literally the first among equals; and while it has been subtle about its power within the group, lately it seems to be growing tired of the fiction that the cartel has any meaning. After all, Saudi Arabia’s sole major export is petroleum, it has a restless population that has grown used to the wealth that the oil industry has brought to the country and its peak productive years are likely well into the past.
With exception of Iraq and Venezuela (both of which are undergoing social and political turmoil) none of the other OPEC members have any significant oil reserves which means that their votes in the group are just a formality and serve no real purpose. Since Iraq and Venezuela are in turmoil and can’t thus act in concert, that leave Saudi Arabia in the driver’s seat and that means no production cuts.
Where OPEC failed when looking back historically, was:
- It failed to include the Soviet Union/Russia in its group and it lost control of that share of the market.
- It failed to include the United States (once a major producer of oil and now a major producer again) in its ranks. By making the US its adversary, it made marginalizing the group a key economic goal for the US.
- It failed to recognize that the West (its largest customer) would use fuel efficiency and taxes to reduce its dependency on fossil fuels.
- It failed to recognize that high oil prices would motivate energy companies to explore for new resources and use technologies (especially hydraulic fracturing aka fracking) to offset the potential of another oil embargo.
- It failed to use its clout to remedy/mitigate internal conflicts in many of its key members, including Iran, Iraq, Venezuela and Nigeria. Those conflicts have worked against the goals of the group instead of strengthening it.