In 1960s, a league of twelve countries who are giant oil producers from Africa, Asia and America came together to form an enduring intergovernmental organization, Organization of the Petroleum Exporting Countries (OPEC) with a common objective. Four countries from Africa (Angola, Libya, Algeria and Nigeria), one from South America (Ecuador) and seven from Asia (Kuwait, Saudi Arabia, Qatar, Venezuela, Iran, the United Arab Emirates and Iraq) agreed to form an umbrella called OPEC.
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Until 2008, Venezuela was a member state of this organization. These countries agreed to base the headquarters of OPEC in Vienna. Since then, Vienna has continued to accommodate OPEC meetings of oil ministers from these twelve countries. Previously, Organization of the Petroleum Exporting Countries (OPEC) had Indonesia as one of the member state.
However, Indonesia withdrew its membership from OPEC after realizing that, it had become an oil importer instead of exporting. With a population of over 400 million people, these twelve countries depend on oil as the major export commodity hence, foreign exchange. Outstandingly, oil has been a fundamental key to economic, social and political development of OPEC member states.
OPEC member states use the revenue generated from exporting oil in the expansion of their economy through a vast industrial base. Additionally, the revenue generated after exporting oil helps member state governments to fund social developments like healthcare, education, creation of jobs and increase the general living standards of the citizenry. (Organization of the Petroleum Exporting Countries, Para. 1-3).
Of course, the formation of OPEC accompanied statutes aimed at governing member countries to work within its brackets. For example, the statutes allow other countries with similar interests but oil exporters to join OPEC so long as 75% of member states voter in favor of that country. OPEC composes of three types of membership as stipulated in OPEC statutes.
Firstly, there are countries falling under founder membership. These countries held the first OPEC meeting in Baghdad, in 1960, and later on agreed to institute such an intergovernmental organization. Secondly, some countries with same interests gained full OPEC membership following their application to Baghdad conference.
The last category of membership comprises of countries that never qualified to attain full membership, but the Conference accepted them under special conditions. The paper will examine the goals and objectives of OPEC as stipulated in its statutes. (Organization of the Petroleum Exporting Countries, Para. 5-12).
The main objective of creating this intergovernmental organization was to oversee and safeguard OPEC interests both jointly and independently. The statutes sought to look for ways, which will guarantee efficient stabilization of oil prices in international oil and petroleum markets. This is because; there had been obstacles in international markets leading to price fluctuations.
Therefore, these countries read mischief in international markets and decide to act on it, with an aim of attaining steady income. OPEC member states a fair deal of the oil exported to consumer nations and that, the supply had to be regular in order to meet consumer expectations and avoid any oil price fluctuation.
Since then, there have been diverse views regarding the formation of this intergovernmental organization. This is because; OPEC became the determinant in production and pricing of oil something that did not ogre well with international consumers. For example, there have been remarkable restrictions in the international arena regarding the control of oil prices.
At times, OPEC member states especially from Arabian countries use their statutes to embarrass developed countries. For instance, during the Yom Kippur War, Arabian OPEC countries used the ‘oil weapon’ strategy to stop further political intervention from the West. These restrictions regarded as oil embargo, led to the 1973 oil crisis that paralyzed the whole world.
Since then, OPEC has constantly determined the price of oil. Political explanations from OPEC member states show that, the control of oil prices came because of unilateral changes happening in the fiscal structure of the world. Thus, these countries sought to ensure that, both underdeveloped and developed countries felt the same effect when it comes to inflation matters. (Hyder, Para. 1-10).
The 1973 oil crisis created unyielding hostility between consumers of the West and OPEC member states from Asia. The oil embargoes from OPEC member states awakened developed countries to look for alternatives in oil markets. OPEC’s ability to manage and dictate oil prices was never to last forever. This is because; there have been recent developments of oil reservoirs in the Gulf of Mexico, some parts of Russia, Canada, and United States.
Furthermore, subsequent modernization of oil markets has seen the influence of OPEC diminish. Nevertheless, about 67 percent of oil consumed in the world, come from OPEC countries. This means, OPEC countries still manage to control international oil prices in global markets.
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Establishment of Organization of Petroleum Exporting Countries (OPEC)
For over five decades now, OPEC has been a central figure in controlling global oil prices. Ironically, it is very interesting to note that, even Britain, which is the biggest world oil supplier, has no say when it comes to price control. This is because; OPEC countries disregard Britain, as it was one of the colonial masters who once proscribed the nature of oil industry. A good example of price control occurred between 1973 and 1974 at the expense of western nations.
This oil embargo led to a dramatic oil crisis, which paralyzed industries and the transport networks all over the world. The political dimension of controlling oil prices in international markets started in 1949 when Venezuela and Iran chose to form a political dispensation with Iraq, Kuwait and Saudi Arabia on oil production and pricing under the umbrella of OPEC.
Their first aim was to deliberate on new modalities and avenues of forming and maintaining mutual communication amongst nations that produce petroleum. Joining the founder members of OPEC were other oil producing countries like Libya, Algeria, Ecuador, Gabon, Qatar, Nigeria Indonesia and United Arab Emirates. (Hammes and Willis 501-504).
Oil ministers from Iraq, Iran, Saudi Arabia, Kuwait and Venezuela met in Baghdad, in September 1960 aiming to strike a common deal of escalating the price of crude oil by a certain margin in order to meet the world financial system. United States of America under President Dwight Eisenhower enacted an oil law confiscating petroleum from Venezuela and instead opted for oil coming from Mexico or Canada, an act read as mischief by Arabian countries.
The law did segregate oil imports from Persian Gulf and Venezuela by creating forced quotas hence, low prices. Under this scenario, President Eisenhower explained certain issues like the importance of oil in war, national security and ease of access to terra firma as factors of controlling oil prices. Interestingly, the enactment of this law led to a vivid downfall of oil prices in Asia.
As a sign of disgust, Venezuela President Romulo Betancourt sought to avenge this law by reaching out Arab oil producing countries. The reaching out of oil producing counties meant to seal a solid preventative strategy whose aim was to maintain the status quo (prosperity and self-sufficiency) of Venezuela’s petroleum. (Hammes and Willis 507-511)
President Romulo managed to convince oil-producing countries in the Arabian region to strike a common statue leading to the formation of OPEC. Most importantly, this organization, initially started by five oil producing countries, sought to address three paramount oil measures. The fists one was to synchronize and amalgamate oil policies falling under member states and identify better ways of discouraging external monopoly.
Secondly, this intergovernmental organization, sought to address new channels aimed at stabilizing the prices of oil in international markets and confiscate detrimental trade obstacles, which always led to price fluctuation. Lastly, this cartel of oil producing Arabian countries sought after tackling irregularities in the supply of oil to shopper countries in exchange of fair return capital.
How OPEC Functions
Although sometimes influenced by politics, the determination of oil prices occurs within certain timings. For example, member countries convene a meeting at the headquarters to analyze the scenario at international oil markets. The lowering of increasing of oil price depends largely on market forecasts ranging from the demand of oil to world economic growth rates.
After thorough analysis of the two market fundamentals, OPEC Secretariat will then make informative choices starting from changing the current petroleum guiding principles.
Lowering or raising oil prices will depend on market fundamental features intended to stabilize oil prices while at the same time, maintaining its steady supply to consumers, in order to control oil demand. (Organization of the Petroleum Exporting Countries, Para. 12-14).
Oil and Politics
The whole process of controlling oil prices has some political intrigues surrounding it. For example, the doggedness of conflict between Arabs and Israel propelled the once price controlling intergovernmental organization into a forceful political icon in Middle East.
In 1967, the Six Day War, between Israel and Arab countries led to the development of a revolutionary faction, Organization of Arab Petroleum Exporting Countries, whose role was to enact and upshot new policies, which will act as revenge to western countries supporting Israel.
The situation deteriorated further, when minor oil-producing countries like Egypt and Syria joined this faction to push sanctions and mount pressure western countries. In 1973, the Yom Kippur War electrified Organization of Arab Petroleum Exporting Countries’ policies and strengthened their stand.
The supply of oil from western countries to Israel enabled Israel forces to triumph over Syria ns Egypt. On realizing this, Arab oil producing countries introduced an oil embargo, 1973, oil embargo, which saw United States and other western countries go without oil from Arab OPEC countries. Although not supported by other OPEC countries outside Arab land, the situation became worse hence, paralyzing production in industries and movement globally.
Nonetheless, because of the oil embargo, there was oil price decrease between 1980 and 1986 leading to oil glut in international markets. The glut caused by over-exploitation and low demand from oil consumers brought forth disunity in OPEC who suffered a 46 percent decline in revenue. (Parra 1-37).
Analysis and Conclusion
Political dissension among Arabian countries weakened OPEC political force. The Gulf War in Middle East was categorical in weakening the once powerful political front. President Saddam Hussein cited that, the increase of oil process through OPEC helped Iraq and other debt-ridden OPEC countries service their loans slickly.
OPEC infightings like the Iraq-Iran War and the invasion of Kuwait by Iraq marked a new era of OPEC conflict leading to the distraction of oil supply hence; reduction of oil prices. Nevertheless, Venezuela benefitted a lot by doing massive scaling of oil production in 1990s.
Later, President Hugo Chavez hosted OPEC summit of OPEC to discuss their achievements. Sadly, the extremist attack in United States opened a new era of wars starting from Afghanistan and Iraq invasion leading to unprecedented increase in oil prices, higher than OPEC targets.
The situation on the ground prompted Indonesia to withdraw its OPEC membership fearing production interests. There came yet another obstacle in 2007, when OPEC countries opted for a euro instead of a US dollar. This fight saw oil prices increase from US$15 to US$ 85 per barrel, in New York Mercantile Exchange, in 2008. (Smith 51-82).
Although OPEC had been successful in controlling oil prices, competition levels from other countries pose serious threat. Entry barriers in international markets provide yet another challenge to OPEC oil dominance.
Without further deliberation, about three-quarters of the world’s oil reservoirs exist in OPEC countries. There is further development going on all over the world to identify oil reservoirs. Perhaps, this will reduce the autonomy of OPEC countries that regulate oil prices whenever they choose. Non- OPEC oil-producing countries seem to benefit when oil prices increase.
Nevertheless, the small production from these countries limit the revenue generated and sometimes, this production does not even meet internal needs. What makes control of price unachievable is that, coordinated efforts from OPEC countries have policies, which discourage any legal intercession albeit, sovereignty of member states.
Market researchers and economists have failed to depict the influence of OPEC in controlling the price of oil in international markets. It is not yet conversant whether the action to increase oil prices occurs due to individual stakes or monotonous and aggressive coalitions among OPEC members or collectively as one unit in OPEC.
Overall, OPEC countries opt for classic cartel whenever they want to raise or lower oil prices. Market research shows that, OPEC members participate in deliberate production restrictions, which will increase demand of crude oil due to paucity. At this instant, the possibility of raising oil prices is actually high. Astonishingly, production of crude oil by OPEC members hit highest between 1973 and 1985 but later on reduced by 50 percent.
According to the current statistics, crude oil production from OPEC countries is extremely low as compared to what these countries were producing in 1973. Ironically, oil consumption levels have increased by 50 percent meaning, there is great demand from consumers who will in turn, meet high prices posted by semi-autonomous OPEC members. (Adelman 170-190).
As it stands, there is no signal whether OPEC member states will reduce their stance and choose to settle on a fixed oil price. The problem with OPEC countries is that, they lack proper revenue distribution modes.
Therefore, individual revenues from oil sales determine individual revenue arising from each quota. Some researchers argue that, economic and demographic disparities among OPEC member states contribute to the warring prices of oil in international markets.
Highly populated oil producing countries like Nigeria and Venezuela have high-cost oil reservoirs unlike less populated oil producing countries like United Arab Emirates, Kuwait and Saudi Arabia, which seem affluent courtesy of the high revenue generated. The future still looks gloomy as geopolitical and serendipitous OPEC episodes continue to harm international oil markets.
Nevertheless, the fixation of oil prices is sometimes god for a liberal market where oil-producing countries will receive a lion share equivalent to its production. OPEC continues to register history in the world courtesy of its unresolved price changing tactics. Through oil export, countries once considered poor are now competing with developed countries.
Adelman, Morris. World Oil Production and Prices: 1947-2000. Quarterly Review of Economics and Finance, 42(2), 2002, 169-191.
Hammes, David and Wills, Douglas. Black Gold: The End of Bretton Woods and the Oil-Price Shocks of the 1970s, The Independent Review, 10(4), 2005, 501-511.
Hyder, Joseph. Organization of Petroleum Exporting Countries (OPEC). 2004. Web. https://www.encyclopedia.com/social-sciences-and-law/political-science-and-government/international-organizations/opec#3403300568
Organization of the Petroleum Exporting Countries. About OPEC. 2010. Web. <https://www.opec.org/opec_web/en/17.htm>
Parra, Francisco, Oil Politics: A History of Modern Petroleum. London. Taurus Publishing Corporation. 2004. Print.
Smith, James. Inscrutable OPEC? Behavioral Tests of the Cartel Hypothesis. The Energy Journal, 26(1), 2005, 51-82.