Thursday, February 4, 2016

What Is OPEC and Why Does It Matter?

The Organization of the Petroleum Exporting Countries (OPEC) is an association of sovereign nations whose economies largely depend on their oil reserves, which are exported and sold as petroleum. The members of OPEC say that they manage oil prices in such as way as to try to ensure fair prices for everyone. Members include Saudi Arabia (the de facto leader), United Arab Emirates Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, and Venezuela.

The organization aims to ensure that oil markets remain stable so that business investors in the member countries earn steady returns, producers receive a decent income, and consumers obtain a consistent petroleum supply. OPEC attempts to achieve these goals by controlling the amount of petroleum exported by its member countries, which in turn affects the price of oil through the basic economic principle of supply and demand. This does not always work, as seen in the current oil market. Too much oil has been produced, and the demand has not increased sufficiently to keep up with the supply. This issue happened before in the 1980s.

Membership in OPEC: Tightly Controlled and Deeply Political

OPEC began with just five members: Iran, Iraq, Venezuela, Kuwait, and Saudi Arabia. All of these countries have remained in the organization for the duration of its existence. Any prospective member has to be approved by three-fourths of the existing members. This number must include all of the founding members. Moreover, Saudi Arabia is effectively the leader of the coalition. The country produces the most oil by far, and it has the second largest number of reserves only behind Venezuela. One might think that Venezuela would have influence over Saudi Arabia due to its reserves. However, Venezuela has many problems in maximizing production, and Saudi Arabia’s leadership continues.

Moreover, Ecuador and Indonesia both left OPEC years ago, and they recently rejoined. Both nations initially left the organization due to problems with the production quota and rejoined in time to become mired in the recent slump in oil prices. While OPEC’s mission is to keep the price of oil steady, tensions between smaller producers such as Ecuador and Indonesia, as well as leader Saudi Arabia, have almost certainly contributed to the collapse of prices. Many of the poorer countries want to cut production in order to keep prices high. However, the Saudis are still making profits and refuse to cut production. This has led to tensions within the organization and rumors of some countries leaving.

Similar tensions led to the nation of Gabon to leave OPEC after nearly 20 years as a member. As with Indonesia and particularly Ecuador, they felt that they wanted to produce more than the quota determined by OPEC. Saudi Arabia effectively sets the quotas, yet it produces as much as it wants and makes billions of dollars on it every year.

The Troubled and Turbulent History of OPEC

OPEC began, somewhat ironically, in response to the actions of the most powerful oil cartel of the time. The “Seven Sisters,” a group of the seven most powerful oil companies in the world, controlled prices and supply. The group cut price several times, which angered the oil exporting countries affected by the decisions. The five founding members of OPEC got together and decided they wanted to be in control of the world’s petroleum markets for both financial and political reasons. The United States and several other countries that controlled the Seven Sisters had strained relationships with the oil exporting countries. This gave these countries a reason to want to distance themselves politically. Of course, the main motive was profit. The oil-rich nations saw that they could control their supply, and manage it in a such a way that they made enormous profits.

Accordingly, OPEC was founded in 1960 in Baghdad. After several years in Geneva, Switzerland, it moved to Vienna, Austria. There were some rumors of a move to Beirut or another city in the Middle East, but these proved to be unfounded. OPEC has been located in Vienna ever since, and all of its members maintain a year-round delegation of diplomats to handle their operations with regards to OPEC.

OPEC soon realized that it could increase its power with more members, and it expanded rapidly throughout the 1960s and 1970s. The Yom Kippur War in 1973 led the Arab nations to declare an embargo on the United States and other countries that had supported Israel. The war quickly ended, but oil price remained high for the time being, and distrust between the United States and OPEC was at an all-time high.

The nations of OPEC ramped up production as a result of the high oil prices, and soon there was too much oil, which lowered prices. This is much the same dynamic that has been observed in the last couple years. 

No comments:

Post a Comment