A Guide to OPEC, Oil Prices, and the Global Economy

Oil continues to function as an increasingly important commodity, despite considerable advancements in alternative energy sources. Industrialized nations use oil to power their cars, heat their homes, and fuel planes that make international travel possible. Oil is also used in the production of common household items including shampoo, shaving cream, and even deodorant. It is not surprising, considering its many uses, that the presence of oil can make the difference between poverty and wealth in a nation or region. More than five decades ago, a group of five major petroleum-producing nations gathered and formed OPEC, an organization that has remained influential in the world since its inception.

What is OPEC?

OPEC stands for Organization of the Petroleum Exporting Countries and was founded in 1960 in Vienna, Austria. The organization was created by five founding members: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. OPEC has grown to include Algeria, Angola, Ecuador, Indonesia, Libya, Nigeria, Qatar, and the United Arab Emirates. Since Saudi Arabia is the most profitable oil producer in OPEC, it has become the organization’s de facto leader. Representatives from member nations meet semiannually at the OPEC Conference in Vienna, and the organization ensures each member has only one vote. Altogether, OPEC countries produce roughly 40% of the world’s crude oil, and their oil exports account for 60% of the international petroleum trade. In addition, more than 80% of the world’s “proven” oil reserves are located in OPEC countries. OPEC’s effect on the world economy is therefore substantial and cannot be ignored.

How does OPEC affect the global economy?

Because OPEC controls such a large share of the world’s petroleum supply, it has a major influence on the global economy. Regional and international politics can lead to an increase in oil prices, as it did from 1973-1974 during the oil embargo imposed by OPEC on the United States and other Western countries that took Israel’s side in the Yom Kippur War. The countries affected by this embargo then formed the International Energy Agency. A worldwide economic recession developed following the embargo, with unemployment and inflation rising considerably. Fuel rationing occurred in the US and some European countries until the embargo ended in March 1974. This incident demonstrates the severe consequences of an OPEC embargo and led nations to begin seriously considering long-term oil conservation and alternative sources of energy.

What else does OPEC do?

OPEC also wields influence in the international development sphere. In the 1970s, the organization established a Fund for International Development (OFID) to promote cooperation between member countries and other developing nations around the world. Some of its activities include funding humanitarian emergency relief, financing private sector projects, and extending loans for development initiatives and trade financing. The organization also finances projects in agriculture, education, health, and water and sanitation. Since its establishment, OFID has provided support to initiatives and entities in 134 countries.

How does OPEC influence oil prices?

Crude oil prices have fallen to a trading price of around $30 a barrel. This price is the lowest in 12 years. The reasons for the drop are complex, but a few big factors come into play. First, experts have cited high production as one of the causes—in December 2015, OPEC tossed aside production limits for its member countries, which it typically imposes to control prices, although member countries have often ignored these caps. Instead, OPEC effectively decided in favor of limitless production, in what industry observers say is an attempt to elbow other producers out of the market. Besides oversupply, experts also point to falling demand, particularly in China, as a reason for falling oil prices, while also claiming that the strength of the dollar contributed to the current situation as well. International politics are also partially involved, as Iran and Saudi Arabia ended diplomatic ties recently.

In general, supply is an important factor when considering oil prices and production. For many years, industry experts and academics have debated the true total extent of the world’s oil supplies.

What is peak oil?

Peak oil is a theoretical point in time when the maximum petroleum extraction rate is achieved, following which the rate continually declines. This theory is rooted in the observed rise, peak, fall, and end of petroleum production in individual oil fields over time. The peak oil theory has proliferated throughout the science and business communities, as well as the general public, since 1919, when it was first proposed by David White, then the Chief Geologist of the US Geological Survey.

While the theory has persisted for many years, the exact timing of this point—and even its existence—is a matter of hot debate. White incorrectly believed it would happen within three years of his proposal of the theory. The late geoscientist M. King Hubbert, who advanced the theory considerably, was also incorrect in his estimation that the world would hit peak oil in 2000. Today, some pundits predict that oil production will begin to decline after 2020.

However, the truth is that there is no consensus about peak oil. New technologies, such as hydraulic fracturing, have allowed for access to previously inaccessible deposits, effectively increasing the world’s supply. If other new technologies are developed, other deposits now considered inaccessible may be exploited in the future. Other matters that complicate the idea and timing of peak oil include the fact that many countries’ “proven” reserves have not been verified by independent audits, and there are economic reasons for them to overstate or understate their true numbers. 

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. 

The Zombie Foreclosure Problem

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The housing crisis that launched the 2008 recession had a dramatic scope and effect. As 2015 draws to a close, many of the negative consequences of the United States' housing bubble have only just begun to be ameliorated, in large part due to rising housing prices. One particular problem, so-called "zombie properties," has followed the national pattern: a nationwide return to average rates with a few troubling local markets still affected by the issue.

Zombie properties begin with a “zombie foreclosure,” a term which is used to describe what happens when homeowners leave a property undergoing foreclosure before a lender actually obtains control over the property. When the lender then cancels or delays the foreclosure, which can happen for a variety of reasons, the property is left vacant, and its title remains in the homeowner's name. These vacant properties are the “zombies,” and their existence has been a blight on neighborhoods across the country. Luckily, educated homeowners can largely avoid these problems, and housing policy experts have been hard at work developing ways to stem the negative effects of zombie properties in parts of the country where they remain a problem.

How Zombie Foreclosures Work

When homeowners receive a notice of foreclosure, their first impulse is often to move out. However, in many states, the foreclosure process moves incredibly slowly, both due to increasingly complex legal issues and banker malfeasance. For example, several states have enacted stricter rules on lenders, forcing them to produce paperwork that may have been lost or inaccurately created. Furthermore, many lenders had very little interest in taking over properties located in housing markets in economically challenged areas, instead choosing to write off the loss. As a result, the property is left vacant. The once and present homeowner to whom the property is still titled remains responsible for numerous issues, including property taxes, while the surrounding neighborhood suffers the ill effects of a neglected and empty property.

The Consequences of Zombie Properties

A homeowner that leaves a property before the foreclosure is complete can face significant problems. Lenders who have written off a property may sell the unpaid balance of the mortgage to a debt specialist, who will pursue the former homeowners with considerable vigor. Housing associations and municipal housing authorities can levy fines. In some areas, violations of property codes can result in incarceration. Credit agencies will continue penalizing former homeowners, while cities will bill them for any maintenance, including the cost of boarding up empty houses or painting over graffiti.

Meanwhile, the community in which a zombie property is located is also affected. An ugly vacant home will drive down prices for the entire area, causing widespread financial damage. Meanwhile, a vacant property has been shown to attract crime, including squatting and vandalism. One study of zombie properties in Chicago found additional concerning effects, including the fact that these properties were far more likely to appear in areas with low incomes and in neighborhoods with a high rate of minority residents.

Zombie Properties Today

As with the distinction between judicial and non-judicial foreclosures, distinctions must be drawn between the national picture of zombie foreclosures and regional variances. In many respects, the zombie property crisis is over. At the peak of the housing crisis, there were more than 300,000 zombies in neighborhoods across the country. However, the real estate experts at RealtyTrac have estimated that 20,050 such properties exist as of the third quarter of 2015. The significant decline in these zombies - a 43% reduction since the third quarter of 2014 - is attributed to numerous factors, including streamlined legal proceedings and rising housing prices.

Despite these improvements, some cities and states are still facing serious issues. For the most part, the states with the most zombie properties are those with judicial foreclosure systems that still remain clogged with unfinished business, including New Jersey, Florida, and New York. However, some analysts suggest that these numbers, which have risen even in cities such as Boston and St. Louis, are largely going up because banks have finally begun completing the foreclosure process, causing homeowners to move out and creating temporary zombies.

Zombie Property Fixes

Municipalities and states still have many options for correcting their problems with zombie properties. One of the most obvious options is to craft legislation that requires lenders to inform homeowners and other interested parties that a foreclosure has been halted or delayed. Cities can also use the tools they already have, ranging from building ordinances, anti-blight provisions, and other statutory powers that enable them to prevent zombie properties from bringing entire neighborhoods down with them.

Meanwhile, homeowners facing foreclosure simply need to keep one thing in mind: until the title of the property is transferred through a successful foreclosure, the property is theirs. It’s generally a good idea to continue occupying a property throughout the foreclosure process, especially since it’s technically "free" given that no further mortgage payments are expected. Borrowers should ideally work with their lender to refinance a loan or otherwise work out a payment schedule. However, in the absence of a workable solution, borrowers can save considerable money simply by remaining on the property until a foreclosure is finalized. As long as the title is in the borrowers’ name, they can remain legally liable for the property, which is another good reason to stay. 

A Brief Introduction to Foreclosures

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The collapse of subprime, mortgage-backed securities in 2008 led to a widespread foreclosure crisis brought on by what the media termed the “Great Recession.” Today, the repercussions of the crisis continue to be felt in courtrooms across the country even as the economy has largely recovered. As result, people around the nation have received a crash course in foreclosure law. Homeowners owe it to themselves to become familiar with their state's mortgage laws, a process that can often be daunting.

The History of Foreclosure

Foreclosure law arose long after mortgages became common. Legal scholars have argued that virtually every developed society in history has had some form of a mortgage. In medieval England, mortgages were originally designed under what is known as the strict title theory, which directed profit and rent to the landowner without interest to avoid violating usury laws. It was only in the 1500s that charging interest became socially and legally acceptable. Moreover, mortgagees had few rights until the 1600s, when the principle of "equity of redemption" made it possible for mortgagees who had missed payments to regain the rights to their property by meeting their debt obligations.

Foreclosures themselves only arose in the 1800s, as English courts began limiting equity of redemption by imposing restrictions on the amount of time a borrower had to repay their mortgage debt. By the mid-19th century, foreclosures were developed as a way for lenders to ask the court to set specific dates for repayment prior to allowing property rights to revert back to the mortgagor. However, American independence led to American jurisprudence, and while several efforts were made in the 20th and 21st centuries to create a federal standard for mortgage laws, the current legal landscape is one in which each state retains its own legal process for foreclosure.

The Foreclosure Process

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While all 50 states have different foreclosure statutes, foreclosures in the United States can generally be grouped into three different processes. The most common, “judicial foreclosure,” is available in all states, although some make it the primary method. In this process, a failure to pay leads courts to take over the property and sell it in a public auction. In several states, mortgages may include "power of sale" clauses in which mortgagors oversee auctions instead of the courts, a convenience that often saves considerable time. The third type of foreclosure, “strict foreclosure,” is used in fewer states and occurs when mortgagees owe more money than the property is worth. In a strict foreclosure, the mortgagor sues the mortgagee to set a timeline for repayment, with the mortgagor recovering the property rights immediately upon failure to repay rather than requiring an auction.

Foreclosure processes vary by state and cover aspects such as how long borrowers have before they receive notice or become subject to eviction, as well as a variety of other issues. In many respects, the processes look very similar. Mortgagors can begin foreclosure proceedings between three and six months following the last payment, after which time mortgagees receive a formal notice and a final timeline for repayment. In many states, debt repayment remains an option until the auction, although some states offer a limited redemption period after this point.

How to Avoid Foreclosure

In many respects, the easiest way to avoid foreclosure is to avoid taking on a mortgage that cannot be repaid. However, for many Americans, the loss of a job or a medical emergency might turn an affordable mortgage into an enormous financial burden. As soon as you miss your first mortgage payment, it becomes vital to seek out assistance. Many mortgagors and lenders are eager to avoid foreclosure, and working with them is vital. Arrangements can be made for repayment in many circumstances. Furthermore, the U.S. Department of Housing and Urban Development offers the assistance of housing counselors who can provide state-specific advice and help mortgagees avoid being scammed by financial services companies that prey on those in foreclosure.

Luckily, mortgagees across the nation have received numerous legal benefits thanks to legislators who have responded to the mortgage crisis of 2008. A wide variety of new laws were enacted to prevent lender abuse, encourage mediation rather than civil suits, and create new opportunities for loan modifications. One federal program, the Hardest Hit Fund, or HHF, offers financial assistance to those facing foreclosure, while other nationwide laws like the Mortgage Assistance Relief Services (MARS) protect mortgagees from deceptive practices through a variety of reforms and rules for companies offering foreclosure rescue services. Many states have also introduced stringent "ability to pay" rules to prevent lenders from entering into mortgage agreements with those who are unable to afford payments. 

Acquiring Distressed Assets in UCC Foreclosure Sales

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In the field of distressed asset acquisition, Uniform Commercial Code (UCC) foreclosure sales offer a number of advantages for buyers. As long as the transaction involved is “commercially reasonable,” Article 9 of the UCC enables lenders to sell collateral after the borrower’s default, using any terms and time table. As a result, all assets acquired at a UCC foreclosure sale will transfer to the buyer without first-lender liens or junior liens.

While UCC foreclosures represent an optimal acquisition strategy, it is important that buyers perform due diligence of all assets and processes in the transaction. Even in transactions involving a cooperating distressed company, buyers rarely receive warranties or representations on assets. In addition to performing due diligence on those assets, buyers typically ensure that they will gain the benefits from the sale and that the sale will proceed in a predetermined manner. Furthermore, due diligence of a distressed company’s real estate arrangements and trade liabilities can further elucidate the financial implications of assets acquired in a UCC foreclosure sale.

Chapter 11 Helps Small Businesses Restructure

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In the field of bankruptcy law, there are typically a number of bankruptcy options available to debtors at any given time. Small businesses often must choose between Chapter 7, Chapter 13, and Chapter 11 bankruptcy, each of which has its own benefits and drawbacks. Chapter 13 bankruptcy requires small businesses owned by a partnership, corporation, or limited liability company to sell available assets, while Chapter 7 bankruptcy pertains only to businesses owned by individuals. Thus, for certain types of small businesses, Chapter 11 bankruptcy is the only option that allows them to continue operating. 

A business can restructure its finances and implement a reorganization plan, contingent on the approval of a bankruptcy court. Chapter 11 plans can help small businesses to balance their income and expenses, primarily by modifying payment terms and reducing obligations. In some cases, Chapter 11 debtors may pay off outstanding claims or downsize the business. As a result, the business can continue to operate and attempt to regain profitability.

Open A Door Supports Women’s Education in Afghanistan

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An international nonprofit dedicated to developing female leadership in countries recovering from armed conflict, Open A Door aims to connect women with college education programs and mentorship opportunities. For nearly 15 years, the organization has worked to empower women in Afghanistan and help them become leaders in their communities. With the support of the U.S. government, as well as the international community, Open A Door has made significant progress in areas such as education, safety, participation, and political empowerment.

Today, for the first time in the history of Afghanistan, women can hold positions of power in various social, economic, and political organizations. In addition to helping women obtain postsecondary degrees in the United States, Open A Door equips them with the confidence and communication skills necessary to challenge authority and bring about meaningful change. Through a program titled Supporting Her Education Changes a Nation (SHE-CAN), the organization plans to unite more than 50 colleges and universities across the globe in support of women’s education and empowerment in Afghanistan. 

To learn more about Open A Door, visit the official website at www.openadoorfoundation.org.