An acronym such as OPEC appears in the media every now and then. The goals of this organization are to regulate the black gold market. The structure is quite an important player on the world stage.
How OPEC came into being and how it affects the oil market.
OPEC (OPEC – The Organization of Petroleum Exporting Countries, literally translated as the Organization of Petroleum Exporting Countries) is an international intergovernmental organization of oil producing countries, created to stabilize oil prices.
The Organization of Petroleum Exporting Countries emerged in the 60s as a result of the unification of the largest oil-producing countries.
At present, OPEC comprises 14 states: Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, UAE and Venezuela. The headquarters of the cartel are located in Vienna.
The decision to establish OPEC was taken at the initiative of Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela in September 1960. These countries were subsequently joined by a further 10 States.
Before the world oil market was controlled by the Seven Sisters Cartel, which included British Petroleum, Exxon, Gulf Oil, Mobil, Royal Dutch Shell, Chevron, and Texaco. This association was in favor of reducing the price of “black gold,” which was due to rising oil rents. This was the impulse that led to the creation of OPEC – the founding states set the goal to gain control over their own natural resources, as well as to reduce the influence of the “Seven Sisters”.
The OPEC Secretariat was first established and located in Geneva, then moved to Vienna in 1965. In 1968, the OPEC meeting adopted the Declaration on Petroleum Policy, which reflected the right of states to exercise control over national natural resources.
The main objectives of OPEC were to establish it:
- to ensure price stability in the oil market;
- to protect the interests of its member states;
- ensuring the stability of oil revenues to OPEC member states;
- developing an oil production and sales strategy.
Thus, OPEC, first of all, pursues the goal of united protection of its own economic interests.
Biannual meetings of OPEC member states’ energy and oil ministers are held to assess the international oil market and forecast its development in the near future. During such meetings, decisions are made on actions needed to stabilise the world market – either to reduce or increase oil production, in line with changes in market demand.
After the creation of OPEC, the balance of power was changed, and the role of the oil market regulator was gradually transferred to the cartel countries.
OPEC member states control more than 60 percent of the world’s oil reserves. They account for about 40% of world oil production and 40% of world oil exports.
As a result of the actions of OPEC member states, the price of a barrel of oil rose by 350% from $2.59 to $11.65 in 1973. This is how Arab countries decided to use “oil weapons” against America and other countries that supported Israel during its conflict with Syria and Egypt. The energy crisis that followed was the biggest in history. Since then, many countries have begun to build their own strategic oil reserves.
The second half of the 1970s was the peak of OPEC’s economic prosperity: demand for oil remained high, with soaring prices generating huge profits for oil-exporting countries. It seemed as if this prosperity would last for many decades.
OPEC’s economic success, however, has not been very sustainable. In the mid-1980s, world oil prices nearly halved, dramatically cutting OPEC’s revenues from “petrodollars” and burying hopes for long-term prosperity.
The weakening of OPEC was caused by two sets of reasons – a relative decline in demand for oil and an increase in supply.
Divisions among the OPEC countries have been aggravated by political instability in the Gulf region. In the 1980s, Iraq and Iran brought their oil production to a maximum to pay for each other’s war expenses. In 1990 Iraq invaded Kuwait, trying to join it, but the Gulf War (1990-1991) ended in Iraq’s defeat. The aggressor was subject to international trade sanctions, which severely limited Iraq’s ability to export oil. When in 2003 Iraq was occupied by American troops, it withdrew the country from the world oil market as an independent participant.
As a result of these factors OPEC lost the role of the main regulator of world oil prices and became only one (albeit very influential) of the participants of exchange trading on the world oil market.
In 2016, due to collapsing oil prices, OPEC countries and the largest independent oil producers agreed to balance the market. Based on these agreements, OPEC+ appears, which includes, among others, Russia, Mexico, Oman, Kazakhstan, Azerbaijan, Bahrain and Sudan.
OPEC affects the price of oil, but does not set it. World oil prices are formed as a result of trading on exchanges. In recent years, the level of production in the US has increased dramatically. This year, America was the first country in history to change the production level of 12 million barrels per day. Plus, we are now seeing a slowdown in global economic growth and the rapid development of renewable energy sources. All of this is leading to lower demand. Time will tell us how this story ends.