A Study of

Organisation of the Petroleum

Exporting Countries (OPEC)
A Project report – International Economic Organization

SUBMITTED BY:

KAUSHAL S. PATEL (17F62)

KRUSHALI DAVE (17F63)
MOHAMMAD SHOEB (17M64)
MONALI TRIPATHI (17M65)

SEMESTER-IV

UNDER THE GUIDANCE AND SUPERVISON OF:

Dr. Yogesh C. Joshi & Dr. Mitesh Jayswal

G.H. PATEL POSTGRADUATE INSTITUTE OF BUSINESS

MANAGEMENT
MBA PROGRAMME (2018-2019)
SARDAR PATEL UNIVERSITY, VALLABH VIDYANAGAR

1
 Acknowledgement

At outset, we would like to thank G. H. Patel Post Graduate Institute of Business Management
and Director Dr. (Prof) Yogesh C. Joshi for designing such a curriculum that help us in in-depth
understanding of the industry and providing us opportunity to do this project work.

We would like to extend our gratitude to Dr. (Prof.) Mitesh Jayswal under whose guidance the
project was successfully completed. The major part of success should be attributed to the efforts
and direction provided by him who acting as mentors was supportive not only in explaining the
complexities of the project but also to guide and support at all times.

At last but not least we would like to thank all who have directly or indirectly supported us in
successful completion of this project.

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 Table of Contents
Sr. No.: Particulars Page
number
Chapter:1 Introduction: 4-8
Introduction
Objective of the study
Literature review
Methodology
Scope of the study
Importance and significance
Chapter:2 History of OPEC 9-14
Mission of OPEC
Values
Objectives of OPEC
Establishment
OPEC members
Functioning of OPEC
Chapter:3 Recent news on OPEC 15-19
Chapter:4 OPEC and the World: A comparative study 20-43
Macro- economic indicators
Oil and Gas Reserves
OPEC’s benefit to the member countries
OPEC influence on economic growth of the
member countries
OPEC as a promoter of Sustainable Development
Chapter:5 OPEC and its influence 44-54
OPEC and history of oil price
Assessment of OPEC in managing oil prices
Setting the target range for oil prices
Managing spare capacity
Influence of OPEC on price
Impact of Kyoto protocol on OPEC
Impact of OPEC on India
Chapter:6 Competitors of OPEC 55-72
Challenges for OPEC
Chapter:7 Conclusions 73-74
Chapter:8 Bibliography 75-76

3
CHAPTER: 1 Introduction

4
Introduction:

The Organization of the Petroleum Exporting Countries (OPEC) is a bloc of fourteen oil-rich
states spanning the Middle East, Africa, and South America. Combined, the group controls close
to forty percent of world oil production. This dominant market position has at times allowed
OPEC to act as a cartel, coordinating production levels among members to manipulate global oil
prices.

OPEC’s golden era occurred in the 1970s, when the United States became increasingly reliant on
foreign oil as a result of rapid economic growth. Ever since, U.S. presidents from Gerald Ford to
Donald J. Trump have railed against the oil cartel as a threat to the U.S. economy.

In recent years, several challenges to OPEC’s influence have come to the fore, including
divisions within its membership, the emergence of the United States as a major oil exporter, and
the global shift to cleaner energy sources. Strained relations between the United States and Saudi
Arabia, OPEC’s largest exporter, might also test the bloc in the coming years.

OPEC was established in 1960 by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela; its
membership has expanded and contracted over the years. The original five sought to build a
united front to respond to oil price cuts imposed by the multinational oil companies that
controlled most petroleum imports into Western countries, as well as U.S. government import
caps that depressed prices of foreign oil in the 1950s. OPEC’s founding members not only set
out to negotiate higher global posted prices for oil but also pursued greater control over their own
resources through the nationalization of international oil company concessions. Most OPEC
nations now own all of their oil reserves.

The Organization of the Petroleum Exporting Countries (OPEC) is a permanent,

intergovernmental Organization, created at the Baghdad Conference on September 10–14, 1960,
by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The five Founding Members were later
joined by ten other Members: Qatar (1961); Indonesia (1962) – suspended its membership in
January 2009, reactivated it in January 2016, but decided to suspend it again in November 2016;
Libya (1962); United Arab Emirates (1967); Algeria (1969); Nigeria (1971); Ecuador (1973) –
suspended its membership in December 1992, but reactivated it in October 2007; Angola (2007);
Gabon (1975) - terminated its membership in January 1995 but rejoined in July 2016; Equatorial
Guinea (2017); and Congo (2018). OPEC had its headquarters in Geneva, Switzerland, in the
first five years of its existence. This was moved to Vienna, Austria, on September 1, 1965.

Member states coordinate policies on oil prices and production levels at regular and emergency
meetings around the world, often at OPEC’s Vienna headquarters. Delegations are usually led by
the oil ministers of each member country, and a secretary-general appointed by the bloc is
entrusted with the day-to-day management of the organization.

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Objectives of the Study:

1) To know what OPEC is, how it was established, why it was established.
2) To understand who the member countries of OPEC are and what are their roles and
responsibilities.
3) To study various objectives functions and operations of OPEC.
4) To study the implications of OPEC in stabilizing oil demand and supply balance.
5) To study OPEC’s role on deciding price of crude oil.
6) To study what is the impact of OPEC and its policies on the global market.
7) To analyze the oil production of OPEC members and Non-OPEC members/ rest of the
world.
8) To understand the change in the petrol price with respect to usage.
9) To study the impact of change in petrol price to the global economy and the Indian
economy.
10) To understand what the substitutes for petroleum products and the threat to the OPEC
member countries are.

6
Literature Review:
OPEC and Its Influence transnational leader services:
(CEU Business School; 27/06/2009)

Future trends in OPEC’s power will depend on three factors: Oil needs of OPEC, oil usage of
world’s main consumers and prevalence of alternative energy sources. OPEC will remain a vital
part of global energy decisions for the foreseeable future. But future dues hold some bad things
for OPEC. This is because renewable energy usage will increase, and world will improve its
efficiency that will decrease world’s dependency on middle eastern oil. These changes will take
many years, so OPEC will be around for a long period of time.

OPEC Pricing Power The need for a new perspective

(Oxford institute for energy studies; March 2009)

Changes in the international pricing system have diminished OPEC pricing power. OPEC was
not operating in a political vacuum. However, it is important to state that the impact of such
political factors is not independent of the oil market. Similarly, oil embargoes i.e. more feasible
when oil prices are low and political commodity, it is still a commodity and like any other, in
long run its price responds largely to economic forces.

OPEC Market Future or Power Future?

(20 /08/2012; Robert & Caines; Department of economics & CIRED; Macgrill University)

Some of the highlights of this article are as follows:

• Member of OPEC do not act as a member of classic cartel.

• Political and economic considerations influence the objective of OPEC.
• The aim of Saudi Arabia, the price leader is to keep price moderate.
• Supply was inelastic in 2001, Saudi investment was not adequate.

OPEC: What difference has it made?

(Bassan Fattouch; Laran Mahadera; Journey 2013; The Oxford institute for energy
studies)

The review shows that while OPEC’s power is visible in the short term, it is less certain that such
pricing power can be maintained in the long run. Taxation, climate change and the energy
securities policies aimed at reducing the share of oil the energy mix can erode OPEC’s position
in the long term, resulting in lower revenue streams for the organization. This represent a real
challenge for OPEC and lies at the heart of a core feature of oil market; The rent distribution
question. The way in which OPEC controls this challenge will determine both its future
evolution and its position in the oil market.

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Methodology:

Type of Research and Research Design:

As for the research design, exploratory research is being used as the main purpose is to gain an
insight into, and an understanding of the economic international institution/ organization called
OPEC.

Data Collection Methods:

Data has been collected from Secondary sources such as: websites, magazines, journals, research
papers, reference books, official website of OPEC, newspapers and other industry related books.

Scope of the study:

1) The latest projection from the OPEC world energy model, OPEC’s action over the
present difficult period provide vivid demonstration of the important role of the
organization place in stabilizing the volatile oil market, a role that will continue to play in
to the near future.
2) Lower prices over the past years have negatively impacted the economies of the OPEC
countries. Saudi Arabia had a fiscal deficit of 16% of GDP in 2015 and similar issues are
happening in the other OPEC countries also.
3) Beyond issues of economy, many of OPEC’s member countries are also engaged in
challenging social and political struggles. There is currently a civil war in Libiya, Iraq, &
recession and humanitarian issues in Nigeria.
4) These challenges, combine with threats of other Non-OPEC oil producers and Non-
petroleum energy countries, will decrease OPEC’s influence in future. SO, it is necessary
to study OPEC to understand an out sized role in oil and gas market dynamics.

Importance and Significance:

This report will provide insights to the management students about the whole Organization of
Petroleum Exporting Countries. This will help them to understand the current oil supply and
demand by the OPEC and role of OPEC in stabilizing the oil prices world over. They will come
to know about various functions and objectives of OPEC and its significance for oil demand and
supply balance world over.

8
CHAPTER: 2 History of OPEC

9
Mission of OPEC:

In accordance with its Statute, the mission of the Organization of the Petroleum Exporting
Countries (OPEC) 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 income to producers and a fair return on capital for
those investing in the petroleum industry.

Values:
We believe in transparent, honest, and auditable governance procedures.
We are responsive to our Members, stakeholders in trade, and society.

Objectives of OPEC:

OPEC's objective is to co-ordinate and unify petroleum policies among Member Countries, in
order to secure fair and stable prices for petroleum producers; an efficient, economic and regular
supply of petroleum to consuming nations; and a fair return on capital to those investing in the
industry.

Establishment:

The 1960s:

OPEC’s formation by five oil-producing developing countries in Baghdad in September 1960

occurred at a time of transition in the international economic and political landscape, with
extensive decolonization and the birth of many new independent states in the developing world.
The international oil market was dominated by the “Seven Sisters” multinational companies and
was largely separate from that of the former Soviet Union (FSU) and other centrally planned
economies (CPEs). OPEC developed its collective vision, set up its objectives and established its
Secretariat, first in Geneva and then, in 1965, in Vienna. It adopted a ‘Declaratory Statement of
Petroleum Policy in Member Countries’ in 1968, which emphasized the inalienable right of all
countries to exercise permanent sovereignty over their natural resources in the interest of their
national development. Membership grew to ten by 1969.

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The 1970s:

OPEC rose to international prominence during this decade, as its Member Countries took control
of their domestic petroleum industries and acquired a major say in the pricing of crude oil on
world markets. On two occasions, oil prices rose steeply in a volatile market, triggered by the
Arab oil embargo in 1973 and the outbreak of the Iranian Revolution in 1979. OPEC broadened
its mandate with the first Summit of Heads of State and Government in Algiers in 1975, which
addressed the plight of the poorer nations and called for a new era of cooperation in international
relations, in the interests of world economic development and stability. This led to the
establishment of the OPEC Fund for International Development in 1976. Member Countries
embarked on ambitious socio-economic development schemes. Membership grew to 13 by 1975.

The 1980s:

After reaching record levels early in the decade, prices began to weaken, before crashing in
1986, responding to a big oil glut and consumer shift away from this hydrocarbon. OPEC’s share
of the smaller oil market fell heavily and its total petroleum revenue dropped below a third of
earlier peaks, causing severe economic hardship for many Member Countries. Prices rallied in
the final part of the decade, but to around half the levels of the early part, and OPEC’s share of
newly growing world output began to recover. This was supported by OPEC introducing a group
production ceiling divided among Member Countries and a Reference Basket for pricing, as well
as significant progress with OPEC/non-OPEC dialogue and cooperation, seen as essential for
market stability and reasonable prices. Environmental issues emerged on the international energy
agenda.

The 1990s:

Prices moved less dramatically than in the 1970s and 1980s, and timely OPEC action reduced the
market impact of Middle East hostilities in 1990–91. But excessive volatility and general price
weakness dominated the decade, and the South-East Asian economic downturn and mild
Northern Hemisphere winter of 1998–99 saw prices back at 1986 levels. However, a solid
recovery followed in a more integrated oil market, which was adjusting to the post-Soviet world,
greater regionalism, globalization, the communications revolution and other high-tech trends.
Breakthroughs in producer-consumer dialogue matched continued advances in OPEC/non-OPEC
relations. As the United Nations-sponsored climate change negotiations gathered momentum,
after the Earth Summit of 1992, OPEC sought fairness, balance and realism in the treatment of
oil supply. One country left OPEC, while another suspended its Membership.

The 2000s:

An innovative OPEC oil price band mechanism helped strengthen and stabilize crude prices in
the early years of the decade. But a combination of market forces, speculation and other factors
transformed the situation in 2004, pushing up prices and increasing volatility in a well-supplied
crude market. Oil was used increasingly as an asset class. Prices soared to record levels in mid-
2008, before collapsing in the emerging global financial turmoil and economic recession. OPEC
became prominent in supporting the oil sector, as part of global efforts to address the economic

11
crisis. OPEC’s second and third summits in Caracas and Riyadh in 2000 and 2007 established
stable energy markets, sustainable development and the environment as three guiding themes,
and it adopted a comprehensive long-term strategy in 2005. One country joined OPEC, another
reactivated its Membership and a third suspended it.

2010 until now:

The global economy represented the main risk to the oil market early in the decade, as global
macroeconomic uncertainties and heightened risks surrounding the international financial system
weighed on economies. Escalating social unrest in many parts of the world affected both supply
and demand throughout the first half of the decade, although the market remained relatively
balanced. Prices were stable between 2011 and mid-2014, before a combination of speculation
and oversupply caused them to fall in 2014. Trade patterns continued to shift, with demand
growing further in Asian countries and generally shrinking in the OECD. The world’s focus on
multilateral environmental matters began to sharpen, with expectations for a new UN-led climate
change agreement. OPEC continued to seek stability in the market and looked to further enhance
its dialogue and cooperation with consumers, and non-OPEC producers.

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Member Countries:
The Organization of the Petroleum Exporting Countries (OPEC) was founded in Baghdad, Iraq,
with the signing of an agreement in September 1960 by five countries namely Islamic Republic
of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. They were to become the Founder Members
of the Organization.

These countries were later joined by Qatar (1961), Indonesia (1962), Libya (1962), the United
Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), Gabon (1975), Angola
(2007), Equatorial Guinea (2017) and Congo (2018).

Ecuador suspended its membership in December 1992, but rejoined OPEC in October 2007.
Indonesia suspended its membership in January 2009, reactivated it again in January 2016, but
decided to suspend its membership once more at the 171st Meeting of the OPEC Conference on
30 November 2016. Gabon terminated its membership in January 1995. However, it rejoined the
Organization in July 2016.

This means that, currently, the Organization has a total of 14 Member Countries.

The OPEC Statute distinguishes between the Founder Members and Full Members - those
countries whose applications for membership have been accepted by the Conference.
The Statute stipulates that “any country with a substantial net export of crude petroleum, which
has fundamentally similar interests to those of Member Countries, may become a Full Member
of the Organization, if accepted by a majority of three-fourths of Full Members, including the
concurring votes of all Founder Members.”
The Statute further provides for Associate Members which are those countries that do not qualify
for full membership but are nevertheless admitted under such special conditions as may be
prescribed by the Conference.

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Functioning of OPEC:
Representatives of OPEC Member Countries (Heads of Delegation) meet at the OPEC
Conference to co-ordinate and unify their petroleum policies in order to promote stability and
harmony in the oil market. They are supported in this by the OPEC Secretariat, directed by the
Board of Governors and run by the Secretary General, and by various bodies including the
Economic Commission and the Ministerial Monitoring Committee.

The Member Countries consider the current situation and forecasts of market fundamentals, such
as economic growth rates and petroleum demand and supply scenarios. They then consider what,
if any, changes they might make in their petroleum policies. For example, in previous
Conferences the Member Countries have decided variously to raise or lower their collective oil
production in order to maintain stable prices and steady supplies to consumers in the short,
medium and longer term.

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CHAPTER: 3 Recent News on OPEC

15
Recent News on OPEC:
OPEC daily basket price stood at $51.55 a barrel Friday, 28 December 2018

02 Jan 2019 | Vienna, Austria, 2 January 2019--The price of OPEC basket of fifteen crudes stood
at $51.55 a barrel on Friday, compared with $52.35 the previous day, according to OPEC
Secretariat calculations.

Trump says he hopes OPEC will be keeping oil flows ‘as is’; 5th December,2018

President Donald Trump urged OPEC to continue pumping oil at current high levels.
The group of Petroleum exporting nations is expected to cut output when members meet on
Thursday, in Vienna, Austria and is reportedly aiming to remove atleast 1.3 million barrels per
day from the market. The group began managing crude supply in partnership with Russia and
several other nations last year in order to end a punishing downturn in oil prices.

OPEC has problems with some oil producers, reasons for Qatar’s exit must be examined
says Iran Oil Minister; 4th December 2018

Qatar pulled out of OPEC amid tension with Saudi Arabia. It marks first time a West Asian
nation has left Cartel, since its founding in 1960.
Qatar said it will quit OPEC to focus on gas in a swipe at Saudi Arabia, the de facto leader of the
oil exporting group which is trying to show unity in tackling an oil price slide.
Qatar produces only some 6,00,000 barrels of crude oil a day, making it OPEC’s 11 th biggest
producer. The loss of production, under 2% of overall OPEC supply a day, wont greatly affect
the cartel’s position in the market.

Oil rises as investors anticipate OPEC production cuts; 4th December 2018

• OPEC, allies aim to cut 1.3 million barrels per day to balance market.
• Canadian supply cut lends support.
• Saudi Arabia says producers must come together for output cuts.
• Soaring US output is OPEC’s biggest headache.
• Texas now produce more oil than Iraq.

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Oil prices soar after US- China suspend trade hostilities; 2nd December 2018

US West Texas Intermediate (WTI) crude future were at $53.38 per barrel; up by $ 2.45 per
barrel or 4.8% from their last close.
Oil prices shot higher on Monday after the United States and China agreed a 90-day truce in their
trade conflict and ahead of a meeting by producer club OPEC this week that is expected to result
in a supply cut.
The trade war between World’s two biggest economies has weighted heavily on global trade,
sparking concerns of an economic slowdown.

OPEC decision will set direction of crude oil price: Anand Rathi; 2nd Decemeber2018

Ravindra V. Rao of Anand Rathi commodities said uncertainty prevails over OPEC’s stance
regarding the recent collapse in prices of crude oil and steps OPEC would take to counter the
fall.

Crude oil prices came under pressure in the past week as well, falling due to an oversupply. US
crude oil production was 11.7 million barrels a day. Reports suggest Saudi Arabia’s crude oil
production has hit a record high in November. Same is the case with Russia where the
production rose to an all-time high of 11.41 million barrels per day in October. Hence, the global
glut weighted on the price of crude oil.

175th Ordinary OPEC meeting, at Vienna, Austria; 6th December 2018

OPEC meets, sizing up its power and its policies. On Thursday, over 200 oil industry
representatives, financial analysts and journalists gathered into basement auditorium at the Head
Quarter of the Organization of the Petroleum Exporting Countries. It is a tricky time for OPEC at
its twice- yearly gathering and more important, for the oil industry and consumers who depend
on the world’s most abundant energy source.

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Three reasons why Qatar left OPEC:

Qatar’s decision to withdraw from OPEC is unlikely to have a domino effect within the cartel,
Francis Perrin, Senior Fellow at the OCP Policy Center (Rabat) and Senior Research Fellow at
the French Institute for International and Strategic Affairs (IRIS, Paris) told Trend.

"Qatar's decision to withdraw from OPEC is a great surprise. It is mostly a business decision.
The country is a small oil producer and exporter and a big gas producer and exporter. It is the
world leading LNG (liquefied natural gas) exporter. OPEC is dealing only with crude oil and not
with natural gas or natural gas liquids. For Qatar the strategic priority is to focus on gas,
especially LNG, which is the jewel in its crown and which presents interesting opportunities of
growth in the mid-term and in the long-term," said the expert.

Another reason is that Qatar is a small country within OPEC, noted Perrin.
"It is the 11th oil producer within the organization which gathers 15 countries. It means that
Qatar's weight within OPEC is not very important."

Perrin said Qatari leaders stress that this decision has nothing to do with the political and
economic sanctions imposed since June 2017 by Saudi Arabia, the UAE, Bahrain and Egypt
(Saudi Arabia and the UAE are OPEC member states).

"I would agree that this political issue is not a key issue to explain Qatar's decision. But it may
have played some role even if it is a small part of the explanation," the expert noted.

Further, he said that Qatar's withdrawal will not have a significant impact on the oil market and
oil prices because Qatar's crude oil production is only 600,000 barrels per day presently out of a
total OPEC production of 33 million b/d.

"World oil production is 100 million b/d. Oil prices are a little higher today due to the agreement
between Saudi Arabia and Russia in order to cut their oil output from the beginning of 2019 (the
formal decision will be taken by OPEC and by 10 non-OPEC countries in a few days) and to an
agreement between the US and China over trade matters."

As for the possibility of Qatar’s increasing its crude output after leaving OPEC, Perrin said it is
out of question.

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"Qatar's withdrawal will be effective from January 2019. It means that from next year onwards
the country will theoretically be able to do what it wants to do with its oil production. But the
Qatari Minister of State for Energy Affairs said that Qatar would comply with the decision that
OPEC will take in a few days. Moreover, Qatar does not have the capacity to increase its oil
production even if it wanted to do this tomorrow. The future of Qatar is natural gas rather than
oil. As far as gas and LNG are concerned the country has the capacity and the willingness to
increase its production and exports and it will do this in the next years," said the expert.
Perrin said he doesn’t think that Qatar's move will have a domino effect within OPEC. "But the
organization must take this decision into account and be receptive to the needs and constraints of
all its member states, including the smallest producers. It is a kind of waking call for OPEC."

Qatar’s Energy Minister, Saad al-Kaabi, has announced that the country will leave OPEC with
effect from 1st January 2019. Mr. al-Kaabi pinned the decision on the country’s desire to focus
on investing in its LNG capacity and that, as a small oil producer, it had little influence over
OPEC policy.

The announcement comes ahead of the meeting by OPEC and its allies including Russia on Dec.
6-7 to discuss cutting supply.

The minister said the decision was not easy as Qatar has been in OPEC for 57 years, but that the
country’s impact on OPEC production decisions was small.

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CHAPTER: 4 OPEC and the World: A
Comparative Study

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OPEC and the World – A Comparative study:
In this chapter we will compare OPEC with the rest of the world. Macroeconomic indicators, oil
and gas reserves, production capacity, import and export from the OPEC is described in the
following section and it was find out that where the OPEC stands and the role of OPEC for
maintaining the demand and supply balance of crude oil.

Oil use per capita in OPEC Member Countries

During the period 1980 to 2016, OPEC Member Countries’ populations increased by about 275
million and, in relative terms, by almost 250 per cent, marking an average annual increase of
around b1 ≈ 8 million per year.1 The largest percentage gains have taken place in Middle Eastern
OPEC Member Countries with relatively small populations, such as Qatar and the United Arab
Emirates. OPEC Members’ oil demand gained almost 2.4 billion barrels during the same period,
marking an average of b2 ≈ 68m b/yr.2 Oil demand in OPEC Members is determined to a large
extent by the transportation and industrial sectors, particularly the petroleum products categories
of gasoline and distillates, as well as kerosenes. The higher rate in oil consumed, compared to the
population, implies a sharp increase in oil use per capita — from 4.9 b/yr in 1980 to 7.0 b in
2016 — with the largest increases in relative terms originating in Middle Eastern OPEC
Members. Healthy growth in the transportation sector of OPEC Members between 2003 and
2013, in addition to a developing industrial sector, have supported oil demand per capita gains
considerably.

21
Oil demand per capita in OPEC Members increased sharply during the early 1980s, as well as
from 2003 to 2013. It remained relatively stagnant between the mid-1980s and 2003, and further
declined from 2014 onwards, as shown in the figure above (right-hand side). The main factors
behind declining oil demand per capita as of 2014 were efficiencies in the transportation sector,
increasing petroleum products retail prices in some OPEC Member Countries and fuel
substitution with other primary commodities, notably natural gas in the industrial sector. As can
be seen from the figure on the left-hand side, while population growth in OPEC Member
Countries follows a linear trend during the time period 1980–2016, oil demand has switched
towards a non-linear structure, especially after strong gains during the period 2005–2013. Oil
demand per capita in 2016 varies substantially among OPEC Members, ranging from a minimum
of 2 to a maximum of 37 b/yr.

22
23
24
Oil Reserves:

25
According to current estimates, 81.89% of the world's proven oil reserves are located in OPEC
Member Countries, with the bulk of OPEC oil reserves in the Middle East, amounting to 65.36%
of the OPEC total.

OPEC Member Countries have made significant additions to their oil reserves in recent years, for
example, by adopting best practices in the industry, realizing intensive explorations
and enhanced recoveries. As a result, OPEC's proven oil reserves currently stand at 1,214.21
billion barrels.

26
Daily and cumulative crude oil production in OPEC Members (1,000 b)

27
28
29
Gas Reserves:

30
OPEC’s benefit to the member country:

Energy resources due to their specific nature are key product and strategic commodity in today’s
international society. Industry worldwide is dependent on the resources for survival and their
cost will always affect the price of the finished product, thereby controlling energy supply is a
powerful tool in today’s international market. The member states of Organisation of Petroleum
Exporting Countries had an early understanding of this new international economic system.
Furthermore, the member states realise their potential to shift the balance of power from the
West. OPEC is a permanent, intergovernmental Organization, created at the Baghdad Conference
on September 10–14, 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The five
Founding Members were later joined by nine other Members: Qatar (1961); Indonesia (1962) –
suspended its membership from January 2009; Socialist People’s Libyan Arab Jamahiriya
(1962); United Arab Emirates (1967); Algeria (1969); Nigeria (1971); Ecuador (1973) –
suspended its membership from December 1992-October 2007; Angola (2007) and Gabon
(1975–1994). OPEC is one of the oldest organizations founded by developing countries, having
survived half a century since its establishment. According to data from official web page of
OPEC, in 2009, this organization possessed 79.3% of global proven crude oil reserves and was
responsible for 60.3% of the world’s crude oil exports.

This organization has been known as an international organization rather than a regional or
intergovernmental one. In fact, OPEC’s decisions about levels of production have a global effect,
as international oil markets are inter-related and oil can be transferred from one market to
another. Moreover, by building more and more sophisticated refineries, crude oil is becoming
more like a homogenous commodity, so that the supply and demand of a specific type of a crude
in one corner of the global oil market will affect the fundamentals of other crudes in another part
of the global oil market.

Moreover, OPEC can easily affect on oil price and its supply. Nowadays in case of OPEC
scholars mainly look at the oil production its reserves, price monopoly and impact of OPEC’s
quotas on world oil market (see Loderer 1985, Griffin and Xiong 1997,); they test OPEC’s
behavior and its impact on the oil prices as well as market (see James 1999, Noguera J. and
Pecchecnino R. 2006) and its role in providing sustainable development. However, there are a
few studies that test whether there is any benefit for the oil producing countries to be the member
of organization of petroleum exporting countries and what are they.

31
As Noguera J. and Pecchecnino R. (2006) has emphasis in their studies there two economic goals
of being member of OPEC. One is macroeconomic – reaching low oil market volatility, and
second one – microeconomic is to promote economic development of the country. Since oil
revenues are vital for the economic development of the OPEC nations, they aim to bring stability
and harmony to the oil market by adjusting their oil output to help ensure a balance between
supply and demand. Also some scholars as Morrison (2004) argues that because of the high level
of oil dependence, the oil sector must perform well in these nations both to maintain current and
ensure future living standards. On the other hand, oil sector and overall economic productivity in
the OPEC economies has declined, and today less rather than more is being produced with the
same resources. Taking in to account that OPEC is one of international organisation with long
history, permanent members and huge impact on world energy supply and market. Also,
considering fact that completely all members of OPEC are developing countries it would be
interesting to know how OPEC is beneficial for the member countries despite the quotas for oil
producing. Taking in to account this circumstance in the paper I also want to see what kind of
and in which spheres the member countries get benefits.

OPEC Influence on Economic Growth of the Member Countries:

OPEC is considered to have a heavy influence on global oil prices by controlling petroleum
supplies, leading the organisation to be referred to as a cartel by some. OPEC does not control
the oil market, but the exports of OPEC total 55% of global exports and so the market will be
affected if the decision is taken by OPEC to produce more or less petroleum.

There have been several key points in the organisation’s history where they have taken the
decision to alter oil production. For example, during the Gulf War in the early 1990’s OPEC
produced more oil, to try and stabilise world supplies. OPEC tightened supplies during 1979-
1980, which led to an increase in oil prices. OPEC once again tightened supplies in 1999, which
eventually led to record oil prices in 2008.

OPEC decides what their overall oil output will be at bi-annual conferences. Delegates and oil
ministers from member countries meet to work out production upper limits for each member.
Occasionally these conferences will be called more than twice yearly if there is a major change
in the global oil market.

Though the influence of OPEC on crude petroleum prices is substantial, the influence of OPEC
on end products, such as petrol, is less important. Oil product prices can be affected by numerous
factors, notably government policies and taxes.

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OPEC is commonly described as Cartel, which is intergovernmental organization. However,
according to the statue of OPEC, it define itself as an international organization with aim to
influence and maintain the price of oil through the control of production levels and to generate
revenue, which goes towards meeting the development needs of its members.

However, OPEC’s influence on the oil markets has significantly diminished compared to the
1970’s OPEC is still the key player of world energy market. Nowadays the organisation supplies
about 60% of world oil output and more than 75% of world petroleum reserves are located
within OPEC nations; and OPEC policy instruments have consistently beenconfined to fiscal and
pricing measures (Logman 1982).

Former Acting OPEC Secretary-General, Fadhil Al-Chalabi has emphasized that OPEC's
objective is to co-ordinate and unify petroleum policies among the member countries, in order to
secure fair and stable prices for petroleum producers, member countries, as well as, efficient
economic growth for the member states, and regular supply of petroleum to consuming nations
(World oil outlook 2010). Many scholars argue that OPEC has evolved over the years and has
become a market phenomenon. Since the early 1970s, a significant degree of “re-integration” has
been achieved in the world oil industry, between OPEC minor and major member countries
(Yang 2004), member countries and the biggest oil-producing companies. Moreover, OPEC
influence on the growth and promote economic growth of its member countries through fair
return of capital, that is mentioned in OPEC statue, to those member countries who investing in
their industries that would lead to economic development of the member countries (OPEC statue
article 1-2).

OPEC’s influence on the economy of the member countries is great, since most member
countries derive more than 80% of their foreign-exchange earnings, as well as huge share of
GDP, from oil and gas exports. In turn, receipts from the oil and gas sector account for at least 70
% of government revenue.

33
Unsurprisingly, the performance of the member countries’ national economies is closely linked
to the fortunes of the domestic oil and gas sector. Investment in oil and gas determines the
potential for the sector to provide either leverage financial resources for economy-wide
development or diverse it through reinvesting. Judged by a number of measures, OPEC member
countries have made varying degrees of economic and social progress over the past 30 years.
Perhaps less debatable and doubtful is the idea that it is now time to review the existing sources
of development finance and the modalities for it in OPEC member countries.

As we have already mentioned OPEC member countries is divided in to two minor and major
countries. Scholars made this diversification according to the hydrocarbons reserve and number
of population. Most minor OPEC countries are those that have large populations and smaller oil
reserves (such as Algeria, Indonesia and Nigeria). Major OPEC countries are those countries that
have larger hydrocarbons reserves and smaller population.

We assume that for describing economic influence of OPEC on the member countries growth,
we should narrow down my observation to one country. However, Indonesia nowadays is a
former member it would be appropriate example to demonstrate economic influence of OPEC
even on minor country. While Indonesia was member of OPEC, since 1962, it has a relatively
diverse its economy by reinvesting, as it was already mentioned, from the oil industry toward
other sectors. Despite the fact that, Indonesia was not well develop country, even within the
OPEC countries, with a large external debt. Indonesia was able to divers it economy from oil
based economy to manufacture. As evidence we can observe that in 2005 Indonesia became a net
oil importer for the first time in decades (EIA, 2004) – this had implications for its membership
of OPEC.

Therefore, nowadays Indonesia is not heavily dependents on oil export. That diversification was
done with help of the reinvesting the income from the revenues obtained by Indonesia within
OPEC (table 2). According the data from World Bank for 2005, the services sector in Indonesia
is the largest sector of economy, nowadays, and accounts for 45.3% of GDP (2005).

This is followed by industry (40.7%) and agriculture (14.0%). However, agriculture employs
more people than other sectors, accounting for 44.3% of the 95 million-strong workforce. The
service sector of economy is followed by the services sector (36.9%) and industry (18.8%).
Major industries include petroleum and natural gas, textiles, apparel, and mining however, the
share of petroleum industry in Indonesian GDP has decreased over last years. (Indonesia in a
Glance 2006).

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The UAE, Saudi Arabia are another examples of OPEC major countries that have larger oil
reserve and smaller population and that countries slightly diversify their economy, moving
increasingly towards services (tourism, banking, re-exports, and information technology) (EIA,
2009). Kuwait and the UAE are the only two Gulf States, which are relatively independent from
oil prices because of the structure of their finances and economy; the other Gulf States will
continue to need higher oil prices to fund their increased levels of expenditure (Barnett J. 2008
citied from Kohl, 2002).

Additionally, as it mentioned in the human development report by UNDP (2003) Saudi Arabia is
the world’s largest crude oil producer, a leader in OPEC’s production quota decisions and
certainly the most active member of OPEC. However, Saudi Arabia has diverse its economy oil
dependence continues to dominate the in Saudi economy (appendix Table 1). Income in Saudi
Arabia remains low from non-oil sources. (Inter-American Development Bank Office of the
Chief Economist Working Paper 312) As a result, the government’s budget is highly vulnerable
to oil price volatility. Improving OPEC member countries’ economies is absolutely essential for
OPEC, since it is one of the aims of organisation. Thus, it is significant for the organisation to
continue and increase investment in their member countries’ economy in the coming years. Oil
export revenues dominate the economies of these countries. Although this revenue will continue
to increase in the future, there is a point where oil will run out, and all the money that is
generated by oil will disappear with it. That is why these investments need to be implemented
immediately. Investments made into oil and gas projects that stretch beyond maintenance and
production expansion would significantly benefit these natural resource heavy economies. Of
equal importance is investment in social capital; education, transportation, telecommunications,
healthcare, etc and the investments toward economic diversification. If these investments are
made while oil revenues are steadily increasing, OPEC member countries will benefit socially
and economically in the future.

35
Nonetheless, as it is emphasized in the statue OPEC, as an international organisation has proved
to have a very strong economic character. It has shown this by targeting the development of its
member states as a goal to achieving the highest GDP growth possible.

36
OPEC’s Benefits to the Member Countries:

OPEC members benefits from it in several ways. Mainly they could be divided in to two as
follow: economical that we have already seen in previous part; and political. In this part of my
paper, We are going to look at other than economic benefits of being OPEC member.
Additionally, we would like to examine whether OPEC member countries make large benefit by
exporting oil within OPEC despite the existing quotas on oil producing for the member
countries.

Among all international trade organisations, OPEC has proved to be a good example of an
alternative international political economy with an undisputed amount of bargaining power and
one of the few powerful organisations not controlled by the West (Farhan Al-Farhan 2003). This
gathering brings great benefits in both economic and political sense for oil exporting countries.

One of the benefits for the member countries can be identified regarding to the primary purpose
of OPEC, which is to secure its member countries’ fair shares of the value of their oil resources,
for the purpose of accelerating economic development and improving the welfare of people of
the member countries (Iz Osayimwese 1999). Another non-economic benefit for the members of
the organisation, is that OPEC protects its member countries interest, within the oil market and
the global arena. (BB Alizadeh MEES 9 febrary, 7 December 2009) Also the fact the
organization provide and willing to increase its development assistance to the minor member
countries is another advantage; since this will lead to diver’s economy, reduce external debts
create new work places, reduce poverty and malnutrition. Despite those benefits, it is also
important for the member countries that the organization provides opportunity to influence on
Western countries as most of them depends on the OPEC oil, as well as paying key role in the
global oil market/ industry. This also includes the murky international politics synonymous with
the oil industry. As we know OPEC emerge in time when the cold war has just end, and
international attention was focused on the tense situation between the Eastern Block and the
Western powers. AL-Otaiba’s (former Minister of Petroleum and Mineral Resources of the
United Arab Emirates under the Presidency of H.H Sheikh Zayed bin Sultan al Nahayn)
argument that he provides can be interpreted as OPEC countries had the opportunity to be
considered as a serious power within the new international system and should use that rationally
in order to achieve their own countries goals. The classical definition of power is “… the ability
to get people to do what you want them to do” (Krasner p.3). The power of OPEC can be viewed
in relation to the rational aspect and absolute role when it used the right strategies and policies to
achieve its member countries’ goals. Another way that the union is beneficial for the member
countries is that the countries which located in the East are secure in terms of wars and other
conflicts (OPEC working paper 2003) but I have doubt on this statement (the two Iraq wars). The
benefit from OPEC to non-OPEC counties is that OPEC focuses its activities on ensuring order
and stability in the international oil market with reasonable prices.

37
The declaration reiterated that OPEC would go ahead in its efforts to accelerate economic
development in the developing countries through its aid programs; The International OPEC
Development Fund and the International Fund for Agricultural Development. It is urged the
industrial countries to contribute positively to these efforts and to work towards the reduction of
debts of the developing countries. Regarding to the more real benefits gained directly from oil
export, OPEC in its long term strategy, has emphasized that …unstable prices cause difficulties
in the interpretation of signals sent by market. It makes no difference whether such signals are
indicative of the market’s structural change or is resulting from a temporary phenomenon.
Therefore, it is difficult to support long-term market stability only by one supplier, if prices
remain unstable. (OPEC long-term strategy:4)

Thus, we think it can be argued that being OPEC member is beneficial as the member countries
by establishing and joining to OPEC make themselves free from dealing with this kind of issues
furthermore get larger economical benefits by playing together. Besides, OPEC in its long term
strategy, has also stipulated ……when the market is tight, very high prices may influence
economic growth, especially in developing countries, threatening future demand growth for oil.
Meanwhile, very low prices could also limit the trend of economic development and social
welfare of OPEC member countries…Thus, avoidance of a market faced with excess of supply or
shortage of supply is necessary. The presence of more members in OPEC would increase the
organization’s ability to stabilize the market. (OPEC long-term strategy:7)

As it was already mentioned, OPEC countries manly drive their main revenues to the GDP from
oil export (OPEC annual reports 2000-2009). We think it is obvious that the OPEC provide
economic growth to the member countries thought the revenues from oil trade. Thus, it is
significant to underline role of OPEC in oil market and pricing. Moreover, understand how the
member countries are making large benefit from oil export despite the existing quotas on oil
production settled by OPEC.

The aim of OPEC is to provide stabile prices on oil for the member countries by controlling the
prices through quotas. OPEC provides equilibrium and sustainability between such market
phenomena as consumers demand on crude oil and supply of the producers, by using the tool of
quotas on oil producing. OPEC implement the main rule of market is that is, when the there is
larger supply of goods and services the prices go down and when there is larger demand the
prices go up, within its member countries by using the quotas. That helps it to control the prices
on oil. As, the member countries of OPEC are the larger producers of oil, its decisions regarding
the quotas, directly affect on the world prices on oil.

38
Thus, it can be argued that the quotas are providing to the OPEC countries opportunity to make
larger benefits. Despite the fact that it is commonly argued, that the quotas are the barriers for the
member countries to make larger benefit. It is obvious that the quotas are the main tool that let to
maintain preferable by the suppliers, OPEC countries, prices on oil in the market and keep the
prices beneficial for both consumers and suppliers. Furthermore, according to the OPEC statue
following to the quotas in oil production volume is not mandatory.

39
OPEC as a Promoter of Sustainable Development:
Here we are going to see the OPEC’s activity toward promoting sustainable development for the
member countries, as well as for other developing countries. OPECs aid organisations were
noted as good examples to the developing countries in the early 1970s. OPEC member states,
acting in partnership, decided in the 1970s to join forces to achieve greater effectiveness and
relevance in the field of development assistance delivery. The aim from the idea was to have
greater impact and to better manage official aid resources, which were increasing in both volume
and significance.

In 1975, OPEC also called industrialized developing countries to come together to solve the
problems poor countries are facing and to look for ways of establishing a better economic system
by allowing increased trade and exchange of knowledge (OPEC review vol. 3.2 1979). OPEC
established the OPEC Fund for International Development (OFID) in January 1976 (originally
called the ‘OPEC Special Fund’) to promote cooperation between OPEC Member Countries and
other developing states. In particular, OFID aims to help poorer, low-income non-OPEC 15
countries in their pursuit of social and economic advancement. OFID is active in many regions,
including Africa, Asia, Europe and Latin America.

It has supported a wide range of projects, from providing clean water and energy to remote
communities, to building schools, hospitals and roads and developing industries, farming and
trade opportunities. Since its establishment, it has made commitments totaling nearly US $10.1
billion, two-thirds of which have already been disbursed. The Third Summit of OPEC Heads of
State and Government in 2007 reaffirmed OPEC’s commitment to energy for sustainable
development. The concluding Riyadh Declaration stated that energy was essential for poverty
eradication, sustainable development and the achievement of the Millennium Development
Goals (OPEC annual report 2007). It associated Member Countries with all global efforts aimed
at bridging the development gap and making energy accessible to the world’s poor.

Over the last three decades, some experts have highlighted the vital importance that OPEC has
played in the socio-economic development and the huge growth of the member states. OPEC
participates in development financing at two levels. First, individual member countries finance
domestic capital investment from a combination of domestic savings and external borrowing and
aid. Second, as a group, OPEC countries provide concessional finance for development projects
in non-OPEC developing countries (Note1). OPEC’s development assistance is provided through
the OPEC Fund for International Development, established in 1976 as a multilateral agency with
a mandate that combines some elements of the activities of both the World Bank and the IMF.

40
The financing of oil and gas projects is a paradigm for development financing in the member
countries’ economies. OPEC countries are still far from achieving the goal of transforming their
enormous hydrocarbon wealth into human and physical capital for sustainable economic
development. To achieve their goal, member countries need to invest massively in oil and gas
projects, beyond just maintaining and expanding production capacity. Practically all members
countries are financially strained. All of them face, in varying degrees, undue geopolitical risks
that limit their access to external financial resources, under the existing international financial
infrastructure. Moreover, all OPEC countries have experienced the “Dutch disease” at some time
in the past, and one member country suffers an extreme form of the disease (Note 2).This being a
“regional” epidemic, the Dutch disease deserves appropriate response from the custodians of
international financial health.

Since 1971 OPEC member states, acting individually and concerned by the difficult economic
circumstances of neighboring countries, had provided assistance to their neighbors (Ibrahim F.I.
Shihata 1982 p 47-59). At the multilateral level, the objective has been to cooperate and
coordinate to make the total aid effort more effective. OPEC has successfully managed, over the
years, to establish a set of international aid bodies. These are:

The Arab Authority for Agricultural Investment and Development (AAAID) is an investment
organisation consisting of 15 Arab states aimed at improving food security in Arab countries. Its
objective is to develop agricultural resources in the member states by investing in all forms of
agricultural production and related activities. Particular areas of involvement include: land
reclamation; plant, animal and fish production; pastures and forestry creation; the transportation,
storage, marketing, processing and exporting of agricultural produce; and, all inputs necessary
for agricultural production.

Arab Gulf Program for United Nations Development Organizations (AGFund) Seven Arab Gulf
countries (Bahrain, Iraq, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates)
contribute to the resources of the AGFund, an organisation that provides grant assistance to UN
agencies and Arab NGOs in support of humanitarian projects. The type of projects supported by
the AGFund is in the fields of health, nutrition, water and sanitation, education, the disabled and
the environment. The main beneficiaries of this fund are mothers and children.

Arab Monetary Fund (AMF) was established by Arab countries with the objectives of laying the
monetary foundations of Arab economic integration, accelerating the process of economic
development in all Arab nations, and promoting trade amongst them. The main activity of the
AMF is the provision of loans in support of economic adjustment programs.

41
Arab Fund for Economic and Social Development (Arab Fund) finances projects for economic
and social development in Arab countries. With a membership comprising all 22 members of the
League of Arab States, it extends concessional loans to governments as well as to public and
private organisations. Preference is given to projects that are of vital importance to the Arab
world and to joint ventures involving Arab cooperation Arab Trade Financing Program (ATFP)
is a specialised financial institution launched by the Arab Monetary Fund in 1989. Its objective is
to develop and promote trade between Arab countries and enhance the competitive ability of
Arab exporters. The ATFP functions as an autonomous body and operates through designated
national agencies.

Arab Bank for Economic Development in Africa (BADEA) seeks to promote economic, financial,
and technical cooperation between African and Arab countries. Funded by Arab governments, it
finances economic development in African countries, stimulates the contribution of Arab capital
to African development, and provides technical assistance.

42
Islamic Development Bank (IsDB) is to foster economic development and social progress in
member countries and in Muslim communities in accordance with the principles of Islamic
Shariah. Its membership consists of 52 countries, which are also members of the Organization of
the Islamic Conference. IsDB has the authority to extend financing and raise funds in many ways
and to establish special funds for specific purposes.

Providing assistance to these countries to diversify their economy, technology transfer, and
capacity building can be cited as being among these commitments from the figure bellow we can
see how the founds are divided between the sectors. That the main share, are transportation,
energy, agriculture and agro – industry education, water supply, and other. In providing
assistance it agricultural and agro – industrial sectors OPEC cooperate with IFAD, together they
provide assistance mainly to the southern African and eastern countries.

OPEC’s efforts to establish cooperation with the World Trade Organization (WTO) is yet
another example that can be mentioned in this regard. Based on OPEC’s long term strategy,
implementing an active role by OPEC in commerce has great significance, especially as far as
developing countries are concerned. OPEC member countries continue to consolidate and
promote economic growth and social development using the relative advantage resulting from
their natural resources. The collective interests of member countries lie in pursuing such policies.
Thus, any other country becoming an OPEC member can also benefit from the outcomes and the
effects of the organization’s policies.

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Chapter: 5 OPEC & its influence

44
OPEC and history of oil prices:
The volatility of oil prices has been a major topic amongst researchers in the global oil market
since the first oil shock in 1973. Prior to the founding of OPEC, Standard Oil 3, Texas Railroad
Commission4 and the Seven Sisters5 in that order, have impacted significantly on supply oil
prices since 1861. In Fig 1.1 below, it can be seen that following the shark spikes in oil prices
between 1861 and 1878, real oil price stayed relatively stable from that period which was largely
controlled by the seven sisters till the shocks that characterized the 1970s and 1980s.

Since the founding of OPEC, besides the six day war in 1967 when 2.0mb/d of oil supply was
lost, the global economy did not witness any significant shocks in the price of crude oil till 1973
when an embargo was placed on Netherland and the United States by OPEC for supporting Israel
in the Yom Kippur war. According to the BP Statistical Review of World Energy 20106, real oil
prices went up from $15.89 in 1973 to $50.41 in 1974 which in nominal terms, represents a
400% increase. This was seen as the first attempt by OPEC to control the price of oil by reducing
supply and as a result, panic buying, inventory demand and speculation further contributed in
driving up spot prices beyond competitive levels. It is also important to note that between 1965
and 1973, world oil demand grew on average at 7.7% annually (Stephens 1995), which coincided
which caused real oil prices to double from $46.13 in 1978 to $93.41 in 1979 while also leading
to a 5.6 mb/d loss in oil supply. The revolution and the invasion of Iran by Iraq had led to a
cumulative loss of 9.7mb/d by 1981. This period represents the first attempt by OPEC to
officially influence world oil markets. OPEC decided to set price differentials for every OPEC
crude relative to the official Saudi Marker crude price to enable it share the burden amongst
member countries in the event of a crash in prices. However, as many researchers have

45
discovered, OPEC’s inability to get its member countries to cooperate and agree on a quota and
price level led to the collapse of the agreement in 19818.

Between 1982 and 1986, oil prices reduced sharply due to a global decrease in oil demand and
the increase in oil production from Non-OPEC countries. OPEC lost its market share, and they
introduced a new system of controlling production known as the loose quota system (Alhajji,
2004) with Saudi Arabia given the swing producer role9. This model was however violated by
several OPEC members who cheated on their quota leading to a reduction in Saudi Arabia’s
output7 to about 2mb/d. OPEC also dropped the Arabian Light as the official crude price to
favour the netback pricing mechanism, a decision that further led to the crash of nominal oil
prices to $14.92. Netback pricing was again abandoned by OPEC by 1988 in favor of a pricing
formula that linked OPEC crude prices to market prices.

Besides the invasion of Kuwait by Iraq in the gulf war which led to a loss of output to the tune of
4.3mb/d from 1990 to 1991, nominal oil prices averaged between $17 and $18 from 1988 to
1997 before it crashed again in 1998 as shown in Fig 1.2 above due to a demand shock which
was characterized majorly by the Asian financial crisis and rapid increase in non-OPEC supply.

46
The events of the oil price crash in 1998 from $19.09 to $12.72 in nominal terms, led OPEC and
non-OPEC oil producers to reduce output by 2.104mb/d. As expected, this led to a price increase
the following year to $17.97 and OPEC sought to control the rapid increase by raising output. In
the summer of year 2000, OPEC introduced the witnessed the price band11 system to check the
volatility of oil prices, a mechanism that was later suspended in 2005 due to its perceived failure
by members of the organization. In recent times, the 2001 attacks on the United States, the Iraq
invasion by United States the economic recession that followed and the resulting price hike in
2008 have impacted strongly on world economies and behaviour of OPEC.

Assessment of OPEC in managing oil prices:

According to economics literature, market power exists when a group of producers collude to
maximize profit by reducing output while charging high prices. The behaviour of OPEC as a
wealth maximizing cartel is an example of an imperfect market condition where some degree of
market power is exercised by producers with a reasonable degree of market share. Although the
market share of OPEC is still below 40%, its influence on oil prices over the years is significant.
More so, the marginal cost of producing oil in the core OPEC regions is relatively low and as a
result of its position as a key oil supplier, the elasticity of demand for OPEC’s oil is relatively
low in the short run.

In controlling the price of oil, OPEC needs to stay consistent and totally cooperative in its
policies (Horn 2004), this has however not been the case as literature and data have shown that
OPEC have struggled to get its members to commit13 to a output policy agreements without
cheating on their respective quotas. Dibooglu and AlGudhea (2007) concluded in their
assessment of cheating within OPEC that members have reacted in response to rising oil prices
than falling prices and they occasionally have to be cautioned by Saudi Arabia when cheating
starts reducing its market share. More so, the divided interests14 amongst OPEC members have
led to a series of fluctuations and inconsistency in its behaviour and they have been mostly been
reactive rather than proactive in assessing the oil market conditions in the past. Its failure to
predict the oil price crash in 1986, 1998 and 2009 is a point of note and also, the instability of its
pricing mechanisms due to politics and cheating cast a doubt on OPEC’s reliability to manage oil
price.

Setting the target range for oil price:

In providing guidance on how to set a target range oil prices, it is important to note that even
though one of the aims of OPEC besides stabilizing the price of oil is to make high revenue from
high oil price, OPEC is more concerned about the impact of a global demand shock and fall in
demand for OPEC crude which leads to low prices, on its economies. Santis (2003) concluded
that Saudi Arabia as a dominant firm does not have any incentive to alter oil prices due to

47
welfare concerns, this also can be further explained by the impact of the past oil price crash on
state budgets and fiscal stability. It is however critical to take cautious approach in setting a
target range for oil price due to the mistakes made in the past.

Managing spare capacity:

The ability of OPEC to manage its spare capacity is important when considering setting a target
range for its oil price. Adequate spare capacity will enable OPEC to stabilize the market by
increasing supply in the event of disruptions caused by low demand for OPEC oil due to an
increase in exploration and production outside OPEC and the subsequent increase in non- OPEC
supply. If this happens, oil prices will crash its effect on the economies of OPEC countries is
always negative as earlier explained. When there is low capacity, OPEC appears lose control in
the oil market any longer as the market will lose confidence in OPEC’s ability to stabilize the
market in the event of supply disruptions. This will however lead to stock piling which will lead
to a crash in oil prices. Most OPEC countries (besides Saudi Arabia who had excess capacity to
the tune of 1.95mb/d in 2000) do not have adequate space capacity to respond to increase in
demand which makes them gain little during output increases (Kolh, 2002). Although expanding
capacity is a long term project due to high cost and technical expertise, it is critical to the long
term relevance of the OPEC group in the oil market.

Consumption patterns of oil consuming countries:

The consumption patterns of major oil consuming countries in the OECD and Non-OECD
countries need to be considered. According to the EIA, the United States (US), being the world’s
largest oil consumer, consumed 18,771,000 barrels/day and 5,954,000 barrels/day (31%) was
imported from OPEC in 2009. It is reasonable to suggest that a fall in the demand for OPEC
crude by the US could have a significant impact on oil prices if not well managed. The EIA also

48
projects that the increase in U.S. crude oil production in the Gulf of Mexico and elsewhere,
combined with increasing bio fuel and coal-to-liquids (CTL) production and decreasing
petroleum-derived fuel demand, is expected to reduce the need for imports in the long run. U.S.
petroleum import dependence falls from 51% in 2009 to 45% by 2035 in EIA's reference case
projection. With this in mind, setting the price of oil close or equal to marginal cost is crucial for
the future demand of OPEC’s crude oil.

According to the BP Statistical Review of World Energy 2010, as OPEC production fell by 2.5
million b/d, production outside OPEC rose by 450,000b/d, due to an increase of 460,000b/d in
the United States. The rapid industrialization on China and India caused disruptions in the oil
market in 2008 as lack of spare capacity was inadequate to meet the rising demand. And as we
have seen so far, the resulting effort by OPEC to get oil prices to recover has always led to them
over supply the market in most cases to send prices crashing again. Calls by China and India on
OPEC to reduce oil price recently due to its damaging effect on their economies is a reference
point, if this is not examined, conservation, fuel switching and increase in oil exploration by
these oil consuming industrialized economies could also have a negative impact on oil prices.

Better information management:

As explained earlier, the price band mechanism failed due to the power it gave to market
speculators to increase oil stock which is inversely related to oil price (IEA Monthly Oil Market
Report, 2000). The more recent method of sending signals to the market though speeches and
press releases is a better way of managing information and staying unpredictable. More so, as
OPEC got more used to operating as a cartel, it realized that regular meetings and monitoring of
market dynamics is better for its management of spare capacity which is important for the
sustainability of its market share.

Stringent measures to prevent cheating:

Saudi Arabia as the dominant oil supplier in OPEC is known to suffer the most when there is a
collapse in oil prices. This has led it to react strongly when cheating by member countries on
their quotas lead to a fall in oil prices which reduces the market share and revenue of the oil
dependent country. More disciplined approaches to compliance on the quota system needs to be
enforced to enable any price agreements by OPEC achieve its objective.

Influence of OPEC on price:

OPEC's influence on the market has been widely criticized, since it became effective in
determining production and prices. Arab members of OPEC alarmed the developed world when
they used the “oil weapon” during the Yom Kippur War by implementing oil embargoes and
initiating the 1973 oil crisis. Although largely political explanations for the timing and extent of

49
the OPEC price increases are also valid, from OPEC’s point of view, these changes were
triggered largely by previous unilateral changes in the world financial system and the ensuing
period of high inflation in both the developed and developing world. This explanation
encompasses OPEC actions both before and after the outbreak of hostilities in October 1973, and
concludes that “OPEC countries were only 'staying even' by dramatically raising the dollar price
of oil.”

Oil Economics:

OPEC is a swing producer and its decisions have had considerable influence on international oil
prices. For example, in the 1973 energy crisis OPEC refused to ship oil to western countries that
had supported Israel in the Yom Kippur War or 6 Day War, which Israel had fought against
Egypt and Syria. This refusal caused a fourfold increase in the price of oil, which lasted five
months, starting on October 17, 1973, and ending on March 18, 1974. OPEC nations then
agreed, on January 7, 1975, to raise crude oil prices by 10%. At that time, OPEC nations,
including many whom had recently nationalized their oil industries, joined the call for a new
international economic order to be initiated by coalitions of primary producers. Concluding the
First OPEC Summit in Algiers they called for stable and just commodity prices, an international
food and agriculture program, technology transfer from North to South, and the democratization
of the economic system. Overall, the evidence suggests that OPEC did act as a cartel, when it
adopted output rationing in order to maintain price.

Since currently worldwide oil sales are denominated in U.S. dollars, changes in the value of the
dollar against other world currencies affect OPEC's decisions on how much oil to produce. For
example, when the dollar falls relative to the other currencies, OPEC-member states receive
smaller revenues in other currencies for their oil, causing substantial cuts in their purchasing
power. After the introduction of the Euro, pre-invasion Iraq decided it wanted to be paid for its
oil in Euros instead of US dollars causing OPEC to consider changing its oil exchange currency
8 OPEC & its influence on Price of Oil to Euros, although after Iraq's invasion, the interim
government reversed this policy, and the subsequent Iraq governments stuck to the US dollar.
Member states Iran and Venezuela have undergone similar shifts from the dollar to the Euro.

OPEC Basket:

OPEC basket is a weighted average of oil prices collected from various oil producing countries.
This average is determined according to the production and exports of each country and is used
as a reference point by OPEC to monitor worldwide oil market conditions. The new OPEC
Reference Basket (ORB) Introduced on 16 June 2005, is currently made up of the following:
Saharan Blend (Algeria), Girassol (Angola), Oriente (Ecuador), Iran Heavy (Islamic Republic of
Iran), Basra Light (Iraq), Kuwait Export (Kuwait), Es Sider (Libya), Bonny Light (Nigeria),

50
Qatar Marine (Qatar), Arab Light (Saudi Arabia), Murban (UAE) and Merey (Venezuela). OPEC
daily basket price stood at $93.96 a barrel on Thursday 13th January 2011

Production Allocation:

OPEC allocates quotas to its member countries every few months. The most popular view is that
these nations agree to increase global demand by restrict its production but as stated earlier Saudi
Arabia takes a different stand. The recent allocation data has no distributions allocated from
November 2007

OPEC Reserves:

OPEC's ability to control the price of oil has diminished somewhat since the Gulf War due to the
subsequent discovery and development of large oil reserves in Alaska, the North Sea, Canada,
the Gulf of Mexico, the opening up of Russia, and market modernization. As of November 2010,
OPEC members collectively hold 79% of world crude oil reserves and 44% of the world’s crude
oil production, affording them considerable control over the global market. The next largest
group of producers, members of the OECD and the Post-Soviet states produced only 23.8% and
14.8%, respectively, of the world's total oil production. As early as 2003, concerns that OPEC
members had little excess pumping capacity sparked speculation that their influence on crude oil
prices would begin to slip. 9 OPEC & its influence on Price of Oil

Who gets What - by OPEC:

Although the popular view is that OPEC is responsible for all the volatility of crude oil prices
globally, the research division of OPEC contradicts this view by regularly analyzing and
publishing the “Who gets What from a litre of imported oil” of the G7 countries. The latest
report published in November 2010 states the following.

51
The crude basket price of OPEC may fluctuate widely but OPEC claims its percentage share of
cost per litre of oil has remained steady.

OPEC’s position in trading Spot & Oil Futures:

Most of the oil futures of different blends produced by OPEC traded at The Dubai Mercantile
Exchange. The DME is the premier energy-focused commodities exchange in the East of Suez.
The DME was launched in June 2007 with the goal of bringing fair and transparent price
discovery and efficient risk management to the East of Suez (Asia Pacific and Middle East), the
world’s fastest growing commodities market and already the largest crude oil supply/demand
corridor in the world. 10 OPEC & its influence on Price of Oil

The DME lists the Oman Crude Oil Futures Contract (DME Oman) as its flagship contract,
providing the most fair and transparent crude oil benchmark in the East of Suez. Today, DME
Oman is the explicit and sole benchmark for Oman and Dubai crude oil Official Selling Prices –
the historically established markers for Middle East crude oil exports to Asia. The DME is
regulated by the Dubai Financial Services Authority (DFSA) and all trades executed on the
exchange are cleared through and guaranteed by the New York Mercantile Exchange (NYMEX),
a member of the CME Group, which is regulated by the U.S. Commodity Futures Trading
Commission (CFTC) and is a Recognized Body by the DFSA. The DME is recognized by over
20 international regulatory bodies across Europe and Asia, further cementing its position as truly
global and well-regulated marketplace. Another fact that significantly strengthens the OPEC’s
position is the fact that among the entire world’s oil producing countries only OPEC nations
have a significant spare oil production capacity. They can expand oil production when demand
increases. OPEC member countries respond to market fundamentals and forecast developments
by co-coordinating their petroleum policies. If demand grows or some producers are producing
less oil, OPEC can increase its oil production in order to prevent a sudden rise in prices. It can
also reduce production in response to market conditions. But increasing oil production is not a
simple procedure. In order to expand their output the member countries need to be sure that the
oil industry will continue to be profitable. Oil producers invest billions of dollars in explorations
and infrastructures. A new field can take 3 to 10 years to locate and develop. Sometimes when it
is not used or used less than capacity for a long period, the plant may suffer irreparable damage.
It is also difficult and a colossal loss if a plant in the middle of the ocean has to be shut due to
lack of demand. If oil producers do not invest enough money and do it far enough in advance,
then the world could face a shortage of oil supplies in future.

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From the early 1970s to the mid 1980s, the OPEC did set crude oil prices. It is not so today. The
price of crude oil is affected by movements of three major international petroleum exchanges –
the New York Mercantile Exchange (NYMEX), the International Petroleum Exchange in
London (IPE) and the Singapore International Monetary Exchange (SIMEX). International
Energy Agency 11

OPEC & ITS INFLUENCE ON PRICE OF OIL:

(IEA) of Paris and US Energy Information Administration (EIA) are also important players. The
spot and future trading in these affect the oil prices. Even though today OPEC is not entirely
responsible for oil prices, OPEC member countries do voluntarily restrain their crude oil
production in order to stabilize the oil market. Sometimes it does so to maintain profits so as to
maintain the member countries’ economic growth. This may happen when these countries,
whose sole earning is from oil exports, suffer losses due to sluggish demand caused by
restrictions like taxes on oil import & consumption. Security of oil supplies relies on security of
oil demand. The year 2008-09 were the first time since 1981 when global oil demand declined in
two successive years due to global recession. Demand fell by 1.8 million barrels per day and the
price of a barrel of crude lost almost 100 $ in less than 6 months from mid 2008, resulting in
unused production capacity.

Impact of Kyoto protocol on OPEC:

Environmental concerns have forced mankind to diversify into alternate sources of energy. The
possible losses that OPEC countries may incur due to threat by these Non- Conventional sources
have triggered a debate on the green paradox (Sinn 2008). This paradox is based on the
assumption that suppliers of oil feel threatened by a decline of future prices due to gradual
reduction of oil consumption in abating countries. If this reduction reduces the discounted value
of the oil price in the future more than at present, the oil producing countries will expand
production in the short run which will increase oil consumption and thus accelerate global
warming. OPEC stated that its Nations are dependent on oil exports and hence need to be
compensated for the adverse impacts arising due to Kyoto Protocol.

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Impact of OPEC on India:

Although India partly subsidizes few products of the refined petroleum to check inflation it
extracts huge tax revenues from import of crude oil. The rate of change of market prices of
refined products largely remains unaltered compared to the fluctuations in the international
market largely due to regulated pricing 12 OPEC & its influence on Price of Oil mechanisms. As
a result India is suffering from vast fiscal deficits and is reflected in the recent outstanding
balance of payment to Iran Iran is India's second biggest crude oil supplier after Saudi Arabia,
accounting for about 13 per cent of its total crude oil imports. If the present issue of payment
with Iran remains unsolved it would potentially hit Indian imports of 400,000 barrels per day of
Iranian crude oil, forcing Asia's third-largest economy to look for more expensive alternatives
that would swell its already high current account deficit. After King Abdullah visited India in
2006, India has steadily moved its oil imports and made Saudi Arabia its largest oil source by
2010. Given a growing convergence with Saudi Arabia even on security issues, India is likely to
find that both the Saudis and the UAE would be more than willing to make up the loss of oil
imports from Iran.

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Chapter: 6 Competitors to OPEC

55
Top OPEC Competitors and How OPEC Controls Them:
A primary reason for OPEC’s formation was to end the dominance of the seven multinational oil
companies known as the “Seven Sisters.” The latter group controlled the oil prices
internationally in the post-World War Two era. Its unilateral decision to cut oil prices by 10% in
February 1959, and then again in August 1960, triggered the concept of the OPEC formation.

As per OPEC’s official site, its objective is “to coordinate and unify petroleum policies among
Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient,
economic and regular supply of petroleum to consuming nations; and a fair return on capital to
those investing in the industry.”

Initially, OPEC started as a representative of the developing world oil producing nations and
acted as a negotiating body to gain larger profit share from the seven sister companies. It soon
got its control of oil production from the member countries and became economically and
politically dominant in the global oil market.

History indicates that OPEC has managed to end the dominance of private oil companies and
emerged as the key driver of the oil market. However, there are allegations that it
is becoming the modern-day version of the earlier “Seven Sister” cartel and killing the
competition of its own freewill leading to a monopolistic oil regime.

Taking cues from historical events, this article looks at the OPEC competitors and how OPEC
deals with them to maintain its dominant position in the oil market.

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OPEC Competitors:
• Shale Oil and Shale Gas Producers: OPEC faces competition from shale oil and shale
gas drillers, primarily those based in the U.S. The relatively new fracking technology has
led to shale gas and shale oil discovery at multiple locations across the globe. These have
emerged as low cost, efficient substitutes for crude oil. With large reserves of shale oil
and gas being identified in the U.S., the nation moved towards becoming self-dependent
with a significant reduction in oil and gas imports.

Fracking also impacted OPEC’s exports to the U.S. as well as to the rest of the world. OPEC’s
current strategy to maintain the market share by increasing the oversupply is driving down oil
prices to record lows, even lower than the earlier benefits realized through discovery of shale oil
and gas. This strategy has limited the price advantage enjoyed by an abundance of shale oil, and
has proved successful to OPEC. Shale oil production has declined significantly in the last few
months.

The outcome of this current state of overproduction and price war is going in favor of OPEC.
Many U.S.-based shale oil drillers are on the verge of collapse, as most were being run on high
debt. The fracking technology which enables shale oil and shale gas extraction is a relatively new
technology and most of the shale drillers are operating as startups with heavy debt.

• Non-OPEC Crude Oil Producers: The list of the top 10 oil producing nations of the
world include the non-OPEC nations like Russia, the U.S., China, Canada and Mexico.
Despite having significant oil producing capacities, these non-OPEC nations still remain
non-influential in the oil market and in the price determination process. Their own
consumption levels are high enough making the majority of them a net oil importer.
OPEC still dominates the oil market compared to these top shots.

• OPEC Member Countries: Due to vested interests, there are occasional instances of
differences between the OPEC group members. Saudi Arabia continues to dominate the
group with significant influence on decision making, while other smaller nations having
lesser bargaining power end up biting the bullet. Instances include the recent ongoing
situation with Saudi Arabia continuing the oversupply of oil and pushing down the oil
prices, while other OPEC countries like Algeria and Venezuela face economic challenges
due to less income from oil exports. Disagreements among member nations, geopolitical
developments, and dominance by a select few members often leads to differences,
including member nations like Ecuador and Indonesia joining, leaving, and rejoining the
group.

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• New Regions: Despite recent developments expected in the newly explored Caspian Sea
and offshore West African Regions, OPEC remains dominated by Middle East member
nations. However, any significant oil discovery away from the Middle Eastern region will
be a challenge to OPEC dominance. The expected discovery estimated to be in the range
of 15 – 40 billion barrels in the Caspian region can shift the balance in the oil market to
some extent.

• Oil Companies: OPEC, being a group of nations, often faces competition from other
large-sized multinational companies. These companies include state run Petrobras from
Brazil, Pemex from Mexico, and Gazprom from Russia. However, almost all of these
companies are in huge debt, and their operations and supply sources are spread across the
OPEC countries. OPEC maintains the upper hand in dealing with them, leaving little
room for competition.

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Historical Instances of OPEC Dominance:

OPEC has managed a steady fist over the global oil market since becoming influential in the
1970s. Here are a few examples:

• 1973 – 74 Oil Embargo: The U.S. and European nations supported Israel in the 1973
Arab-Israeli war, which led OPEC to impose an oil embargo from October 1973 to
March 1974. It leads to oil prices quadrupling from $3 to $12 per barrel. The entire
world, including the U.S., took the pain until the peaceful end to the conflict was put in
place.
• 1979 – 1980 Oil Crisis: After Saudi Arabia, Iran and Iraq are the other two largest
members of OPEC. The 1979 Iranian Revolution, and the 1980 Iran-Iraq war led to
disruptions in oil supplies. While consumers switched to alternative sources like coal and
nuclear power, there were major initiatives in non-OPEC regions for oil exploration
which led to a decline in OPEC dominance. By 1986, OPEC market share declined from
around 50% to less than 30%, while non-OPEC oil production rose around 15%.

Saudi Arabia, the largest among the OPEC group, requested other OPEC member countries to
cut off production, but none complied. To prevent a further decline in market share, Saudi Arabia
cut down its own production to one-third, with an aim to create oil scarcity. As this strategy
didn’t work, it soon reversed it and started producing crude oil in excess. This oversupply led to
low oil prices, making the competitors (and the OPEC member countries) cut back production,
thereby leading to a regaining of market share by OPEC.

• Other Events: The 1990 Iraqi invasion of Kuwait, the 9/11 attack in 2001 in New York,
and the 2003 invasion of Iraq by the allied forces had a very short-term impact on oil
prices. OPEC maintained its dominant position and ensure the smooth oil supply to the
world, despite these events having large-scale impacts on the global economy.

The Bottom Line:

Since its inception, OPEC has experienced challenges on the technology front (like fracking),
due to the discovery of oil in new non-OPEC regions, and on the geopolitical front (war events).
The group, led by Saudi Arabia which is the largest oil producer among the OPEC nations, has
the capacity and financial reserves to keep pumping billions of barrels of oil and keep oil prices
in control. Though finding of new oil reserves by competing companies or nations may tilt the
balance in the distant future, it’s OPEC who calls the shots at the moment.

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Petroleum Technologies Timeline:

When retired railroad conductor Edwin Drake struck oil in 1859 in Titusville, Pennsylvania, he
touched off the modern oil industry. For the next 40 years the primary interest in oil was as a
source of kerosene, used for lighting lamps. Then came the automobile and the realization that
the internal combustion engine ran best on gasoline, a byproduct of the process of extracting
kerosene from crude oil. As the demand grew for gasoline to power not only cars but also
internal combustion engines of all kinds, chemical engineers honing their refining techniques
discovered a host of useful byproducts of crude—and the petrochemical industry was born. Oil
had truly become black gold.

1901 North America’s first oil gusher

North America’s first oil gusher blows at the Spindletop field near Beaumont
in southeastern Texas, spraying more than 800,000 barrels of crude into the
air before it can be brought under control. The strike boosts the yearly oil
output in the United States from 2,000 barrels in 1859 to more than 65
million barrels by 1901.

1913 High-pressure hydrogenation process developed

German organic chemist Friedrich Bergius develops a high-pressure

hydrogenation process that transforms heavy oil and oil residues into lighter
oils, boosting gasoline production. In 1926 IG Farben Industries, where Carl
Bosch had been developing similar high-pressure processes, acquires the
patent rights to the Bergius process. Bergius and Bosch share a Nobel Prize
in 1931.

1913 New method of oil refining

Chemical engineers William Burton and Robert Humphreys of Standard Oil

patent a method of oil refining that significantly increases gasoline yields.
Known as thermal cracking, the chemists discover that by applying both heat
and pressure during distillation, heavier petroleum molecules can be broken
down, or cracked, into gasoline’s lighter molecules. The discovery is a boon
to the new auto industry, whose fuel of choice is gasoline.

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1920s Fischer-Tropsch method

By using fractional distillation, two German coal researchers create synthetic

gasoline. Known as the Fischer-Tropsch method, the gasoline is produced by
combining either coke and steam or crushed coal and heavy oil, then
exposing the mixture to a catalyst to form synthetic gasoline. The process
plays a critical role in helping to meet the increasing demand for gasoline as
automobiles come into widespread use and later for easing gasoline shortages
during World War II.

1920s- Nylon, acrylics, and polyester are developed

1940s
An assortment of new compounds derived from byproducts of the oil-refining
process enter the market. Three of the most promising new materials—
synthesized from the hydrocarbon ethylene—are polystyrene, a brittle plastic
known also as styrofoam; polyvinyl chloride, used in plumbing fixtures and
weather-resistant home siding; and polyethylene, which is flexible
inexpensive, and widely used in packaging. New synthetic fibers and resins
are also introduced, including nylon, acrylics, and polyester, and are used to
make everything from clothing and sports gear to industrial equipment,
parachutes, and plexiglass.

1920s- New compounds derived oil-refining byproducts enter market

1940s
An assortment of new compounds derived from byproducts of the oil-refining
process enter the market. Three of the most promising new materials—
synthesized from the hydrocarbon ethylene—are polystyrene, a brittle plastic
known also as styrofoam; polyvinyl chloride, used in plumbing fixtures and
weather-resistant home siding; and polyethylene, which is flexible,
inexpensive, and widely used in packaging. New synthetic fibers and resins
are also introduced, including nylon, acrylics, and polyester, and are used to
make everything from clothing and sports gear to industrial equipment,
parachutes, and plexiglass.

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1921 Lead added to gasoline

Charles Kettering of General Motors and his assistants, organic chemists

Thomas Midgley, Jr., and T. A. Boyd, discover that adding lead to gasoline
eliminates engine knock. Until the 1970s, when environmental concerns
forced its removal, tetraethyl lead was a standard ingredient in gasoline.

1928 Portable offshore drilling

By mounting a derrick and drilling outfit onto a submersible barge, Texas

oilman Louis Giliasso creates an efficient portable method of offshore
drilling. The transportable barge allows a rig to be erected in as little as a day,
which makes for easier exploration of the Texas and Louisiana coastal
wetlands. More permanent offshore piers and platforms had been
successfully operating since the late 1800s off the coast of California near
Santa Barbara, where oil seepage in the Pacific had been reported by Spanish
explorers as early as 1542.

1930s New process increases octane rating gasoline

U.S. refineries take advantage of a new process of alkalinization and fine-

powder fluid-bed production that increases the octane rating of aviation
gasoline to 100. This becomes important in the success of the Royal Air
Force and the U.S. Army Air Force in World War II.

1936 Catalytic cracking introduced

French scientist Eugene Houdry introduces catalytic cracking. By using silica

and alumina-based catalysts, he demonstrates not only that more gasoline can
be produced from oil without the use of high pressure but also that it has a
higher-octane rating and burns more efficiently.

1942 First catalytic cracking unit is put on-stream

The first catalytic cracking unit is put on-stream in Baton Rouge, Louisiana,
by Standard Oil, New Jersey.

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1947 Platforming invented

German-born American chemical engineer Vladimir Haensel invents

platforming, a process for producing cleaner-burning high-octane fuels using
a platinum catalyst to speed up certain chemical reactions. Platforming
eliminates the need to add lead to gasoline.

1947 First commercial oil well out of sight of land

A consortium of oil companies led by Kerr-McGee drills the world’s first

commercial oil well out of sight of land in the Gulf of Mexico, 10.5 miles
offshore and 45 miles south of Morgan City, Louisiana. Eleven oil fields are
mapped in the gulf by 1949, with 44 exploratory wells in operation.

1955 First jack-up oil-drilling rig

The first jack-up oil-drilling rig is designed for offshore exploration. The rig
features long legs that can be lowered into the seabed to a depth of 500 feet,
allowing the platform to be raised to various heights above the level of the
water.

1960s Synthetic oils

Synthetic oils are in development to meet the special lubricating requirements

of military jets. Mobil Oil and AMSOIL are leaders in this field; their
synthetics contain such additives as polyalphaolefins, derived from olefin,
one of the three primary petrochemical groups. Saturated with hydrogen,
olefin-carbon molecules provide excellent thermal stability. Following on the
success of synthetic oils in military applications, they are introduced into the
commercial market in the 1970s for use in automobiles.

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1970s Digital seismology

The introduction of digital seismology in oil exploration increases accuracy

in locating underground pools of oil. The technique of using seismic waves to
look for oil is based on determining the time interval between the sending of
a sound wave (generated by an explosion, an electric vibrator, or a falling
weight) and the arrival of reflected or refracted waves at one or more seismic
detectors. Analysis of differences in arrival times and amplitudes of the
waves tells seismologists what kinds of rock the waves have traveled
through.

1970s Mud pulse telemetry

Teleco, Inc., of Greenville, South Carolina, and the U.S. Department of

Energy introduce mud pulse telemetry, a system of relaying pressure pulses
through drilling mud to convey the location of the drill bit. Mud pulse
telemetry is now an oil industry standard, saving millions of dollars in time
and labor.

1980s ROVs developed for subsea oil work

Remotely operated vehicles (ROVs) are developed for subsea oil work.
Controlled from the surface, ROVs vary from beachball-size cameras to
truck-size maintenance robots.

1990s New tools and techniques to reduce the costs and risks of drilling

The combined efforts of private industry, the Department of Energy, and

national laboratories such as Argonne and Lawrence Livermore result in the
introduction of several new tools and techniques designed to reduce the costs
and risks of drilling, including reducing potential damage to the geological
formation and improving environmental protection. Among such tools are the
near-bit sensor, which gathers data from just behind the drill bit and transmits
it to the surface, and carbon dioxide/sand fracturing stimulation, a technique
that allows for non-damaging stimulation of a natural gas formation.

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2000 Hoover-Diana goes into operation

The Hoover-Diana, a 63,000-ton deep-draft caisson vessel, goes into operation in

the Gulf of Mexico. A joint venture by Exxon Mobil and BP, it is a production
platform mounted atop a floating cylindrical concrete tube anchored in 4,800 feet
of water. The entire structure is 83 stories high, with 90 percent of it below the
surface. Within half a year it is producing 20,000 barrels of oil and 220 million
cubic feet of gas a day. Two pipelines carry the oil and gas to shore.

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Challenges to OPEC:

OPEC was organized in the early 1960s by Saudi Arabia, Iran, Iraq, Kuwait and Venezuela with the
primary goal of unifying the five countries’ oil export policies — and hopefully dictating a high price for
their oil. The five countries certainly possessed that power when the cartel was initially formed, and while
the cartel still produces about 40 percent of the world’s oil, OPEC’s dominance has declined over the
years. Today, only Saudi Arabia and to a certain extent the United Arab Emirates, Qatar and Kuwait
retain the ability to voluntarily adjust production levels. OPEC’s other members — Libya, Algeria,
Nigeria, Ecuador and Angola — must maintain production to finance their national budgets. Effectively,
this means that OPEC wields nowhere near the power it once did. Even a producer of Saudi Arabia’s size
is barely able to change the price of oil through boosting or cutting production.

A new wave of oil production outside the cartel has already hit. Production in the United States has
increased to an estimated 8 million barrels per day — the highest level since the 1980s. Elsewhere,
production is set to take off in Canada and potentially Brazil. At the same time, increased production
outside OPEC is dwarfed by the ambitious expansion plans put forward by OPEC members Iraq and Iran.
While production outside the cartel is manageable, together with Iraq and Iran’s plans it could represent a
significant threat to oil prices in the latter half of the decade.

Iraq’s energy sector has been revitalized after the past five years and is now producing nearly 3.5 million
barrels per day. Its oil ministry has set several ambitious goals, including production hitting 9 million to
10 million barrels per day by 2020. Iran, too, sees prospects for boosted production on the horizon.
Complementing the negotiations with the United States on a possible long-term rapprochement, Iranian
President Hassan Rouhani has started a significant reform campaign hoping to bring oil production back
to the pre-sanction level of 4.2 million barrels per day within six months and increase it to the pre-
revolution level of 6 million barrels per day within 18 months. To be clear, both goals are not attainable
within their respective time frames, but significant increases are possible.

The amount of production that comes online in Iraq will largely depend on two factors. First, the political
system and violence will shape the pace of investment and regulatory procedures, such as issuing
contracts and permits. Second and more important, there are logistical limitations to bringing online that
level of production in such a short period of time. Some of these limitations can be overcome with proper
coordination between international oil companies, oil services providers, the Shia surrounding the Basra
region and the various political interest groups in Baghdad. Adroit cooperation between all of these
parties is unlikely, meaning Iraq will fall short of Baghdad’s lofty goals, but Iraq can reach about 5
million to 6 million barrels per day by 2020, and closer to 6 million to 6.5 million barrels per day within a
decade.

For Iran, the challenge is somewhat simpler, since its limitations are largely caused by external sanctions.
As seen in other countries, typically when oil production has been interrupted following regime change,
sanctions and other causes, production levels rarely reach the level achieved prior to the disruption.
However, should sanctions be removed, Iran could quickly revive about half of its offline production
within 12 to 18 months — about 500,000 to 750,000 barrels per day. In the longer term, there are some
reasons to believe that Iran could buck the trend and increase its production back to previously achieved

66
levels, and perhaps even increase it, but the time frame would be measured in years, not months. All of
this, of course, is subject to geopolitical events that could slow the process down or stop it entirely —
such as internal backlash in Iran and a slow timetable for negotiating with Washington. After bringing
shut-in production back online, Iran (like Iraq) is more likely to slowly increase its daily oil production by
about 250,000 to 300,000 barrels per year, pushing Rouhani’s goals to after 2020.

OPEC Going Forward

OPEC is facing short-term and long-term challenges. In the near term, rising production in the United
States and Canada has been unexpectedly quick — increasing by 1 million barrels per day in each of the
past two years. Although most of the U.S. increase has been offset by production taken offline due to
instability in Libya, added U.S. exports have already forced Saudi Arabia to reduce production levels at
times to maintain prices. U.S. production is set to grow by another 1 million barrels in 2014, potentially
straining OPEC’s preferential price points.

In the longer term, Iran and Iraq’s production is the key issue. Should Iran and Iraq together boost
production to a reasonably achievable level of 11 million barrels per day by 2020, that would represent an
increase of 5 million-6 million barrels per day above present levels. OPEC’s export quotas have already
been a source of tension among its members, but producers have always found ways to skirt around them.
That may no longer be possible. While Iran’s domestic consumption will increase significantly, the
potential export increases are still too high for Saudi Arabia to offset. This will cause stress within the
organization among regional rivals Iran, Iraq and Saudi Arabia. Saudi Arabia may ask Iran and Iraq to
voluntarily limit export growth, but without other incentives there is no reason to believe they would do
so when it is in their short-term economic interest to boost exports as much as possible.

Increased exports by Iran and Iraq also play into the broader rivalry between Saudi Arabia and Iran over
issues such as the Syrian civil war and Iranian influence in Saudi Arabia’s border regions as well as its
oil-producing Shiite-dominated Eastern Province. Historically, Saudi Arabia has argued for increased
production from the cartel to preserve OPEC’s market share, since high prices have helped encourage
alternative energy development elsewhere, whereas Iran and Iraq have argued for moderate production
levels and strong prices. Additionally, while Saudi Arabia can afford to sell oil at $85 per barrel, many of
the governments surrounding it need prices at or above $100 per barrel, and Riyadh does not want to see
its neighbors engulfed in even more turmoil than they already are due to lower oil revenue. Iran and Iraq
are pursuing this boost for their long-term production and believe they can do so without reducing prices
by relying on increased demand from developing Asian markets.

Asia is now the world’s biggest net importing region — bigger than Europe and North America
combined. Naturally, this has led to increased codependence between OPEC and developing Asian
countries, principally India and China. Indeed, China has massive projects with Saudi Arabia, Iraq and
Iran. China’s footprint has expanded dramatically in Venezuela and it imports about 15 percent of its oil
from OPEC member Angola. India has also deepened its connections to OPEC countries and has emerged
as Nigeria’s biggest customer.

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As OPEC’s biggest customer, Asia will continue its strong demand in the near future, and so stress on
OPEC will not necessarily mean lower oil prices. The impact on long-term prices is less certain, however;
the price will be determined not only by the size of Asian growth in the future, but by global oil supplies
in non-OPEC countries as well. While OPEC historically has been used as a political tool to increase oil
prices or place an embargo on exports, as can be seen from the 2008 price spike, OPEC’s modern
challenge is more concerned with keeping oil prices reasonably low, not artificially raising them or
embargoing oil. In order to preserve its long-term health, OPEC will need to preserve relatively low oil
prices, both to ensure that developing markets in Asia can afford to keep buying the oil and to prevent
alternatives such as shale oil, electric cars or natural gas-to-liquids technology from becoming more
economically feasible. Furthermore, tempered oil prices for consumers in Asia will only reinforce the
region’s economic growth, contributing to increased demand for OPEC’s oil.

Few other challenges that OPEC is facing are:

• Uncertainty in Global Demand, Structural shift in demand from developed world to developing
world.
• Non-OPEC oil-producing nations (Russia, Norway, Canada, Mexico etc.) often increase
production when OPEC cuts it.
• Russia overtook Saudi Arabia as the world’s biggest crude supplier in 2009.
• OPEC’s share of production has gone down from around 51% in the mid-1970s to just over 40%
now.

Problem of Member Cohesion within OPEC nations: -

• Maintaining quota discipline within the cartel.

Existence of factions within OPEC, which are generally classified into three groups:
1. The group led by Saudi Arabia, the UAE and Kuwait, who are in favour of increased supplies and
moderate pricing,
2. The group led by Libya, Iran and Algeria, who are insistent on decreasing output for higher
prices,
• The in-between group including Nigeria, Venezuela, Indonesia who have been known to take
sides depending on their own economic/political agenda.
• Middle-Eastern Strife & Political instability in OPEC oil-producing countries - Mostly
authoritarian states that use oil money as a means of sustaining political power.
• Future technological developments in areas of renewable energy sources - According to IEA
(International Energy Agency), the increase in renewable usage will far outstrip annual growth in
energy liquids(crude oil and natural gas) as a source of the world's power ‡Crude oil, OPEC will
become less important in the energy equation.

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Emerging challenges critical to determine OPEC’s continued relevance:

How will countries like Nigeria be affected by OPEC’s production cut deal, and how
sustainable is this policy in the face of declining oil value?

OPEC’s recent decision to cut about 800, 000 barrels of daily output is a strategic response
designed to address oversupply, stabilise the market and strengthen crude oil prices at the
international oil market. After being exempted three times from production cuts, Nigeria now has
to join efforts with other OPEC member-countries by also reducing its daily production output
level. The key challenge for Nigeria has always been how to sustain oil and gas production at a
level that can drive ongoing economic recovery process.

However, a minimal production cut, in the range of 40, 000 barrels per day, should not
significantly alter or weaken Nigeria’s ongoing economic recovery process. Also, since Nigeria’s
promise to cut production does not include condensates, an ultra-light oil, which is not classified
as crude, then the short term economic impact of the production cut may be minimised in Nigeria
by sizeable condensate production. Generally, a minimal cut in production level is a sacrifice that
Nigeria, as well as other OPEC members have had to make in the face of declining oil prices.

How would you describe the relationship between OPEC and non-OPEC member
countries, especially in the short and long-term?

The rise in the production output, as well as influence, of non-OPEC members such as Russia,
the United States, China, Mexico, Canada, Norway and Brazil means that stabilising oil markets
is no longer a task for OPEC alone. OPEC has therefore had to dig deep by building a shared
understanding with non-OPEC countries known as the “Decoration of Cooperation.” As part of
this cooperation, non-OPEC countries have voluntarily committed to achieving production cuts
of about 400, 000 barrels. This partnership is remarkable as it shows that international
cooperation in oil and gas governance is not only just possible, but indeed very desirable if we
are to stabilise the global oil market.

In the long term, the key challenge is how to sustain the cooperation, as well as, get other non-
OPEC producers to align with the partnership. To achieve this, there is a need to institutionalise
this partnership and move it from an informal alliance, to a formal and sustainable forum for
international oil and gas cooperation and governance.

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How will countries like Nigeria be affected by OPEC’s production cut deal, and how
sustainable is this policy in the face of declining oilvalue?

OPEC’s recent decision to cut about 800, 000 barrels of daily output is a strategic response
designed to address oversupply, stabilise the market and strengthen crude oil prices at the
international oil market. After being exempted three times from production cuts, Nigeria now has
to join efforts with other OPEC member-countries by also reducing its daily production output
level. The key challenge for Nigeria has always been how to sustain oil and gas production at a
level that can drive ongoing economic recovery process.

However, a minimal production cut, in the range of 40, 000 barrels per day, should not
significantly alter or weaken Nigeria’s ongoing economic recovery process. Also, since Nigeria’s
promise to cut production does not include condensates, an ultra-light oil, which is not classified
as crude, then the short term economic impact of the production cut may be minimised in Nigeria
by sizeable condensate production. Generally, a minimal cut in production level is a sacrifice that
Nigeria, as well as other OPEC members have had to make in the face of declining oil prices.

How would you describe the relationship between OPEC and non-OPEC member
countries, especially in the short and long terms?

The rise in the production output, as well as influence, of non-OPEC members such as Russia,
the United States, China, Mexico, Canada, Norway and Brazil means that stabilising oil markets
is no longer a task for OPEC alone. OPEC has therefore had to dig deep by building a shared
understanding with non-OPEC countries known as the “Decoration of Cooperation.”

As part of this cooperation, non-OPEC countries have voluntarily committed to achieving

production cuts of about 400, 000 barrels. This partnership is remarkable as it shows that
international cooperation in oil and gas governance is not only just possible, but indeed very
desirable if we are to stabilise the global oil market.

In the long term, the key challenge is how to sustain the cooperation, as well as, get other non-
OPEC producers to align with the partnership. To achieve this, there is a need to institutionalise
this partnership and move it from an informal alliance, to a formal and sustainable forum for
international oil and gas cooperation and governance.

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Is it foresee a sustainable cooperation between the cartel and major producers in
addressing price volatility?

An institutionalised partnership framework between OPEC and non-OPEC members will be in

the best interest of all concerned, to rebalance and stabilise the global oil market. Addressing
market volatility is a challenge that no side can manage in isolation. However, moving from an
informal alliance to an institutionalized partnership will require significant changes in OPEC’s
Charter, mandate and governance framework, which could be some time away. For now, it is
important for OPEC to continue to identify and accommodate the interests of non-OPEC
countries while hoping that a more sustainable and permanent cooperation framework will
evolve naturally over time.

Demand for gas and other alternative energy sources are on the increase on the backdrop
of the environmental dangers of fossil fuels. Do you think OPEC will remain relevant in the
near future?

The rise of climate change mitigation measures—primarily those targeted at reducing global
dependence on fossil fuels—pose common long-term challenges to the future of the global oil
and gas industry in general, and specifically to the ongoing relevance and future of OPEC.
OPEC’s future relevance will to a large extent depend on its ability to formulate a coherent
response to a rise in demand for competing and low carbon energy sources. As the advent of
United States’ shale oil has shown, responding to new energy sources is something that requires
a clear plan.

To remain relevant in the emerging alternative energy world order, OPEC must strategically
evolve and develop response plans that reflect current broader oil market conditions and
scenarios. For example, OPEC will have to devote increased resources and efforts to renewable
energy research such that it can have clearer understanding of the different outlooks/scenarios
with respect to how renewables may impact or result in structural shifts in global energy markets.
OPEC will also have to be more proactive in integrating environmental considerations into oil
and gas markets planning and scenarios. While the oil and gas industry will remain relevant for
some years to come, OPEC would have to formulate concrete plans on how to remain a key
player in a diversified global energy market.

Qatar has left OPEC. What are the implications of this, and what impact will it have on the
organisation?

Qatar’s decision to leave OPEC will further accentuate perennial debates on the future relevance
and influence of OPEC as a price-modulating entity. Due to several factors, OPEC’s influence
has evidently waned over the last years. With ongoing oversupply in the oil market, ongoing

71
drop in oil price, rise in renewable energy production, internal fragmentation amongst OPEC
members, and the rise in the influence of non-OPEC oil producing countries, such as Russia,
OPEC member countries may have to urgently go back to the drawing board to decide a strategic
path to ongoing market relevance.

Qatar has made an informed decision that allows it to focus on its core comparative strength in
the market, which is natural gas supply, especially liquefied natural gas. Qatar’s dominance and
leadership in the natural gas market, coupled with its membership of the Gas Exporting
Countries Forum (GECF) arguably allows it to maintain its geometric growth and positive
trajectory outside of OPEC.

How will this development affect countries like Nigeria, and the oil sector generally?

OPEC has successfully weathered many challenges since its establishment in 1960. The current
events, however provide, tougher tests. For Nigeria, the key challenge is how to sustain oil and
gas production to a level that can drive ongoing economic recovery process. While Nigeria may
be able to live with a small production cut, any push for significant cuts in production could
weaken the ongoing economic recovery process.

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Chapter: 7 Conclusions

73
Conclusions:
OPEC Still Exists today and still has considerable influence in determining the price per barrel of
petroleum by setting quotas, but their best days are behind them. The cartel seems to understand
that raising prices is easier in short run than in long run. Non-OPEC nations such as Russia,
Canada and Mexico have stripped the cartel of its power to single-handedly manipulate the
petroleum market. The World has benefited from the increased production of petroleum by Non-
OPEC nations and thus reduced their annual imports from the OPEC countries in recent years.

OPEC’s oil has been a vital source of energy for the world during the last half of century, and
will continue to be so throughout the 21st century. The economic performance in all OPEC
countries, except Indonesia (former member), largely mirrors the behavior of the oil and gas
sector. Oil price volatility often translated instantaneously into sharp fluctuations in foreign-
exchange earnings and government revenues, with serious implications for macroeconomic
management. Thus, the financing of oil and gas projects is a paradigm for development financing
in the member countries’ economies. Concluding the findings it can be argued that the
Organisation of Petroleum Exporting Countries is economically beneficial for the member
countries. Since OPEC has influence on member countries’ economic growth and development.
That we could observe in case of Indonesia. Moreover, despite the existing quotas on oil
production, the member countries make benefit by oil exporting. OPEC influence and maintain
the prices of oil by controlling the volume of oil production and generate revenue. Those
revenues later go to development the member countries economy and to other fund that help to
OPEC members and other countries in their development. Additionally by the quotas
organization is able to influence on the prices in world oil market; and from the presented
findings it was obvious that exporting countries do benefit from the quotas and being member of
OPEC.

Despite big revenues from oil exporting, OPEC countries are still far from achieving the goal of
transforming their enormous hydrocarbon wealth into human and physical capital for sustainable
economic development. To achieve their goal, member countries need to invest massively not
only in oil and gas projects, beyond just maintaining and expanding production capacity, but also
in economical diversification. Practically all member countries are financially strained. All of
them face, in varying degrees, undue geopolitical risks that limit their access to external financial
resources, under the existing international financial infrastructure. For further research we think
it would be interesting to see whether the Indonesian experience can be implemented for other
member countries, especially for minor OPEC member countries. And to test is within OPEC
any key payer country which, influence on decision making process regarding quotas and funds
distribution.

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Chapter: 8 Bibliography

75
Bibliography:

• www.opec.org

• www.investopedia.com

• www.wikipedia.org/wiki/OPEC

• www.economictimes.indiatimes.com/topic/opec

• www.moneycontrol.com>News

• www.bbc.com/news/topics

• Shodhganga@INFLIBNET: Search

• www.sciedu.ca/rwe
(OPEC’s Benefit for the Member Countries Jamola Khusanjanova)
• Journals

• Newspapers:
The Times of India,
Business Standard,
The Economic Times,
The Financial Express.

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