Free Literature Review On Does OPEC Affect The Price Of Oil
Relevance of the topic is determined, above all, by the significance of OPEC in international economic relations and the history of its activity. The member countries of the organization account for 40% of oil supplies to the world market and about 78% of proven oil reserves, which is why their influence on the oil prices cannot be denied. However, the global oil market in the XXI century is not monopolized to such an extent, as was the case in the recent past.
Today it is appropriate to talk about an oligopolistic market with the presence of supply-side along with the OPEC group of nations, such as Russia, Mexico, Norway, UK and others, conducting independent oil export policy. It is therefore very significant that in the early 70-ies of XX century Western oil companies controlled up to 90% of oil production in the world, while in recent years the countries-members of OPEC managed to keep under control about 40% of the market. However, as experts rightly say, such share is enough to OPEC, which using a set of specific tools, could regulate the export and in most cases maintain a steady level of prices on the world market.
This role of OPEC in the world economy suggests its activity in international legal relations, which determines the relevance of a comprehensive study of the activities of OPEC. In fact, the policies associated with the oil and the price of it have become an object of the world politics, as evidenced by recent events in Iraq.
OPEC is the Organization of the Petroleum Exporting Countries, founded in 1960 by a number of countries (Algeria, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela) to coordinate actions in terms of sales and pricing for crude oil. Due to the fact that OPEC controls about half of the world's oil trade, it can significantly affect the level of world prices. The share of the oil cartel, which was registered in 1962 in the United Nations as a full intergovernmental organization, accounts for about 40% of world oil production.
Currently, OPEC has 12 members, taking into account changes in the composition that occurred in 2007: emergence of a new member of the organization - Angola and return to the bosom of the organization Ecuador. In 2008, Russia declared its readiness to become a permanent observer in the cartel.
OPEC was founded after the "Seven Sisters" cartel that brought together such companies as British Petroleum, Chevron, Exxon, Gulf, Mobil, Royal Dutch/Shell and Texaco (Kaufmann, 2011). It controlled processing of crude oil and sale of petroleum products throughout the world - to unilaterally reduce purchasing oil prices, on which they paid taxes and interest for the right to develop the natural resources of oil-producing countries.
In the 1960s the world markets had oversupply of oil, and OPEC was created with a view of preventing further price drops. However, in the 1970s, a sharp increase in global demand for oil allowed producing countries to significantly increase their revenues from sales, especially due to the increase in world oil prices quadrupling in 1973-1974 and another two times in 1979.
OPEC was strong in the 1970s, when oil demand remained high and soaring prices brought huge profits to giant oil companies and dramatically increased the value of their oil reserves. The weakness of OPEC fully manifested itself in the early 1980s, as a result of full-scale development of new oil fields outside OPEC, the widespread introduction of energy-saving technologies and economic stagnation, the demand for imported oil in the industrialized countries fell sharply, and prices fell by almost half (Farzanegan & Markwardt, 2009).
The term OPEC Reference Basket of crudes was officially introduced on January 1, 1987. From mid-June 2005, the price of the basket is defined as the average index of physical prices for the following 13 grades of oil produced by the cartel countries: Saharan Blend (Algeria), Minas (Indonesia), Iran Heavy (Iran), Basra Light (Iraq), Kuwait Export (Kuwait), Es Sider (Libya), Bonny Light (Nigeria), Qatar Marine (Qatar), Arab Light (Saudi Arabia), Murban (UAE) and BCF 17 (Venezuela), Girassol (Angola) from January 2007, Oriente (Ecuador) from October 16, 2007. Historical maximum for the OPEC basket is the price of $130.52 per barrel, recorded on June 13, 2008.
The main goals of the OPEC are:
Co-ordination and harmonization of petroleum policies of Member States.
Determining the most effective individual and collective protection of their interests.
Ensuring the stability of prices in the world oil markets.
Attention to the interests of the oil-producing countries and the need to ensure: sustainable income of oil-producing countries; efficient, cost-effective and regular supply of consumer countries; fair returns on investment in the oil industry; protection of the environment for present and future generations.
Cooperation with non-member countries of OPEC with a view to implementing initiatives to stabilize the world oil market.
Full members can only be the founding countries and those countries whose applications have been approved by the conference. Any other country, to a considerable extent exporting crude oil and having interests basically similar to the interests of member countries, may become a full member, provided that its adoption is approved by a 3/4 majority vote, including the votes of all the founding members. Thus, there are three categories of members:
Founder-members – organizations taking part in the Baghdad meeting of 1960 that signed the original agreement on the establishment of OPEC;
Full members – founders plus those countries, an application for membership of which was confirmed by the conference;
Associate members, who do not have full membership, but under certain circumstances, may take part in the OPEC conference.
Experts believe that the main disadvantage of OPEC is that it brings together countries whose interests are often opposed. Saudi Arabia and other countries of the Arabian Peninsula are among the sparsely populated, but they have huge oil reserves, large investments from abroad and maintain a very close relationship with Western oil companies. Other non-OPEC countries, such as Nigeria, are characterized by high population and poverty, they implement costly programs of economic development and have a huge debt. These countries are forced to produce and sell as much oil as they can (Lizardo & Mollick, 2010).
Another important problem of the OPEC is the seemingly simple problem of what to do with money. It is not always easy to properly dispose of the shower that flooded the country with petrodollars. Monarchs and rulers of the countries, on which wealth has fallen, sought to use them to the glory of their own people and, therefore, have undertaken a variety of constructions of the century and other similar projects that could not be called a reasonable investment. Only later, when the euphoria of the first happiness passed, when enthusiasm fell a little due to falling oil prices and a decrease in government revenues, the state budgets started spending more wisely and well.
Third, the main problem is to compensate the technological backlogging of the OPEC countries from the leading countries of the world. After all, at the time of establishment of the organization, some of the countries that belonged to it had not yet get rid of the remnants of the feudal systems. Solution to this problem could be the rapid industrialization and urbanization. The introduction of new technologies in production and, consequently, people's lives were not lost by the people. The main stages of industrialization were the nationalization of some foreign companies, such as Aramco in Saudi Arabia, and the active involvement of private capital into the industry. This is done by a comprehensive state aid to the private sector of the economy (Kesicki, 2010). For example, in the same Arabia, there were created 6 special banks and funds that have provided assistance to entrepreneurs under the state guarantees.
The fourth problem is the lack of qualified national staff. The fact that workers in the state were unprepared for the introduction of new technologies and were unable to serve the modern machines and equipment, which were put on oil production and processing plants and other factories and enterprises. The solution to this problem was to attraction of the foreign specialists. It was not as easy as it can seem. Because soon it generated a lot of controversy, all of which increased with the development of society.
Thus, all the OPEC countries are in deep dependence on the income of their oil industry. Perhaps the only country in OPEC, which is an exception is Indonesia, which receives substantial income from tourism, forest, sale of gas and other raw materials. For the rest OPEC countries, the level of dependence on oil export varies from as low as 48% in the case of the United Arab Emirates to 97% in Nigeria (Hamilton, 2011).
At the initial stage, the OPEC did not go beyond the purely commercial framework. However, even modest demands of the monopoly were seen as a defiant challenge. In their headquarters, people refused to recognize the illegitimate organization and warned that they will negotiate with each country individually, but never with the organization.
In the member countries of the OPEC, there is almost the whole range of state regimes of Asia, Africa and Latin America: the feudal monarchies, undergoing rapid period of the capitalist transformation (in the Gulf); bourgeois republic with a relatively developed private capital (Venezuela, Indonesia, Ecuador) and those where the local capitalism only begins to develop (Gabon); countries at the stage of the national democratic revolution (Algeria, Libya). In addition, the countries - participants of OPEC sharply differ from each other in the scale of oil potential, size of territory, population, socio-economic structure.
Proven oil reserves can be distinguished in supergiant - Saudi Arabia (more than 23 billion tons), the giants - Iraq, Kuwait, UAE, Iran (from 12 to 13.5 billion tons), countries with large reserves (up to 4 billion tons) - Libya, Venezuela, Nigeria, Indonesia, states with relatively modest reserves (up to 1 billion tons) - Qatar, Ecuador, Gabon (Brückner, Ciccone & Tesei, 2012).
In a number of OPEC members, especially sparsely populated countries in the Arabian Peninsula, the oil revenues are much higher than domestic spending. Even lavishly spending money on industrial and transport construction, agricultural development, education and health, imports of consumer goods, buying a large scale weapons, they just are not able to spend all the "oil" money. Hence - "excess" currency, mainly US dollars.
In the history of OPEC, there formed two groups with polar, in general, economic interests. On the one hand, relatively speaking, the "radicals" (Algeria, Libya, Iraq, Iran), and on the other - "conservatives" (Saudi Arabia, UAE, Qatar). Others follow a particular group depending on the circumstances.
It will be a simplification, of course, to assume that the radicals are always right and conservatives dream to break up OPEC. After all, none of them wants to stay with oil monopolies alone. None of the OPEC members would argue that it is necessary to increase revenue to reduce production and thereby improve the situation on the market. However, none of the members of OPEC want to take the first step (Schmidbauer & Rösch, 2012).
It is clear that OPEC will occasionally stumble, but any serious drop in fuel prices will force its members to be more restrained. OPEC countries are well aware that the sale of more oil at a lower price is not profitable and that only self-supporting partner organizations can ensure the cohesion necessary for the implementation of the necessary shares in the global market.
Nowadays you will not meet a person, more or less interested in World Economy and International Relations, who does not know the abbreviation OPEC. These four letters for almost 30 years represent organization of the petroleum exporting countries - an influential association of developing countries that each year supply to the world market from 50 to 80 percent of liquid fuels.
Born in the era of the collapse of the colonial system, OPEC has evolved during the rise of the national liberation movement and gained strength in the struggle with foreign oil monopolies. Union of Petroleum Exporting was the first union of developing countries, which led a successful attack on the system of exploitation in the critical area of the world capitalist economy.
For the first time in the history, a group of developing countries challenged the foreign monopolies and centers of capitalism standing behind them, breaking their resistance and being able to defend its interests. The success of the OPEC members has inspired other liberated countries who have joined forces in the struggle for a new international economic order based on equality, justice and mutual benefit. As a result, the OPEC actions went beyond the scope of the oil and have become an important part of the efforts of the developing world, aimed at economic liberation.
Brückner, M., Ciccone, A., & Tesei, A. (2012). Oil price shocks, income, and democracy. Review of Economics and Statistics, 94(2), 389-399.
Farzanegan, M. R., & Markwardt, G. (2009). The effects of oil price shocks on the Iranian economy. Energy Economics, 31(1), 134-151.
Hamilton, J. D. (2011). Historical oil shocks (No. w16790). National Bureau of Economic Research.
Kaufmann, R. K. (2011). The role of market fundamentals and speculation in recent price changes for crude oil. Energy Policy, 39(1), 105-115.
Kesicki, F. (2010). The third oil price surge–What’s different this time?. Energy Policy, 38(3), 1596-1606.
Lizardo, R. A., & Mollick, A. V. (2010). Oil price fluctuations and US dollar exchange rates. Energy Economics, 32(2), 399-408..
Schmidbauer, H., & Rösch, A. (2012). OPEC news announcements: Effects on oil price expectation and volatility. Energy Economics, 34(5), 1656-1663.
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