History Of OPEC Research Paper Sample
Importance and Influence of OPEC
Organization of Petroleum Exporting Countries (OPEC) is an international organization of petroleum producer and exporter nations. Currently the organization has a share of forty percent in the international oil market and substantially impacts the market by reducing or increasing production and prices of crude oil. OPEC sets annual targets of production of crude oil for its members every year. OPEC ensures smooth supply of petroleum to consumers and at the same time, it also procures the monetary interests of petroleum producing countries. OPEC also has a responsibility towards investors who invest in the ventures of OPEC in different parts of the world. OPEC influences market in direct and indirect ways. There are a number of companies that depend upon OPEC for their businesses and market capital of these companies are also affected severely when OPEC changes its policies. This paper intends to discuss OPEC and its significance in the international oil market.
OPEC was founded in the year 1960 in Baghdad by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. These founding members signed an agreement to preserve their interests in the oil production and export. The number of OPEC members grew in coming years and by 1969 there were 10 members of OPEC. Initially OPEC had made its secretariat in the Geneva, Switzerland which was shifted to Vienna, Austria in the year 1965. When OPEC was founded in 1960s, the world was passing through a phase of transition. A number of new nations were emerged and the need of oil was continuously increasing in the world. OPEC sensed the growing need of oil and made strategies to fulfil the demand.
At the time when OPEC was formed, the contemporary oil market was dominated by “seven sisters”. “Seven sisters” were multinational companies and used to rule the international oil market. “Seven Sisters” used to own more than eighty five percent share in the oil market. These companies did not want any competitor to grow in order to continue their monopoly in the international oil market and to make their benefits growing. OPEC developed its strategy and vision in order to compete with these giants and sustained because of its policies. OPEC members were aware of their potential and bright future (Fishelson, 1982).
OPEC emerged with prominence on the world map in the decade of seventies. All member countries were in absolute control of oil production in their respective countries and they also lodged their presence on the international level. OPEC addressed the difficulty of poor nations in the year 1975 regarding oil prices and availability. In the year 1976, OPEC members also arranged for a Fund for international development fund. Various other social welfare schemes by the OPEC increased the popularity of organization.
The membership of OPEC grew to 13 members by 1975. Few members also quit their membership due to their local and political issues. The membership cannot be offered to any country, but there is a process and countries are given membership only after fulfilling required formalities. OPEC also faced two significant moments in this decade that affected the performance of the organization in negative ways. The first situation was Arab oil embargo in the year 1973 and the second problem occurred in the year 1979 when Iranian revolution took place (Fishelson, 1982).
Dees, Kaufmann, Kardeloglou and Sanchez (2004) in their article analyzed the claim that the ability of OPEC to influence actual oil prices is reduced. The authors analyzed influence of OPEC by establishing correlation between three variables chosen under the study i.e. OECD stocks, OPEC production behavior and actual oil prices. Dees et al. mentioned that OPEC is capable to influence oil prices by using capacity utilization, establishing production quotas and exceeding production than set quotas. Karp and Newbery (1991) in their study analyzed three factors: first that resources of oil are limited; second, market power of big oil producers, and third, market power of large oil importers. The authors analyzed impact of these three factors on world oil market (Dees et al., 2004; Karp and Newbery, 1991).
According to Karp & Newbery, oil prices include opportunity cost, associated with the sale of oil on later date because the sources of oil will not last forever and are exhaustible. Members of OPEC from Middle East are very powerful members because of their share in the world oil market in terms of crude production. These countries hold capacity to influence supply and prices of the oil in different markets. The authors suggest that prices of crude oil in the international market can also be impacted by controlling the demand of oil (Karp and Newbery, 1991).
Large oil exporters can reduce or increase the prices of oil by increasing or decreasing the production of the crude oil in the international market. It is difficult for several countries to control demand of oil at local level. OPEC exercises its market power in controlling oil market by reducing supply of oil and reserving oil for supply at later stage. OPEC starts behaving monopolistically during late stage of extraction of oil, however, the organization behaves competitively at early stage of oil extraction.
Dees et al. also claim in their article by mentioning that OPEC decisions, related with quotas may or may not have long-run impact on the international oil prices. However, in short-run, impact of OPEC decisions clearly get reflected on the crude oil prices on various stock exchanges including NYMEX. The author said that OPEC can increase the oil prices by declaring low production quotas, however, in general OPEC declared quotas according to forecasted capacity of production (Dees et al., 2004).
Gately (2007) in his article forecasts the expected behavior of OPEC for next 25 years. Gately mentioned that OPEC in coming years should increase its export in order to maintain its influence and strong presence in the market. Gately mentions that in coming 25 years demand of oil will rise and in absence of adequate supply from OPEC, non-OPEC demand will rise and countries will look for other suppliers. Gately says that OPEC may not achieve significant increase in profit from the investment made in increase of export, but OPEC will require to do so to maintain its competitiveness. According to Gately, OPEC will require to increase its export by 60 percent by 2030 in order to maintain its share in world oil market and considering market share of non-OPEC oil suppliers (Gately, 2007).
Smith (2005) in his article said that various experts criticize OPEC for restricting the supply or production of oil and for increasing the prices. However, till today there is no evidence available that support this claim. Smith applied production based method to analyze cooperative behavior of OPEC and its members. Smith analyzed literature available on the subject and calculated price, production and demand data to understand the behavior adopted by OPEC members. Smith did not find any evidences or data that support monopolistic behavior of OPEC. However, Smith found that OPEC behavior is similar to bureaucratic syndicate. The author also mentioned the dominating leadership role of Saudi Arabia among the members of OPEC (Smith, 2005).
Huppmann and Holz (2012) in their study analyzed the role of market power in world crude oil market. According to the authors, the role and force of market power can be analyzed by using different models such as Nash-Cournot, Stackelberg leader-follower model, OPEC oligopoly, and perfect competition. Huppmann and Holz also considered role of arbitrators and integration taking place in crude oil supply chain.
Over past ten years, the structure of crude oil market has shifted significantly. The world crude oil market shifted from monopoly to competitive market. According to Huppmann and Holz, before 2008, the prices in crude oil market were largely controlled by Saudi Arabia who acted as leader and was non-cooperative. However, after 2008 oil prices became competitive because of reduction in supplying ability of OPEC. Finding of Huppmann and Holz goes in line with Gately who mentioned about increase in production and export of OPEC (Huppmann and Holz, 2012; Gately, 2007).
Smith (2009) in his study analyzes various factors that make crude oil market volatile. Smith says that during 1874 to 1973 the prices of oil were stable and used to range between USD 10 to 20/ barrel. In 1973 politically motivated oil producing countries banned oil export to United States of America which resulted in rise of prices. Smith says that recent trends indicates that prices of crude oil in world market are unstable and it is difficult to predict what the next level of oil is.
Smith says that all stakeholders involved, in crude oil supply chain, are motivated by the monetary benefits. Stakeholders maintained their profit in all positive or adverse circumstances. Volatility in oil market is largely driven by unstable supply and demand of the oil in different markets. Increasing population and income of developing nations are positively contributing towards demand of crude oil. Certain events such as closer of BP’s Alaskan Prudhoe Bay Field, economic crises and wars also impacts demand and supply of crude oil, which ultimately impacts prices of the oil in world market.
Kisswani (2011) in his article discusses impact of political consideration on the extraction of oil from sources. According to the author, political leaders of different countries who are major oil suppliers or exporters plays a major role in decision making with regard to extraction of oil. OPEC manipulate prices by changing quantities of oil extraction. OPEC while making any decision related with quantities of oil that need to be extracted, consider the profit as well as political support from citizens (Kisswani, 2011).
Kisswani tries to display the problem of high oil prices from different angel. According to the author OPEC manipulate prices in order to harm West countries. The decisions taken by OPEC are not always pure and based on the actual demand or supply of the oil, however, decisions are sometimes manipulated by OPEC in order to support local political ambitions. OPEC reduced quantity of oil extraction so that supply of oil in western markets get negatively impacted which further result into increase in the prices of oil. OPEC by doing this also earns extra revenue, which is certainly beneficial for the Arab nations (Kisswani, 2011).
Fishelson (1982) in his research study tries to examine the ongoing conflict among OPEC members and how OPEC will become monopolistic power. The study was conducted three decades ago prices of oil were started fluctuating and conflict between U.S. and oil producing countries was going on. In 1973 after ban on export of oil to U.S. different changes took place in oil industry. At that time all OPEC members were not in harmony. However, the author mentioned that power of OPEC was forecasted by various experts and economist (Fishelson, 1982).
Fishelson says that OPEC was a major supplier of oil to the world, hence, increase in his power was expected. OPEC holds the power to control product and extraction of oil which ultimately impacts the oil prices. Overall various research studies conducted in past and in recent time support the powerful role of OPEC in world oil market. Different authors claims positive and negative impacts associated with the role of OPEC, but no author denied the power of OPEC in world oil market.
Current Members and Decision Making
Currently there are twelve members in OPEC. These members are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela. New membership is given when existing members approve the membership status to any applicant nation by a majority decision of 3/4th. Permanent members have a couple of special privileges in the functioning of the organization. OPEC statute recognizes the difference between the founder members and permanent members and treat them accordingly. Founder members have more gravity in their opinion and instructions in comparison to comparatively new members.
Secretariat is the body that looks after operations and decision making of OPEC. The OPEC Secretariat is located in Vienna and functions in accordance with OPEC statutes. The OPEC Secretariat ensures implementation of various resolutions that are passed by OPEC board of governors. Secretariat is headed by a secretary general who functions in capacity of chief executive officer of the OPEC. Secretary General takes major decisions as the authorized representative of the organization with instructions of board directors. Secretary General has the wide powers within the periphery of OPEC statutes (Huppmann and Holz, 2012).
Secretary General also administers the various affairs of the organization and makes a balance among different departments. There is battery of officers to assist secretary general of the OPEC. Secretary General is assisted by legal head, research head, services head and other departments of secretariat. OPEC Secretariat looks after various national and international affairs of OPEC. Secretariat also coordinates with representatives of local government, national and international delegates. Secretariat also has duty of scrutinizing various political and liaison developments that may affect the smooth functioning of the organization.
Impact of OPEC Decisions on Main Street and Wall Street
OPEC has more than forty percent market share in the international oil market. OPEC is also much organized organization in recent times and functions in very strategic manner. When OPEC decides to reduce production, the global market starts thinking about oil prices and any change in their policy affects the oil prices globally. There are many countries that are depended on oil supplies by OPEC. Any change in price, production or policy by OPEC may affect the money markets of the Main Street as well as Wall Street (Gately, 2007).
Competitors of OPEC shiver when the organization makes any declaration on oil prices or policies. OPEC nations can hold oil prices down irrespective of any negative or unfavorable factor, but their competitors cannot afford such situation in recent times and they may lose a substantial amount of money in money markets. OPEC policies affect market directly as well as indirectly as there are a number of companies that depend on the organization for their businesses. When OPEC declares any significant changes in their policy, it affects the capital of oil companies, as well as, other associated companies. Such developments affect the international oil market in a considerable manner (Dees et al., 2004).
A considerable size, huge market share and influence of OPEC on international oil market affect the Wall Street and Main Street in many ways. Recent examples prove that OPEC has the power to sway the market by its policies. It was the OPEC that controlled crude oil prices and did not let them rise even in the situation when crude oil prices were collapsed globally. Many companies faced the consequences of such steps of OPEC. Several companies, trading in the oil market, suffered huge monetary losses and were collapsed subsequently due to OPEC policies (Karp and Newbery, 1991).
Discussion and Conclusion
Influence and relevance of OPEC is very significant in the international oil market. OPEC nations can influence oil prices and production and it may further impact money markets as there are several companies, associated with the oil sector. The influence, which OPEC has in the oil market, is expected to grow in future as there is no other body that is so organized and believes in collective working. Various reports from reputed organizations show that though there are big companies and oil producing nations, but none of them can match or compete with the influence and reach of OPEC in current times. OPEC is not a private organization, but it is a group of countries. There is a substantial difference in the working of private companies and countries. Countries and governments do not think about making profits only, but they also take care of various liabilities. OPEC also donates enormously for various social, developmental and human causes.
Having observed the comprehensive analysis of the OPEC, its history, functioning and influence on the international market, the paper concludes that OPEC is one of the most influential organizations of recent times that influences the global oil market in a considerable manner. OPEC does not only affect and influence the oil sector, but at the same time, it also influences big markets including main street and Wall Street that proves its influence. OPEC has direct and indirect influence on money markets and it also has the capacity to influence economies of some countries. The importance of OPEC is expected to grow in the future because of its policies and functioning. OPEC does not function in a profit making corporation only, but it also takes care of various duties and causes.
Dees, S., Karadeloglou, P., Kaufmann, R. & Sanchez, M. (2004). Does OPEC Matter? An Econometric Analysis of Oil Prices. The Energy Journal, Vol.25, No. 4, 67-90.
Fishelson, G. (1982). OPEC and the Rest of the World Trade Equilibrium –A Clarifying Note. The Energy Journal, Vol. 3, No. 1, 95-102.
Gately, D. (2007). What Oil Export Levels Should We Expect From OPEC? The Energy Journal, Vol.28, No. 2, 151-173.
Huppmann, D., & Holz, F. (2012). Crude Oil Market Power--A Shift in Recent Years? Energy Journal, 33(4), 1-22.
Karp, L., Newbery, D. (1991). OPEC and the U.S. Oil Import Tariff. The Economic Journal, Vol. 101, No. 405, 303-313.
Kisswani, K. (2014). OPEC and political considerations when deciding on oil extraction. Journal Of Economics & Finance, 38(1), 96-118. doi:10.1007/s12197-011-9206-7
Smith, J. (2009). World Oil: Market or Mayhem? The Journal of Economic Perspectives, Vol 23, No. 3, 145-164.
Smith, J. (2005). Inscrutable OPEC? Behavioral Tests of the Cartel Hypothesis. The Energy Journal, Vol. 26, No. 1, 51-82.
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