Table of
Contents
INTRODUCTION
Many till date
still question why OPEC was established and the reason for its presence. Few
observers and even few experts remember that the Organization of Petroleum Exporting
Countries was created in response to the 1959 imposition of import quotas on
crude oil and refined products by the United States(Zycher, 2008) . The United States
had set up a fixed Quota system that did not allow imports of excess crude oil
from different countries. Due to this, many countries from the Middle East did
not benefit due to less exports as well as depressed prices. Therefore the
upcoming of OPEC was said to be beneficial to the Middle East as they had control
over their own exports and imports and did not have to depend much on the
United States.
Petroleum has become an important energy
source since the beginning of industrial revolution andit is now the major
backbone of energy for transportation, electricity generation, heating,
cookingand manufacturing industries. The world total population is projected to
increase to about 8.3 billionby 2030 from the current 7 billion and the world
primary energy consumption is expected to grow by1.6% per annum from 2011 to
2030 since the world population and income growth rate are the maindrivers for
energy demand (BP, 2012). These figures emphasise theimportance of petroleum on
the world energy demand. Over the years petroleum has become animportant input
in the global economy and in nearly every form of production; hence it is
regarded as the blood of world economy(Basil, 2011). This term paper aims to
discuss the brief history ofOPEC, the impact of OPEC on world oil production,
how OPEC affected world economy and thepossible future of OPEC, as well as the
successes and failures of the organization.
HISTORY AND PRESENT DAY FUNCTIONING OF OPEC
The Organization
of Petroleum Exporting Countries (OPEC) was established on September 14, 1960,
it consisted of just five developing countries(Lukman) . From five countries, OPEC grew to having many
more members, as more countries in the world began to export their resources of
petroleum and oil. Any region with
Petroleum or Crude oil is capable of becoming a member depending on their
interests on exports of these resources.
OPEC is a
permanent, intergovernmental Organization, created at the Baghdad conference in
1960, by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. The five founding
members were later joined by nine others; Qatar, Indonesia, Libya, United Arab
Emirates, Algeria, Nigeria, Ecuador, Angola and Gabon(Opec) . The main aim of the
organization is to create a stable platform for Petroleum exporting countries
where stable prices are decided to consuming nations and to form a step forward
to improve the growing industry.
The organization
is said to be divided into six main sections that have diverse duties and
commands. These different sections work together in order to bring out the best
of their capabilities. Firstly the OPEC Conference(Ria Navosti, 2014) is the section that
organizes important factors such as the budget as well as recommendations
regarding the organization. This is where the boards of governors shares their
ideas as well as decide on who the president is. Second are the Board of
Governors (Ria Navosti, 2014) themselves, who
represent their individual country who serve a two year term. These members
implement their ideas on decisions and budget in the organization. The third
section is the Ministerial Monitoring Committee that monitors the rates of oil
in the market and advices the organization if any new decisions must be made.
Furthermore, the
Economic Commission Board is in charge of assisting the board on stability and
growth in the passing years. It ensures the firms stability in the fluctuating
oil markets and ensures price fairness is always present. The last two are the
Secretary General and the General Secretariats are there to perform executive
functions for the organization. The main decisions and implementations are done
by them directly.
As a strong organization, OPEC does
have its mission of objectives that states its goals and future objectives.
OPEC states that its missions are directly linked to its objectives as a way to
keep the organization running. One of the main mission objectives is that the
organization shall devise many ways and means of ensuring stabilization of oil
prices in international markets, with a view to eliminating harmful and
unnecessary fluctuations(OPEC, 2014) . Looking at this
objective, the main mission for the organization is to ensure the regularity of
prices as they make up a great part of the product. Importing countries always
look at the cost before purchasing the product; therefore a good price will ensure
good exports and imports for the firm.
Furthermore, the main mission and
vision of OPEC is to coordinate and unify the petroleum policies of its member
countries and ensure the stabilization of oil markets in order to ensure an
efficient, economic and regular supply of petroleum to consumers(OPEC, 2014) . As a powerful
organization, the main focus is providing sufficient amounts of the product to
the customers and ensuring quality services are provided at the same time. Not
only providing the supplies, but OPEC also ensures that there is unity among
all its members and a sort of relation is present between this. This ensures
easier transfer of services among them as they are some of the biggest oil
producers in the world.
STRENGTHS
AND WEAKNESSES OF OPEC
STRENGTHS
1.
They control the price
of oil by talking to the Middle Eastern countries where most of the oil is
produced. They help influence the oil prices and have brought many countries
together as well as the oil supply. When supply outages hit, for instance with
the recent loss of Libyan crude, OPEC has by and large stepped up production to
reduce the impact on markets.
2.
Its members are some
(but not all) of the most important oil producing countries including Saudi
Arabia and Mexico.
3.
Enables economic
growth- OPEC is devoted to ensuring the economic advancement of poorer
countries and also environmental harmony. The unified policies enforced across
the member nations makes certain that people who invest in the oil industry are
going to have fair returns on their respective investments. This means no
country is going to be left behind with regards to economic advancement.
4.
Ensure market
stability- OPEC is also committed to ensuring market stability through secure
supply at reasonable prices. It helps in maintaining an adequate amount of
spare oil that is used for balancing the market as well as keeping it
sufficiently supplied.
Since
OPEC can easily flood the oil market using very cheap petroleum, it could lead
to huge losses for Western oil firms.
5.
Unifies different
countries. The key objective of OPEC is to join together various countries with
similar interests in the petroleum industry. In fact, it was established to
unite against Western oil companies who were lowering oil prices. OPEC member
nations produce about 45% of the total crude oil production in the whole world.
This means that any actions that are going to be taken by this particular
organization are going to be felt in the entire world.[1]
WEAKNESSES
1.
The fact that OPEC
controls and influence oil prices is also a major weakness because OPEC’s short
term plans has caused a continuous stream of fluctuations in oil rates and
often dramatic rises in these prices.
2.
It is difficult really
for OPEC to control crude oil prices because of externalfactors like NYMEX (New
York mercantile exchange), IPS (International petroleumexchange inLondon),
SIMEX (Singapore international monetary exchange) and warsand conflicts in
producing nations.[2]
3.
OPEC doesn’t have the
power to harmonize policies because ,
they don’t possess absolute control as anycountry can pull out at any time (as
in the case of Ecuador and Algeria) or decide notto be the swing producer
anymore for her country’s own benefit e.g. Saudi Arabia. The internal division
amongst the cartel due to conflict of interest makes it difficult tounify any
kind of policy.
4.
The increase in the production
of Non-OPEC members and the Drive for energy conservation. It is obvious that
if the drive for energy conservation strengthens, OPEC members will start to
lose money, their cartel will be of no use anymore since people will start to
buy alternative energy sources that are cheaper and environmental friendly.[3]
ACHIEVEMENTSAND
CHALLENGES OF OPEC: 50 YEARS AND COUNTING
ACHIEVEMENTS
Since its formation in September
1960, OPEC, anthe oil industry in the world has experienced significant
achievements despite the few challenges that have hindered its progress. These
include:
1. A steady and a secure
supply of oil
In line with its principles
structure, OPEC has been in forefront in the provision of energy and these was
achieved through many ways, these includes, working together as member states
to ensure a stable, secure supply and well managed oil sector by ensuring
stable oil supply. Others efforts includes, eliminating harmful and unnecessary
fluctuation through regulation to consumers and ensuring steady supply for
producing nation as well as fair return on capital to investors(Rahman, 2014).
2. More than Fifty year of
its existence
OPEC was first set up in 1960 to
safeguard the interest of the nation producing petroleum. What led to its
formation was the domination of oil industry by the so called multinational
companies such as seven sisters who dominated the industry, yet they were not
among the main oil producing nations. OPEC, despite the prediction by many,
that it will not survive for long because it was an initiative of developing
states, struggled to gain respect and recognition in international energy
committee till now.
3. Sustainable development
Having made up of developing
states, OPEC was used as a tool to connect with developed nations to improve
its nation. These was done through different ways, one is by establishing
bilateral and multilateral aid institution such as OPEC special fund, to
improve on things like cooperation between its members. These funds were
directed to where it had greater impact such as helping the poor, by providing
them healthcare, food, water and sanitation, basic education and rural
development.
Other funds were invested in the
public sector, in provision of loans for development of project, debt relief,
trading capital, and technical assistance, private’s investors and enterprise
communication relief. As a result, the citizens and the people of OPEC member
states have tremendously increased on their per capita income, and still members
are advocating for economic development, environmental protection and social
programs (Rahman, 2014).
4. OPEC and the
Environment
OPEC member states are greatly concerned
about the environment, these is proven by individual and collective efforts of
the member states in use of technology to maintain the environment. They have
heavily invested over the past years in flared-air recovery project, in an
effort to reduce air out of gas flared.According to the World Bank, OPEC makes
lots of effort in participating in workshops aimed at improving the reduction
of pollution by the gas.
5. Encouraging dialogue
and cooperation
Cooperation was one of the main
strengths of OPEC; it was the main reason for its formation, with a commitment
to safeguard the interest of its members in the international oil market. More
effort in bringing stakeholders closer was seen in 1980’s following the
collapse in oil price and members had to take measures to stabilize the market
even in the subsequent years hence leading to the formation of the
international energy forum for more dialogue.
6. Strengthening of the
national oil companies
The idea was catalyzed by the
continued domination of the Multinational Cooperation to control the quality of
the oil produce, manage sells and decide on whom to sell. Oil producing
countries had to exercise the right of permanent sovereignty over their natural
resources in the interest of national development.
OPEC provided a platform by
exposing its member to stronger global presence in oil industry as well as
global trade and environmental negotiations by enabling the flow of knowledge,
resource and intellect hence gradually increasing the size, structure and strength
of National oil countries in their role responsibilities and capacity (Midgal,
1999).
CHALLENGES
Oil producing countries as well as
OPEC face a number of challenges ranging from both short-term to long-term. The
challenges are both economic and political in nature emanating from various
developments in the global oil and energy industry.
1.
Fluctuations in oil
revenues have posed a challenge because of the variations in prices and levels
of production. This has had devastating effects on expenditure and economies of
OPEC member states.
2.
Producing and exporting
states in OPEC face the long-term challenge of their economies depending on a
single main source of income. There is a need to diversify the bases of their
economies as well as balance the oil demands of the current and future
generations.
Still
in regards to long term effects, there is a challenge posed by the timing and
means of directing investments to raise their production capacities. The uneven
growth of global demand as well as the need for OPEC oil requires enormous
investments in each OPEC country to develop its production in order to keep its
share in the world oil market.
3.
There are also
challenges that affect OPEC as an organisation. The first challenge from within
OPEC revolves around its ability and effectiveness in dealing with the crises
of supply interruptions for whatever reason from its member countries
resumption of supplies thereafter. The second short term challenge to the
organisation is its ability to achieve stability and balance in the market.
Seasonal demand variations mean that the organisation ought to adjust its
production to fit the various seasons of demand.
4.
There is the need to
maintain a reference price band and quota system. OPEC abandoned its fixed
pricing system in 1986, and has since adopted basket reference prices.
Regarding the quota system, OPEC faces the challenge of making the quota system
effective to maintain coherence and unity. A sustainable and fair quota system
which is acceptable to member countries minimizes quota violations and keeps on
a single instrument in OPEC’s hand to influence the market. (Mommer, 2007)
PROPOSED
SOLUTIONS FOR OPEC TO ADDRESS ITS SHORTCOMINGS
The first solution would have to be
on technology. OPEC member states must continually strive to develop technology
especially in their oil exploration especially at the national oil companies’
production level.
The oil field in general needs to
be more dedicated in the framing and recruitment of employees, engineers,
technicians and geologists alike to curb the issue on skilled labour shortage
in the industry. National oil companies ought to work closely with their
respective governments in order to facilitate the educational and professional
mobility of citizens in the oil sector which would be vital for the future of
OPEC as an organisation.
The environment debate poses
another threat not only on OPEC but the oil industry as whole. The oil industry
needs to conceive ways that are environmental-friendly in the exploration, transportation
and production of oil to desist issues such as oil spills and gas flaring. In
regard to global warming, OPEC supports the development of carbon capture and
storage (CCS) technologies, which hold great promise for utilising the use of
fossil fuels more environmental friendly.
OPEC member countries ought to
revise their future capacity expansion plans due to the uncertainty in demand
this is due to the uncertainty surrounding consuming countries who are sending
mixed signals. The imminent growth of the world economy demands security in
supply, while on the other hand measures taken by countries such as the likes
of the US to move away from fossils on to other alternative sources of energy.(Hartshorn, 2013)
Granted, there is a consensus view
that oil demand will continue to rise in the near future therefore there is a
greater need for cooperation between national oil companies and international
oil agencies such as OPEC. To reduce or minimise uncertainties in the oil
sector, issues such as partnership, transparency, dialogue and cooperation are
to be addressed.
THE
FUTURE OF OPEC
Oil is not forever, it is a limited
resources and at the rate of production in 2010, OPEC's oil reserves can last
for 113 years, while non-OPEC oil producers’
reserves is
estimated to last for less than 18 years (OPEC, 2012b). Despite this huge oil
reserve, will OPEC continue still be the major driver of the world oil economy?
The two major factor that pose threats to OPEC’s future are
majorly renewable energy and non-conventional sources of oil like shale oil,
shale gas and oil sands which are driven by advancement in technology.
Non fossil fuel source is projected
to contribute to 18.2% of the global primary energy source in 2030 from 13%
contribution in 2010 (OPEC, 2012). This shows that the future will still be
dominated by fossil fuels with renewables and other alternatives playing
supportive role. Until oil is replaced in the transportation sector by
renewable, OPEC will still be relevant in the regulation of oil production and
market.OPEC in its World oil outlook 2012 estimated that shale oil will be
contributing to about 2 million b/d by 2020 (which is almost equal to Nigeria
current output) and by 2035, it will be contributing about 3 million b/d but
its future contribution will be mainly to North America energy consumption and
hindered by costs, water and well services availability, regulation, concerns
over potential environmental impacts and energy prices (OPEC, 2012c).
America and Canada may have huge
shale oil-and- gas reserves, but Fracking and pyrolysis techniques use in its
extraction is very expensive when compared with the production costs within the
OPEC domain. At a price lower than $70-to-$80 per barrel the economics of
production will no longer allow it to be viable and the shale oil production
will decline drastically.
OPEC it seems to be more concerned
with the security of their future in Asia. China and India is
forecasted to be the world’s
largest and 3rd largest economies and energy consumers, jointly accounting for
about 35% of global population, GDP and energy demand by 2030. By 2030, China
and India is projected to jointly account for all the net increase in global
coal demand, 94% of net oil demand growth, 30% of gas, and 48% of the net growth
in non-fossil fuels due to increase in industrialisation, urbanisation and
motorisation (BP, 2012).
CONCLUSION
On the fiftieth anniversary of the
OPEC establishment, it is appropriate to consider the future, and attempt to
prospect the key features of the organization in both the short and the long
run.
The organization is facing an uncertain situation during the current phase: Prices have been stable at a reasonable and acceptable range for some time now. But at the same time, the rate of commitment to the production quotas by member states, according to al-Badri, is about 53 percent, a rather low rate which, should it continue to be so, will lead among other things to the increase of commercial oil inventories kept by international companies. Indeed, these inventories in the United States have reached their highest level since the early nineties.
The major threat to OPEC’s existence will be the United States’ drilling technologies spreading across the globe. With China holding technically recoverable shale gas reserve of about 1275 trillion cubic feet(KPMG, 2012), it is certain that a lot of OPEC’s oil consumption will reduce but the global world oil demand will decline drastically for gas and power will definitely change hand.
The organization is facing an uncertain situation during the current phase: Prices have been stable at a reasonable and acceptable range for some time now. But at the same time, the rate of commitment to the production quotas by member states, according to al-Badri, is about 53 percent, a rather low rate which, should it continue to be so, will lead among other things to the increase of commercial oil inventories kept by international companies. Indeed, these inventories in the United States have reached their highest level since the early nineties.
The major threat to OPEC’s existence will be the United States’ drilling technologies spreading across the globe. With China holding technically recoverable shale gas reserve of about 1275 trillion cubic feet(KPMG, 2012), it is certain that a lot of OPEC’s oil consumption will reduce but the global world oil demand will decline drastically for gas and power will definitely change hand.
It is hoped that the organization
will continue its current path in defending prices, and keep clear of the
previous path where political disputes prevailed over economic interests among
its members, which led all the exporting countries to lose the opportunities to
increase their oil revenues.
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[3]
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