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OPEC (Organization of Petroleum Exporting Countries)

Article · November 2018

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 OPEC (Organization of Petroleum Exporting Countries)
Introduction

OPEC was founded in the year 1960 at the Baghdad conference by five-member states (Iran, Iraq,
Kuwait, Saudi Arabia and Venezuela). Venezuela made the first motion towards the creation of OPEC
in the year 1949 when it negotiated with the government of Iran, Iraq, Kuwait, and Saudi Arabia
suggesting the exchange of views and easy communication among oil producing states (OPEC, n.d.).

The demand for a closer cooperation among oil producing states became more ostensible during the
first petroleum congress that took place in Cairo, Egypt in the year 1959 in which it was concluded
that oil companies are to contact the government of oil producing states before setting up a price on
oil.

The conference in which OPEC was established as a permanent intergovernmental organisation of oil
exporting nations took place between 10 -14 September 1960 and it was agreed upon by its first five
members states (OPEC, n.d.).

The main reasons behind the creation of OPEC was to ensure the stabilization of oil prices in the
international market and also to regulate the supply of petroleum to consuming nations.

OPEC headquarter was in Geneva, Switzerland during it five 5 years of existence, before it was
moved to Vienna, Austria on 1st September 1965. Republic of Congo became the last country to fully
join OPEC on 22nd June 2018. Currently OPEC consist of 15-member states which are Algeria,
Angola, Ecuador, Equatorial Guinea, Gabon, Saudi Arabia, United Arab Emirates, Libya, Iran, Iraq,
Kuwait, Qatar, Republic of the Congo, Nigeria and Venezuela. As of September 2018, the 15-member
states of OPEC accounted for an estimate of 44% of global oil production and 81.5% of the world oil
reserves making it the major influence on global oil prices (OPEC, n.d.).

The creation of OPEC set out a landmark towards national sovereignty over natural resources making
OPEC member states a key player in global oil market and world trade. In October 2015, Sudan
formally submitted an application to become a member of OPEC, but her application has not yet been
acknowledged because of the ongoing crisis in Sudan (OPEC, n.d.).

Indonesia withdrew as a member of OPEC in the year 2016 when OPEC requested for a 5%
production cut. Every member states of OPEC pays 2 million dollars annually as membership fee.

OPEC board members consist of ministers of member states. Headed by OPEC secretary general who
is the chief executive of the organisation. Mohammed Sanusi Barkindo is the current secretary general
of OPEC. OPEC operate on the principle of unanimity and “one member, one vote”. Saudi Arabia act
as the “de facto leader” since it the largest and most profitable oil exporter among other member states
(Kanovsky, E 1992).
Economist do refer to OPEC as a textbook example of a cartel that cooperates to reduce market
competition, OPEC is a model force which seeks to stabilize market and its members can easily
influence global oil prices through a collective action

Structure of OPEC

OPEC is structured based on 3 different part / categories which are as follows:

1. The conference
2. The board of governors
3. The secretariat

Role in International political economy

OPEC as an institution plays a vital role in the control of oil price in global market, OPEC oversee the
production, price and sales of oil through its member states. OPEC derive such responsibility because
majority of oil producing countries are its members. OPEC members states possessed 81.89% of
crude oil reserve in the world according to its annual statistical bulletin of 2018 which makes the
institution a key player in world economy (Alvaro Silva-Calderón, n.d.).

OPEC actions during the previous oil crisis shows the significant role occupied by OPEC in
stabilizing oil market. The institution (OPEC) first shows its influence on world economy during the
war between Egypt and Israel along with when Israel illegally occupied Palestinian territories in 1973
that lead to OPEC placing an oil embargo on Israel with its supporters such as USA, South Africa,
and Netherland. The 1973 embargo affected oil supply in international market and also led to the
rapid increase of oil which affected world market (Duncan, R. C and Youngquist, W. 2001).

The primary objectives of OPEC as an international institution are:

a. Co-ordinate and unify the petroleum policies of the member countries and to determine the
best means for safeguarding their individual and collective interests,
b. Seek ways and means of ensuring the stabilization of prices in international oil markets, with
a view of eliminating harmful and unnecessary fluctuations,

Provide an efficient economic and regular supply of petroleum to consuming nations and a fair
return on capital to those investing in the petroleum industry (Francis N. Botchway, 2011)

The major role of OPEC which is to stabilize price of oil in international market in order to avoid huge
movement of price, so as to secure an efficient, economic and steady supply of oil to its consumers
(Alvaro Silva-Calderón, n.d.).

OPEC decisions and policies has effect on other sectors, most especially manufacturing and
transportation sector, which has direct influence on finished product and house hold commodities. The
increase in oil price also increases the cost of production which is passed on to the final consumer.

OPEC influence world economy because increase of oil price can in turn lead to higher inflation and
even reduce economic growth.

OPEC promote sustainable development among its member states and also other developing
countries. The establishment of OFID (OPEC fund for international development in 1976 has helped
in increasing cooperation between OPEC member states and other developing countries. And it has
supported wide range of project such as, providing of energy, clean water to remote communities,
building of infrastructure for poor non-OPEC countries.

Liberal approach of OPEC

OPEC is a good example for liberal theory in international relation because liberalism acknowledge
that state plays a critical role in the international system, other institution such as WTO, World Bank
IMF etc. are also an example of liberal theory. liberals argue that economic growth is intended to
improve standards of living for individuals (Andrew Moravesik, 2008).

Liberalism was founded with an aim of challenging the dominance of mercantilism system that was
adopted by government. It set a line between politics and economics, arguing that the main purpose of
economic activity is to enrich individual and not to enhance state power (Thomas Oatley, 2013),
which is exactly what OPEC stand for, one of the primary goals of OPEC is to enrich it member state
economically and not to enhance the power of its member states.

Unlike Mercantilism which believe that wealth is acquire through accumulation of power and sees
trade as a way of acquiring wealth from abroad only by operating a positive balance of trade
(exporting more goods), liberalism believes that countries can’t enrich themselves only by operating a
trade surpluses but by producing and exporting primary commodities and importing commodities that
are expensive to produce at home (Thomas Oatley, 2013) which is what OPEC stand to promote.

According to liberalism, globalisation is the universal condition of world politics and that states are
embedded in a democratic and transnational society which support economic, social and cultural
interaction between countries (Thomas Oatley, 2013).

OPEC operate within the frame work of liberal approach which called for the existence of political
actors in a distinctive environment of international politics without a world government or any
authority with a monopoly on the legitimate use of force.

Compare to other theories, OPEC framework adopt liberal approach, and offers benefit to all its
members states and fight strongly against competition which mercantilism theory tries to promote,
and also exploitation which maxims theory promote.

Future Projection

According to the foreseeable future, oil will maintain its leading position in meeting the demands of
the world growing energy demands and currently OPEC account for more than 80% of the world oil
reserve. The demand for oil is set to rise by 28 million b/d to 113 million b/d by 2025 which same
time represent the annual average growth of 1.5 million b/d (OPEC Annual statistical bulletin, 2016).

OPEC Asia member states are expected to register average annual economic growth of 2.5 % in 2025.
Global markets for commodities, manufacturing and service is expected to account for a rise of 18
million b/d in oil demand by 2025 (World oil outlook, 2017).

By 2025 OPEC could be producing around 55 million b/d of crude which is almost half of all global
supply. Oil is expected to account for 40 % of energy demand over the next two decades, gas demand
is expected to continue growing at a fast rate to over 28% by 2025 (World oil outlook, 2017).
 Source: World oil outlook 2017, organization of the petroleum exporting countries

According to OPEC long term strategy, it is projected that OPEC will be relied upon to supply most
of the incremental barrel demand by 2025 (World oil outlook, 2017).

Energy demand is expected to increase by close to 100 million barrels of oil equivalent a day (mb/d)
between 2015 and 2040, while oil is expected to see a drop in its share of the energy mix over the
forecast period, it is expected to remain the fuel with the largest share, at just over 27% by 2040.
Natural gas sees growth throughout the period and by 2040 its share is slightly more than 25%. It is
observed that oil and gas combined is still expected to make up over 52% of the global energy mix by
2040 (World oil outlook, 2017).

The outlook for long-term oil demand growth is slightly more optimistic than in last year’s WOO,
reaching 111.1 mb/d by 2040, although average growth slows to around 300,000 b/d between 2035
and 2040 on the back of anticipated efficiency improvements, a further tightening of energy policies,
as well as decelerating GDP and population growth (World oil outlook, 2017).

In the case of crude, it is estimated that OPEC will need to supply an additional 7.7 mb/d in the period
2020-2040. For all OPEC liquids, the figure is 10.5 mb/d. Moreover, the share of OPEC crude in
global oil supply is expected to increase from 34% in 2016 to 37% in 2040 (World oil outlook, 2017).
 Source: World oil outlook 2017, organization of the petroleum exporting countries

The above graphs show the expected increase in demand of oil. OPEC projection anticipated China
and India to remain the largest oil consumer by 2040 due to it increase in population (World oil
outlook, 2017).
 Reference
Andrew Moravesik (2008). The new liberalism. The oxford handbook of international
relations.
Thomas Oatley (2013). International Political Economy. International Edition 5th Edition.
Duncan, R. C and Youngquist, W. (2001) The World Petroleum Life Cycle. In K. E. F. Watt
(ed.), Human Ecology: Civilization in the 21st Century, Vol. 1 (in press). Transactions
Publishers, Piscataway, NJ
Kanovsky, E (1992). The Economic Consequences of the Persian Gulf War: Accelerating
OPEC’s Demise. Washington Institute for Near East Policy, Washington D.C.

OPEC Annual statistical bulletin, 2016. Organization of the petroleum exporting countries
World oil outlook 2040, (2017). organization of the petroleum exporting countries
Alvaro Silva-Calderón, D. R. (n.d.). OPEC's role and the challenges we face in the petroleum
industry [Press release]. Retrieved October 24, 2018, from
https://www.opec.org/opec_web/en/913.htm
OPEC. (n.d.). Member Countries. Retrieved October 24, 2018, from
https://www.opec.org/opec_web/en/about_us/25.htm
OPEC. (n.d.). Brief History. Retrieved October 24, 2018, from
https://www.opec.org/opec_web/en/about_us/24.htm

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