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
and it is now the major backbone of energy for transportation, electricity generation, heating,
cooking and manufacturing industries. The world total population is projected to increase to
about 8.3 billion by 2030 from the current 7 billion and the world primary energy consumption is
expected to grow by 1.6% per annum from 2011 to 2030 since the world population and income
growth rate are the main drivers for energy demand (BP, 2012). These figures emphasise the
importance of petroleum on the world energy demand. Over the years petroleum has become an
important 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 of OPEC, the impact of OPEC on world oil production, how OPEC affected world
economy and the possible 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.
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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
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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.
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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 external factors like
NYMEX (New York mercantile exchange), IPS (International petroleum exchange in
London), SIMEX (Singapore international monetary exchange) and wars and conflicts in
producing nations. 2
3. OPEC doesn’t have the power to harmonize policies because , they don’t possess
absolute control as any country can pull out at any time (as in the case of Ecuador and
Algeria) or decide not to 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 to unify any kind of policy.
1 The advantages and disadvantages of OPEC retrieved from http://business-finance.blurtit.com/2553939/what-
is-the-advantages-and-disadvantages-of-the-opec
2 M James (2012) is OPEC meeting its objectives? Retrieved from
http://www.academia.edu/1121835/IS_OPEC_MEETING_ITS_STATED_OBJECTIVES
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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
ACHIEVEMENTS AND CHALLENGES OF OPEC: 50 YEARS AND COUNTING
ACHIEVEMENTS
Since its formation in September 1960, OPEC, an the 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
3 Problems of OPEC retrieved from http://www.opec.org/opec_web/en/914.htm
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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.
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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.
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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)
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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
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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.
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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