OPEC

In this article, we will discuss the international organization that is OPEC, or the Organization of the Petroleum Exporting Countries. In this article, we will discuss the history of OPEC, the members within the organization, as well as the objectives of the organization. We shall examine their history as it pertains to oil, and examine how influential OPEC is as an international organization in the international system. In this article, we shall answer common questions about OPEC. But more than that, we will offer detailed expert analysis on the interests driving member states, and how OPEC itself is often divided when it comes to their oil policy. Let this article serve as a detailed guide to the workings and understandings of the Organization of the Petroleum Exporting Countries.

Understanding OPEC is necessary for one to have a thorough knowledge base on not only the Middle East and North Africa, the world’s oil economy, but also international relations as a whole. As we shall point out, the international organization is often involved in many of the regional and world issues, much of them political, and it is often through oil politics that some of the members states have attempted to influence the political and economic landscape of the region, and the world.

Members of OPEC

OPEC is currently made up for 13 countries throughout the world. The member states of OPEC are:

Algeria, Angola, Ecuador, Iran, Iraq, Indonesia Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuala. Historically, Gabon and Indonesia were also members in the past, although Gabon left in 1995, and Indonesia temporarily left in 2009, returning in late 2015. OPEC states currently produce 40 percent of oil in the world today.

History of OPEC

The Organization of Petroleum Countries was founded in 1960 by five states. Those initial founding members of OPEC were Iran, Iraq, Kuwait, the Kingdom of Saudi Arabia, and also Venezuela.

The reason that OPEC was initially formed was related to the conditions of oil, and the control of the domestic oil sectors of each of these states. During the decades prior, with the rise of colonialism in the late 1800s and early 1900s, colonial and non-colonialist outside actors became heavily involved in the oil sectors of these states shortly after the discovery of oil. Outside companies (such as the Anglo-Iranian Oil Company) would be in charge of the oil process, from oil exploration, to drilling, extracting, refining, and then shipping of the oil in the international market.  For these early decades, the economic agreements were such that the outside companies (who often had ties to Western states) would receive the vast majority of the profits (upwards of 86 percent in many cases). As a result, while the local leaders were still making money from this rent, most of the money left the country, and into the hands of outside entities.

Following continuous years of large profits based on these ratios of profits, local leaders demanded additional revenue. And while the revenues percentages were renegotiated at times (sometimes 50/50 splits), the oil state leaders realized the profit that they could make by controlling their own oil industries. Thus, countries began to nationalize their oil oil, taking it away from these companies who were previously in charge of the oil. It was in 1960 that these initial five states mentioned came together to work with one another on protecting their own oil interests.

With the creation of OPEC, the member states stressed the importance and reason for their cooperation. This can be found in Article 2 of OPEC’s statute, which reads:

The Structure of OPEC

There are three functioning organs that make up the structure of OPEC. They are: The Conference; The Board of Governors, and the Secretariat.

The OPEC Conference is a meeting of all OPEC countries. There are usually two OPEC Conference meetings per year (although additional conference meetings can be called if needed). Here, states have delegates that represent their interests at the meeting. Every country has one vote at the OPEC conference. There are a number of functions that get carried out at the conference. The members at the conference:

In order to decide on a policy through OPEC (at the conference) there will be a vote, and the vote must be unanimous. Thus, if the vote is not unanimous, the policy will not carry. This is important when thinking about the effectiveness of OPEC as an international organization; if one country wants to limit the effectiveness of OPEC as a unified body, it is rather easy to do so. As we shall point out below in the “Politics of OPEC” section, Saudi Arabia, being one of the top individual producers within OPEC, is able to ignore other states’ demands and continue to carry on their own policies, thus reducing the influence of other states within the Organization of the Petroleum Countries.

The Board of Governors at the Organization of the Petroleum of Exporting Countries is an organ of the body where governors are nominated. Here, governors, serve two years, and when serving, each have one vote. The Board of Governors meet twice a year (at a minimum), although they can meet more than that. Their responsibilities include:

The Politics of OPEC

One of the first major political moves made by OPEC–and one that allowed them to become greater players in the international economic oil markets was the 1973 Oil Embargo. In 1973, Egypt and Israel became involved in a war with one another. At that time, Israel continued to occupy the Palestinian territories of the West Bank, Gaza strip, East Jerusalem, as well as Syria’s Golan Heights and Egypt’s Sinai Peninsula. With Egypt attacking Israel, and with the Israeli response, the members of OPEC decided to get involved politically and economically. Upset with the continued illegal occupation of Palestinian territories, OPEC used their oil as a political weapon. They called for (and instituted) an oil embargo against Israel, the United States, the Netherlands, as well as South Africa for their support of Israel during the 1973 War. As a result, these countries had a difficult time buying oil. Not only did OPEC stop selling oil to these states, but they also promised to reduce the monthly oil supply by 5 percent until Israel would withdraw from the Palestinian territories. And while OPEC eventually removed their embargo without Israel leaving the Occupied Palestinian Territories, the action to reduce the oil supply worried many states, many of whom not only began more strongly expressing their support for the Palestinian cause, but also expressed concern about access to oil.

As a result of this action, the price of oil in the international markets rose very quickly; where oil was hovering around a few dollars a barrel, the price quickly went up over three times that amount. And at auction (where anyone could buy the oil), the price went to seventeen dollars a barrel. From this point on, OPEC realized the power that they have in affecting oil prices by their manipulation of the oil supply for international markets.

The Recent Politics of OPEC in 2015

One of the most interesting developments of the OPEC organization has been its approach towards supply levels of oil in recent years, and particularly in 2015. In order to understand how oil has been used politically, it is necessary to understand the interests and motivations of the more powerful countries within OPEC.

In December 0f 2015, OPEC members had a meeting in which they discussed oil output levels. At the meeting, there were talks about possibility limiting their oil supply. The reasons that some states have argued for reducing oil supplies is because of the low price of oil; as of December 2015, a barrel of oil was trading at around 42 dollars (with oil dropping under 40 dollars on December 4th, 2015). This is much lower than figures last year, where oil was as high as 108 dollars a barrel in May of 2014. For countries that have been heavily reliant on the higher oil prices have been asking for cutting supply.

Let’s examine the motivation of this particular activity. If a state leader has set their budget off of expectations that oil profits are based off of an example of 100 dollars a barrel, a drop to 45 or 50 dollars a barrel would greatly affect their ability to fund their domestic and international initiatives. This could in turn impact their influence in their state, and could also upset citizens, particularly if they were expecting said programs funded by the government. This issue becomes particularly problematic if most of your income is reliant on oil. So, for countries such as Iran, who is facing sanctions due to their nuclear program, reducing oil output would lead to greater demand, which would then be reflected in price. So, these countries would like OPEC to cut supply, which in turn would lead to more demand, in turn driving prices up per barrel.

However, there are other countries in OPEC that are more willing to continue producing high amounts of oil, thus reducing demand. Take Saudi Arabia (and their allies such as Kuwait, the United Arab Emirates, and Qatar) (CNN, 2015). Saudi Arabia, for example, has enough oil for under two centuries of production and sales. However, Saudi Arabia is strategic about their strategy. They have recently been concerned about US shale oil, and the possible extraction and sales of this oil. Saudi Arabia understands that as more oil companies are exploring for oil in the US or Canada, that this could have a great affect on their long-term oil business. It is in there interest to find ways to push these oil companies out of business. And the way that they are able to do so is through high oil supply. In fact, “OPEC has set a production target almost without interruption since 1982, though member countries often ignored it and pumped well above it. The ceiling of 30 million barrels a day, in place since 2011 and now abandoned as too rigid, is no exception. OPEC output has outstripped it for 18 consecutive months, according to data compiled by Bloomberg. Now the organization says it will keep pumping as much as it does now — about 31.5 million barrels a day — effectively endorsing limitless output” (Bloomberg Business, 2015). States are not following the recommendation, and are looking out for their own interests, producing what is beneficial for their own domestic and international interests, often at the expense of the other OPEC member states. 

At current prices, it is not worth many US and Canadian companies to explore for oil. In fact, many companies have greatly cut their oil exploration budgets. If however, oil was worth more, then it would be in the interests of these companies and countries to expand their oil sectors. But this would be detrimental to a country like Saudi Arabia, who has much invested in their long-term oil industry. So, Saudi Arabia’s position in OPEC has been to continue to supply oil (and they have been producing about 10.3 million barrels per day). This keeps prices low, shuts out US and Canadian companies, keeps international consumers happy (with cheap gas prices), which in turn puts little pressure on their governments to move towards alternative energy.

But as mentioned, this only helps countries with high oil supplies, those with little current need for finances, and those who are willing to take less today to ensure a lack of development of alternative energies, or the expansion of additional oil entities. However, again, this hurts countries who don’t have a long time horizon for oil production, and also those who need more revenue today. And although it is hurting Saudi Arabia’s cash reserves, they are willing to take the short-term hit, for future benefits. 

It is for these reasons that in 2015, OPEC states were not in agreement with one another. It has Laura Hurst, Nayla Razzouk, and Julian Lee of Bloomberg Business argue that “OPEC has abandoned all pretense of acting as a cartel. It’s now every member for itself.” And the Sydney Morning Herald called OPEC “dead” after the December meeting came and went without an agreement on oil supply, leaving countries to operate on their own, without concern for an OPEC output agreement.

It will not be surprising if Saudi Arabia cuts supply in the next couple of years. But they will do so when they think that oil companies have moved further away from their own oil exploration. As of right now, it seems to be working. Looking at US oil in December of 2015, “U.S. crude settled 2.7 percent lower at $39.97 a barrel,” which is close to the cost of OPEC oil per barrel (CNBC, 2015). It is interesting to note however that some question whether this policy can be sustainable. For example, in an article in MarketWatch, Professor T. Homer Bonitsis was asked about Saudi Arabia’s approach towards oil supply. Bonitsis argued that “The Saudi strategy of attempting to knock out competitors by using predatory pricing is not a game changer long-term…Some producers may shut down temporarily, but will reopen when prices recover again. Indeed, some producers may go bankrupt—only to have their assets sold at bargain prices. The new investors in these assets have a lower fixed cost structure to produce oil; in essence, creating a lower-cost competitor! The policy is doomed to failure long-term.”

Saudi Arabia’s Foreign Policy

Along with Saudi Arabia’s moves towards reducing the ability of their competition to produce oil in North America, Saudi Arabia also has other reasons for keeping prices low that are not related to US and Canadian oil production. As mentioned, Iran–another OPEC member–wants to reduce oil supply. Iran and Saudi Arabia are regional rivals with one another. By keeping prices low, Saudi Arabia knows that it is weakening Iran, which is something that they are comfortable with. If Iran becomes stronger (and can be so through more oil revenue), this will concern Saudi Arabia. But along with hurting Iran, Saudi Arabia is also on different sides of the conflict with Syrian leader Bashar Al-Assad, as well as Russia (and Vladimir Putin). By keeping prices low, Al-Assad has less revenue (although he has lost some of his oil share to ISIS). In addition, Russia also has less to spend from their energy profits. So, there are foreign policy interests for Saudi Arabia, Kuwait, and their allies in OPEC. Moreover, because of ISIS’ takeover of large segments of Syrian oil, low oil prices have also been a way to combat their economic profits from oil sales.

Saudi Arabia and the Future of OPEC

In 2016, there have been discussions about the possibility that Saudi Arabia was distancing itself from OPEC, which would lead to a much weaker international organization with regards to influencing oil supply on the international market. According to some, this feeling by Saudi Arabia has been developing for years. In 2014, Saudi Arabia ignored the wishes of many OPEC states to cut supply. For Saudi Arabia, their own political and economic interests were selected, at the expense of other members’ interests. While that in and of itself is not necessarily surprising, what that decision did do is lead to further individualized behavior in OPEC. 

Then, in April of 2016, “Saudi Arabia scuttled the production freeze deal in Doha, killing what would have been only a modest agreement that put limits on oil output. By all accounts, the emergence of the young Deputy Crown Prince Mohammed bin Salman led to a harder line from Saudi Arabia. The replacement of long-time oil minister Ali al-Naimi a few weeks later solidified perceptions of a new era in Saudi Arabia. The Saudi government has very little inclination to limit its output just as its strategy is bearing fruit, and even less of a willingness to work with Iran, its regional rival, who it is battling in proxy wars in Yemen and Syria. Saudi Arabia is going it alone and oil production is now close to record levels, above 10.2 mb/d” (Cunningham, 2016).  But with the recent announcement of the new economic plan in Saudi Arabia to remove itself from reliance on oil, there are discussions that Saudi Arabia will have even less of an interest in OPEC (Cunningham, 2016).

The questions about OPEC’s ability to control oil supplies within the member states was further questioned after OPEC members, who, meeting in early June of 2016, were unable to agree on production caps. This then led to the continuation of oil levels. Because of the inability for OPEC members to all come to an agreement on reducing oil output, it has some, such as senior energy analysts Fadel Gheit to say that “OPEC is finished. OPEC is over” (Fox, 2016). And while others might question the long term ending of an international organization such as OPEC, it is clear that the countries within the IO are not on the same page with regards to their respective production levels. 

Conclusion

OPEC was created to give power to the individual oil producing states, but more specifically to work with other oil-rich countries in order to increase their power in the international system. However, in the past year, it seems that countries within OPEC are driven as much by their own economic and political interests as they are for a unified oil production policy, the effects of which have left OPEC much weaker as an international organization as in recent years (and decades) past. OPEC may continue to play an influential role in the politics of oil in the world, but as long as states with the organization have divergent and contrary interests in the Middle East and elsewhere, it will be unlikely to see the 12 states with the Organization of the Petroleum Exporting Countries to maintain a unified and common policy toward their oil production and oil output.