Type: Response Essays
Sample donated: Leticia Lyons
Last updated: September 15, 2019
OPEC is a permanent, intergovernmental organizationcreated at the Baghdad Conference on September 10-14, 1960. It was an outgrowthof the 1st Arab Petroleum Congress in 1959 when the Oil ConsultationCommission, created by a few of the oil producing countries, signed what wasknown as the Maadi Pact at the end of their meetings. The organization is also a significant provider ofinformation about the international oil market.
Other cartels are: TheInternational Energy Agency (IEA) is one of thelarger organizations involved in the oil and gas industry. The IEA is theenergy forum for 26 industrialized countries. Formed by the Organization forEconomic Cooperation and Development (OECD) as an autonomous intergovernmentalentity within the OECD in 1974 in direct response to the oil crisis, itsmembers include: Australia, Austria, Belgium, Canada, the Czech Republic,Denmark, Finland, France, Germany, Greece, Hungary Ireland, Italy, Japan,Republic of Korea, Luxembourg, The Netherlands New Zealand, Norway,(participates under a special Agreement), Portugal, Spain, Sweden, Switzerland,Turkey, United Kingdom, and the United States.
One of the overall objectives ofthe IEA, which reflects the original reason for the group’s establishment, isto seek ways to reduce the members’ vulnerability to a supply disruption. TheOrganization of Arab Petroleum Exporting Countries (OAPEC) was established in 1968 and is based in Kuwait.Membership is limited to petroleum producing Arab countries. The three foundingmembers were Kuwait, Libya, and Saudi Arabia. The OAPEC is not a cartel in thesame sense as OPEC. OAPEC is devoted to developmental activities and increasingthe cooperation among its members. MOTIVATIONFOR CHOOSING THE TOPIC OPEC members strongly prefer to describe theirorganization as a modest force for market stabilization, rather than a powerfulanti-competitive cartel. In its defense, the organization was founded as acounterweight against the previous “Seven Sisters” cartel ofmultinational oil companies, and non-OPEC energy suppliers have maintainedenough market share for a substantial degree of worldwide competition.
Moreover, because of an economic “prisoner’s dilemma” that encourageseach member nation individually to discount its price and exceed its productionquota, widespread cheating within OPEC often erodes its ability to influenceglobal oil prices through collective action. ORIGINAND NATURE In 1949, Venezuela and Iran took the earliest steps inthe direction of OPEC, by inviting Iraq, Kuwait and Saudi Arabia to improvecommunication among petroleum-exporting nations as the world recovered fromWorld War II. At the time, some of the world’s largest oil fields were justentering production in the Middle East. The United States had established theInterstate Oil Compact Commission to join the Texas Railroad Commission inlimiting overproduction. The US was simultaneously the world’s largest producerand consumer of oil; and the world market was dominated by a group ofmultinational companies known as the “Seven Sisters”, five of whichwere headquartered in the US following the breakup of John D. Rockefeller’soriginal Standard Oil monopoly. Oil-exporting countries were eventuallymotivated to form OPEC as a counterweight to this concentration of politicaland economic power. LITERATUREREVIEW OPEC is mainly Saudi Arabia, the dominant producer,and some other sub-groups and Saudi alone acts like a dominant producer.
(Alhajji and Huettner, 2000) Dermot Gatley (1984) conducted one of the early surveysand grouped OPEC behavior modeling approaches into either a dominanttheoretical approach based on the wealth maximizing model or a simulationapproach based on the target capacity utilization model. (Dermot Gatley, 1984) In 1998, Mabro surveyed and criticized the literatureon OPEC behavior for the period 1960-1998 and grouped it into six categoriesincluding: history, previous literature surveys, economic modeling, politicaleconomy, policy proposals, and trade journals reporting. (Mabro, 1998) OPEC behaves more like an oligopoly with Saudi Arabiaas a price leader and largest producer. (Plaut, 1981) OPEC can control the world oil market via restrictingsupplies to increase prices and achieve certain revenues. (Tussing, 1989) CURRENTSITUATION (2010-2017) By the time of the 2011 Libyan Civil War and Arab Spring,OPEC started issuing explicit statements to counter “excessivespeculation” in oil futures markets, blaming financial speculators forincreasing volatility beyond market fundamentals. On 10 September 2008, with oil prices still nearUS$100/bbl, a production dispute occurred when the Saudis reportedly walked outof a negotiating session where rival members voted to reduce OPEC output.Although Saudi delegates officially endorsed the new quotas, they statedanonymously that they would not observe them.
The New York Times quoted onesuch delegate as saying: “Saudi Arabia will meet the market’s demand. Wewill see what the market requires and we will not leave a customer without oil.The policy has not changed.” Over the next few months, oil prices plummetedinto the $30s, and did not return to $100 until the Libyan Civil War in 2011 During 2014–2015, OPEC members consistently exceededtheir production ceiling, and China experienced a slowdown in economic growth.
At the same time, US oil production nearly doubled from 2008 levels andapproached the world-leading “swing producer” volumes of Saudi Arabiaand Russia, due to the substantial long-term improvement and spread of shale”fracking” technology in response to the years of record oil prices.These developments led in turn to a plunge in US oil import requirements(moving closer to energy independence), a record volume of worldwide oilinventories, and a collapse in oil prices that continued into early 2016. In December 2017, Russia and OPEC agreed to extend theproduction cut of 1.8million barrels/day until the end of 2018 LESSONSLEARNT The term cartel, can be defined as “a group ofparties, factions, or nations united in a common cause; a bloc” as well as”a combination of independent business organizations formed to regulateproduction, pricing, and marketing of goods by the members.” History shows many examples of successful and not sosuccessful cartels – they have been around for hundreds of years. The steelindustry and diamond industries are some examples. However, one of the mostpowerful modern cartels is the Organization of the Petroleum ExportingCountries more commonly referred to as OPEC. Prior to the rise of OPEC, the oil industry wasdominated by the large oil companies often known as the Seven Sisters thatpossessed the technology and skills for exploration and production that thecountries lacked.
OPEC was born, to some extent, to reduce the influence theoil multinationals. As Skeet suggests in his book, “The governments of theoil producing countries in varying degree, but in all cases with increasingfervor, viewed the systems under which the companies operated as an outdatedexample of imperialist domination.” In fact, one of the first thingswritten in the 1st OPEC Conference Resolution in Baghdad states, “Memberscan no longer remain indifferent to the attitude heretofore adopted by the OilCompanies in effecting price modifications.” RECOMMENDATIONS With oil prices rallying above $60 per barrel, Russia hasquestioned the wisdom of extending existing cuts of 1.8 million barrels per day(bpd) until the end of next year as such a move could prompt a spike in U.
S.production. Russia needs much lower oil prices to balance its budgetthan OPEC’s leader Saudi Arabia, which is preparing a stock market listing fornational energy champion Aramco next year and would hence benefit from priciercrude. Six ministers from OPEC and non-OPEC oil producers includingSaudi Arabia and Russia met in Vienna on Wednesday – one day ahead of a fullOPEC gathering – and recommended extending the cuts to the end of 2018. Atpresent, the cuts expire in March. Several sources familiar with the talks havesaid Russia had suggested an option of reviewing the deal at the next OPECmeeting in June in case the oil market overheats. Some Russian producers including Rosneft, run by an ally ofPresident Vladimir Putin, Igor Sechin, have questioned the rationale ofprolonging the cuts, saying it will lead to a loss of market share to U.S.
firms, which are not reducing output. OPEC, which comprises 14 countries, has traditionally beenmuch less worried about exit strategies as its members have been known forreducing compliance and cheating on their quotas towards the expiry of suchdeals. “Russia seems to be pushing OPEC to have a concrete plan tophase out the cuts when appropriate ..
. compared to the typical undisciplinedOPEC strategy,” U.S. bank Tudor, Pickering, Holt & Co, which is active inthe shale industry, said.
BIBLIOGRAPHY “Top 100 Most Influential People in the Shipping Industry: 3. OPEC and the oil men”. Lloyd’s List. 12 December 2014.· “Our Mission”. OPEC.
Retrieved 16 February 2013. “General Information” (PDF). OPEC. May 2012. Retrieved 13 April 2014.· Gülen, S. Gürcan (1996). “Is OPEC a Cartel? Evidence from Cointegration andCausality Tests” (PDF).
The Energy Journal. 17 (2): 43–57. doi:10.5547/issn0195-6574-ej-vol17-no2-3.
Archived from the original on 16 September2000.· Browning, Edgar K.; Zupan,Mark A. (2004). “The Prisoner’s Dilemma and Cheating by CartelMembers”. Microeconomics: Theory &Applications (8th ed.). Wiley.
pp. 394–396. ISBN 978-0471678717. Retrieved 5 September 2016.
· Colgan, Jeff (16 June 2014). “OPEC, the Phantom Menace”. Washington Post.
Retrieved 9 November 2016.· Gately, D. (1984) “A Ten Year Retrospective: OPEC andthe World Oil Market.” Journal ofEconomic Literature, 22(3): 1110-1114. · The American Heritage Dictionary of the EnglishLanguage, 5th ed., · https://ahdictionary.com/word/search.
html?q=cartelExternal Link· Skeet, Ian. OPEC: Twenty Five Years of Prices andPolitics. (Cambridge: New York: Cambridge University Press, 1988), p. 5.