OPEC – the Organisation of the Petroleum Exporting Countries – is celebrating its 50th anniversary, having been established in September 1960. It is therefore an opportune time to review its achievements.
There were five founder members — Iran, Iraq, Kuwait, Saudi Arabia and Venezuela — and today there are 12. These countries were later joined by Qatar (1961), Indonesia (1962), Libya (1962), the United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), Gabon (1975) and Angola (2007). Gabon terminated its membership in 1995 and Indonesia suspended its membership effective January 2009.
The organisation initially operated from Switzerland but in 1965 opened headquarters in Vienna, Austria, where it has been ever since. There is a small – and very able – permanent staff, most of whom are seconded from the member countries.
Opec’s stated objective is to co-ordinate and unify petroleum policies among member countries in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.
The current 12 member countries accounted for 22.5% of world oil production in 2009. Their share of the world’s proved oil reserves is much higher at about 72%. Their reserves: production ratio is 85, implying that they can produce for another 85 years at the current level of output. The non-Opec ratio is only 18.
It is difficult to assess the real impact of Opec, although there have been various books and many more academic articles. I believe it attracts much more attention and publicity than merited, so some of the achievements have been exaggerated. Nevertheless, it has undoubtedly had a significant impact on the oil industry during some periods of the 50 years.
Few will have expected Opec to last as long as it has. After all, members include politically volatile countries such as Iraq, Iran and Venezuela. Some have been at war with each other, notably Iraq’s invasion of Kuwait.
Nevertheless, there are many similarities among the members which have helped maintain a common purpose. Most of their economies are very dependent on oil and could be described as developing, in contrast to those of the big oil consumers such as the US, Japan and EU.
Saudi Arabia is clearly the most important because of its massive oil reserves but it has not dominated Opec despite its crucial role as the world’s swing producer. Saudi is the only country with substantial spare capacity and has generally been willing to reduce or increase production in line with the organisation’s wider interests.
I believe it is important to note that major oil exporters such as Norway and the Russian Federation – plus the UK in the past – have never joined Opec, for differing reasons.
In the UK’s case – and some other countries – membership might have been in conflict with international obligations to the European Commission and World Trade Organisation, because Opec is clearly a cartel.
It sets annual production quotas for member countries, which are usually reviewed each year. Most countries usually exceed their published quotas but Opec normally turns a blind eye, particularly for the poorer countries. Saudi Arabia and to a lesser extent the UAE have usually been willing to compensate by reducing their own production accordingly.
Iran is the worst offender at the present time, because of the international sanctions and the country’s desperate need for foreign currency. Iraq will cause increasing problems as its oil industry revives and output increases to former levels.
Opec rose to international prominence during the 1970s, as member countries took control of their domestic petroleum industries and acquired a major say in the pricing of crude oil on world markets. On two occasions, oil prices rose steeply, triggered by the Arab oil embargo in 1973 and the Iranian revolution in 1979.
Oil prices crashed in 1986 and since then Opec has been in a much weaker position. I believe there are two main reasons for that: the rise in non-Opec oil production in countries such as the UK and Norway; and the trend towards non-oil consumption, notably gas for electricity production and more recently the growth of renewables.
Prices were remarkably stable in the 1990s and the first decade of the 2000s, until the massive price spike in 2008 to a peak of $145 per barrel. I have still not read a convincing explanation of that spike but personally believe that much of it was attributable to hedge funds and other speculators.
The cartel responded sensibly and constructively to the price fluctuations in 2008 and 2009, and I believe has re-established a good reputation in the oil industry.
Its influence today may be relatively minor but the reserves estimates mentioned earlier suggest that its power must strengthen again in the near future.
Having lasted 50 years, I am sure its members will be willing to wait for a few more years as non-Opec production continues to decline.
Tony Mackay is MD of economists Mackay Consultants
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