OPEC (Organization of Petroleum Exporting Countries)

The OPEC has been created in September 1960 during a Conference held in Bagdad by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela upon an Iraqi initiative. Today OPEC consists of 11 member countries. The aim of the organisation is to combine and coordinate members’oil production and export policies in order to safeguard their interests. Decisions referred to the OPEC Pricing Policy are taken during the regular meeetings of the national oil ministers of the member states. Since the early ’80s, the organisation started fixing quota agreements influencing the world oil supply and consequently the inflation rates, the currency exchange rates and the Trade Balances of the countries which are most dependent on imported oil. The OPEC member states are the following :

  • Algeria
  • Angola
  • Ecuador
  • Indonesia (withdrew in 2008 when became for the first time a net importer of oil, expressing its desire, nonetheless, to re-enter the Organisation if it becomes once again a net exporting of oil)
  • Iran
  • Iraq
  • Kuwait
  • Libya
  • Nigeria
  • Qatar
  • Saudi Arabia
  • United Arab Emirates
  • Venezuela

These countries account for 2/3 of the known deposits of crude oil (2/3 of which are located in the Middle East) whereas obviously Non OPEC Countries hold less then 1/4 of the total amount of the word known oil reserves. In 1996, OPEC Members represented 33.3% of the oil world production (including crude oil, natural gas liquids, refinery gain, etc…). At the end of 1999, OPEC Crude Oil production amounted to 26,507 b/d, in July 2000 OPEC supplied approx.28,172 b/d.

The OPEC headquarters are located in Vienna (Austria) and the organization’s Secretary General is Mr.Abdallah Salem el-Badri, elected in January 2007.

The organization has three main weak points:

  • Its decisions require unanimity for adoption.
  • Its members do not always abide by the decisions which are taken.
  • The Organization does not include all the major players in the Oil Market arena such as Angola, Bahrain, Brunei, the United Kingdom, Mexico, Norway, Oman, the United States, Russia and the former Soviet republics.

In February 1999, after the steep decline in the oil market which led to a price of less than $ 10 a barrel OPEC oil ministers reached a new agreement in The Hague on 12 March 1999. The members of this meeting were : Saudi Arabia, Iran, Algeria, Venezuela and Mexico. This agreement which comprehended OPEC plus Mexico, Norway and Oman enacted further cuts of just 2 million barrels a day, on top of the 2.6 million million a day already agreed by OPEC in July 1998, with an implicit threat that Saudi Arabia could use its production muscle, if necessary, to keep the other producers in line until oil prices reaches $ 15 a barrel.

Following unusually disciplined reductions in supply under the The Hague agreement, the oil price recovered rapidly and more than doubbled in six months time, approaching $ 24 by the middle of September 1999. The market continues to show signs that the exporter group will continue to abide by this agreement by reducing total output at least till the expiry date of the agreement in March 2000. On 17 November, oil ministers of two of the biggest OPEC exporters – Saudi Arabia and Venezuela – and Mexico re-confirmed in Riyadh that the cuts would stay in place at least until the end of March 2000. Later on the same day, the barrel hit $ 25, a level last seen during the second Gulf War. This time obviously the oil producers have been able to slice their outputs because the March 1999 agreement has rapidly been very effective.

On 22 November, crude oil leapt even further high, close to $ 26 when Irak started implementing a threat to halt its 2.2 million barrels a day of exports related to the UN « Oil for Food Resolution ». As a result, the average price in 1999 was finally over 18 $ a barrel.

Contrarily to expectations of many experts, the rise of the oil price continued in 2000, nearing 30 $ by the middle of February and 34$ in early September 2000. These increases in prices are mainly due to the higher oil demand induced by the higher growth of Asian Economies, a continuous expansion of the US Market, and a stagnation of the Non OPEC Countries’production caused by very small investment efforts done during the low prices period.

Following intense pressure by the U.S., Saudi Arabia convinced most of the other OPEC members on March 28 to raise from April 1 their production by 6.5 % (1.7 millions b/d). This was intended to stabilize the barrel around 25$. Nevertheless, the price raised again after a while and was reaching 32 $ by mid-June 2000.

On June 21, OPEC took the decision to raise again its production by 708,000 b/d from July 1. As this decision turned out to have little effect, Saudi Arabia – which is the only OPEC member having a significant amount of spare production capacity – announced on July 3 that it could unilaterally release 500,000 b/p more if prices do not go down to $ 25.

The rise of crude oil prices will boost the inflation everywhere. Concerning the European Union and the euro-zone, the inflation forecast for 2000 has been revised from 1.2 to 1.5%, and it is forseen that there will be a slight further acceleration in 2001, to 1.6% (figures given by the European Commission in November 1999). Higher oil prices will certainly push up inflation more in Europe than in the U.S. but the output loss will be significantly bigger in Japan than in Europe or the USA (due to the fact that Japan is more dependent on imported oil and exports less to OPEC countries than the EU). The main reason why the US administration was so eager to obtain a substantial reduction of the price per barrel was that the gasoline price in the US was nearing 2 $ a gallon, a level which could be politically disastrous for the Democrat administration during a presidential campaign. In spite of the OPEC decisions, the price has gone over 2 $ a gallon in some parts of the US during summer 2000. At this very moment, within the Euro Zone, the industrial producer price index rose by 0.4% in June 2000 compared with a revised 0.7% increase for May 2000. In spite of the recent resolution/gesture of OPEC Members to raise the oil production by 3% i.e. 80,000 b/d (following the preveous quota enlargments of March 1,7 million b/d and 708,000 b/d in June 2000) gasoline prices keep growing in Europe leading to strikes and social discontent all over the Euro Zone (see Truckers strikes in Belgium, France and UK in September 2000).

The events of September 11, 2001, the invasion of Afghanistan in the same year, the Iraq war launched in 2003 whose consequences prevail today have caused an important surge in oil prices in recent years, pushing countries such as Indonesia to remove itself from the Organisation in a desperate effort to protect its national oil interests. Simultaneously, the OPEC has to confront the issue of declining global oil demand.

See also OAPEC

OPEC e-mail address : info@opec.org

Official OPEC website : http://www.opec.org