Impact of Opec Essays

Impact of Opec Essays Impact of Opec Essay Impact of Opec Essay The Organization of the Petroleum Exporting Countries (OPEC), inter-governmental organization, was established at the Baghdad Conference in Iraq in September 1960 by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. These five countries were later joined by eight other countries; Qatar (1961), Indonesia (1962), Libya (1962), United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), and Gabon (1975). Ecuador and Gabon withdrew from OPEC in 1992 and 1994. The current eleven OPEC members account for about 40 per cent of world oil production, and two-thirds of the world’s proven oil reserves. Note: Iraq remains a member of OPEC, but Iraq’s production has not been a part of OPEC quota since 1998). The purpose of OPEC is to co-ordinate and unifies petroleum policies among the member in order to limit supplies in the hope of keeping prices high. From 1920s to 1960s, the major oil companies colluded to prevent prices from falling. In th e 1960s, OPEC had started as a group of five oil producing, developing countries, seeking out the member countries’ legitimate rights in the international oil market. So the rise of OPEC was tied to a shifting balance of power from the multi-national oil companies to the oil producing countries. The creation of OPEC intensified the need among the Third World countries for closer cooperation in order to achieve their political and economic objectives. Membership grew to ten within the decade. In 1970’s, member countries took control of their domestic petroleum industries and acquired the right to influence the pricing of crude oil on the world market. There were two oil pricing crises, triggered by the Arab oil embargo in 1973 and the Iranian Revolution in 1979. During the 1973 War between Egypt and Israel, Saudi Arabia refused to increase production in order to halt rising prices unless the United States backed the Arab position. When the U. S. government proposed a military aid package for Israel, Arab States began an oil embargo against the United States and later expanded to the Portugal, South Africa, and Netherlands. The first Summit of OPEC sovereigns and Heads of State was held in Algiers in 1975. OPEC acquired its 11th and final current member, Nigeria, in 1971. In 1980s, oil prices peaked at the early period in the decade. Iranian Revolution and ensuing stop of Iranian petroleum exports had caused panic and speculation in the world oil market. This is called Second Oil Shock. Moreover, the outbreak of the war between Iran and Iraq in 1980 affected the oil market. The Iran-Iraq war removed almost 4 million barrels of oil a day from the world market. Since early 1980s, the world petroleum market confronted OPEC with an unfavorable choice such as cutting price to regain market or cutting production to maintain price. But OPEC did not want to reduce oil prices; for fear that they would loose economic and political gains, and their political influence. Environmental issues began to be discussed as an international agenda In the early 1990s, OPEC experienced a third price crisis when Iraq invaded OPEC member Kuwait. Iraq had long claimed the territory of Kuwait. In 1991 the territorial conflict was worsen by the oil issues. One of them was the continued pumping of oil by Kuwait from a field located under both countries and another issue was low oil revenues for Iraq which made playing off its war debts difficult. Iraqi invasion would expand revenues. Iraqi power in OPEC raised oil price and increases war debts to Kuwait. Iraq thought that the United State response would be political and economic sanction. But the Iraqi invasion causes a military response which was supported by a coalition of western and Arab states. The absence of the two major oil producers (Iraq and Kuwait), could have raised the oil price to ceiling. Meanwhile, Saudi Arabia and other oil producers expanded production to keep prices from raising a great deal. Since the Persian Gulf War, Iraq has refused to compliant with the United Nations resolutions; in other words, Iraq invasion has resulted in a long term oil embargo. During the 1990s, OPEC continued to emphasize oil production quotas. Oil prices collapsed at the end of the period, but began to increase in the beginning of 21st century, owing to the greater unification of OPEC members and increasing the well-governed oil company in Non-OPEC countries such as (Mexico, Oman, Russia, and Norway), and also increased tensions in the Middle East, and political crises in Venezuela affected oil prices in the world. OPEC has attempted to develop a coherent environmental policy because the international efforts to reduce the oil consumption have been more significant in this century. Economic Impact of OPEC: Our economy depends on its cost, of which a large part is represented by the cost of energy. The cost of the oil products is affected by the price of crude oil, taxation and other causes. The price of crude oil is influenced by the decisions taken by oil producers, especially the price for which they are willing to sell. Oil prices obviously matter to the world economy and OPEC still has influence on oil price decision. Higher oil prices since 1999 was partly caused by OPEC mal-management of oil supply. We can see that OPEC has influence on global economy, because oil prices remain an important determinant of economic performance of each county. If there is a shortage of oil supplies, oil price will rise. This would have all sorts of implications for industry, such as higher transportation costs. Higher costs can lead to lower economic growth. U. S. oil prices began to increase in the early 1970s when OPEC began to assume a major influence on oil prices. In 1970, OPEC members agreed to set an oil export tax rate of 55 percent, and OPEC members started to nationalize the oil industry. In 1973, Arab’s embargo resulted in that crude oil prices increased from average of $4. 15 per barrel in 1973 to $9. 07 in 1974, which led to the United States recession in 1974. In the late 1970’s, during the Iranian Revolution, declination of oil production led huge price increases. U. S. crude oil prices increased from $12. 46 per barrel in 1978 to $35. 24 in 1981. OPEC had huge impact on the economic industries. In term of oil price development, the cost of crude oil for U. S. refiners was $20 in 1996. Oil prices dropped a little in 1997; the cost fell to $12. 04 per barrel. Countries benefited from the lower cost of virtually oil products. Concerning this issue, OPEC member countries agreed to cut production, and OPEC tried to maintain the crude oil price above U. S. refiner cost in 1999. The production cuts pushed crude oil price up, hitting $30 per barrel in 2000. The production, however, started to increase, because OPEC tried to maintain market stability. Economic impact of OPEC has declined in the decades. The United States and other economies are less dependent on oil than they were 20 years ago. Because U. S. and other nation’s economies produces much more national output for each barrel of oil consumed compare to when they produced before. In 1970s, the U. S. economy generated about $250,000 of national output based on per barrel of oil consumed, but in 1999, economy produced about $450. 000 per barrel. This date shows the improved performance of the U. S. economy based on per barrel of oil consumed. Efficiency improvements, seeking out other energy sources have lessened the dependence of the U. S. economy on oil. Another data shows the declination of economic impact of OPEC, the U. S. economy spent more than 6 percent of GDP in crude oil in 1980 and 1981, when average price of crude oil was $28 a barrel. In 1996 to 1997, the price was $20 per barrel. But the percent of GDP spent on crude oil is less than 2 percent and 1 percent in 1998. These data indicates that oil price increases has less influenced the economy than they had in 1980s. Power of Saudi Arabia: Saudi Arabia’s economy heavily dependent on oil with export oil revenues accounting around 90 percent of total Saudi export earning, 70 percent of state revenues and 40 percent of the its GDP. Saudi Arabia holds the world’s largest petroleum reserves and accounts over one-third and one-half of total OPEC oil production. Saudi Arabia’s oil policy has huge influence world oil pricing. Three basics of its policy are; maintaining stability in oil markets; opposing high oil prices that might discourage demand growth or lead to a rapid rise in Non-OPEC production; maintaining its own dominant market share in the United States. Saudi Arabia has dominated the world oil market by emphasizing the market control and avoiding the new competition and maintaining the higher prices. It is true that the policy has worked well. Saudi Arabia is considered as a dominant firm while many other OPEC countries are price-takers. One thing with the problem that Saudi Arabia is a dominant firm is that its share of OPEC production rose from 24 percent in 1973 to 37 percent in 1980. So Saudi Arabia is in a better situation than other exporters. Within a considerable range of market conditions, Saudi Arabia could stabilize prices by restricting its own production and exports. Saudi Arabia also has a great ability to expand its production, and has wide political influence that reinforces the power that it derives from being the largest exporters of oil. In 1999, Saudi Arabia took a key role in coordinating campaign of OPEC and other oil-producing countries to raise the oil price to its highest level since the Gulf War by managing production and oil supply. Moreover, Saudi Arabia established the Supreme Economic Council to formulate and coordinate economic development policies for institutional reforms. Relationship to Non-OPEC Countries and Prospects: OPEC and Non OPEC countries often agree to reduce oil and gas supply to check prices. This cooperation is rather strange but since both organizations often benefit from high oil price, then each organization may be obliged to cut or increase oil production at the request of the other countries. So oil price is decided based on demand and supply to maximize the profit of producing of OPEC and Non-OPEC. OPEC supplies 40 percent to 45 percent of world’s oil supply and holds 75 percent of proven revenues and Non-OPEC countries produce 60 percent of the world oil (est. 2004). Most Non-OPEC countries have private sectors; there is little government intervention over production level. Non-OPEC productions were more vulnerable to price collapse because Non-OPEC countries’ production costs tend to be higher than OPEC costs. The production of Non-OPEC countries has declined in decades, and OPEC may be more important role to decide oil prices. However, OPEC has actual influence on price, but does not control or set the oil price directly. The world oil market itself appears to be in change of pricing and in a long term the main deciding factor will be substantially of OPEC revenues. The problem of capacity and depletion will be more significant. When oil price increases, countries start to produce more and undersell each other. The question arises as to how efficiently OPEC can implement the long –term strategy? Needless to say, we are faced with the problem â€Å"increasing demand and decreasing supply† in the world oil market. Reduction of oil production in Non-OPEC is also a burden to OPEC. OPEC member countries are aware of growing international need of renewable energy and environmental problems due to use of fossil fuels. But there is no specific alternative energy supply in the near future and there is no significant regulation to control energy consumption in the market based economy. How many people feel it an emergency? How many people know that the United State has refused to sign the Kyoto Protocol? It will not take long before our demand completely exceeds the production capability of the oil countries.