Sixtieth Anniversary of OPEC: Pivot of Global Oil Market
Sixtieth Anniversary of OPEC: Pivot of Global Oil Market
September 14, 2020 marks the sixtieth anniversary of the Organization of the Petroleum, Exporting Countries or OPEC.

TEHRAN (Iran News) – September 14, 2020 marks the sixtieth anniversary of the Organization of the Petroleum, Exporting Countries or OPEC – almost two thirds of a century of existence characterized by embargo, conflict, and even war.

It is an intergovernmental organization of 13 nations founded in 1960 in Baghdad by the first five members (Iran, Iraq, Kuwait, Saudi Arabia and Venezuela) and headquartered since 1965 in Vienna, Austria. In 2019, OPEC accounted for 42.0 percent of global oil production and 71.8 percent of the world’s proven oil reserves, giving it a major influence over the global oil market and prices that were previously controlled by the so-called “Seven Sisters” cartel of the world’s largest multinational oil companies. 1

The stated mission of the organization is to “coordinate and unify the oil policies of its member countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of oil to consumers, a steady income to producers, and a fair return on capital for those investing in the oil industry. 2 The organization is also a significant provider of information about the international oil market. The current OPEC members are Algeria, Angola, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, the Republic of Congo, Saudi Arabia, the UAE and Venezuela.

The formation of OPEC marked a turning point toward national sovereignty over natural resources and OPEC decisions have come to play a prominent role in the global oil market and international relations. The effect can be particularly strong when wars or civil disorders lead to extended disruptions of supply. In the 1970s, restrictions in oil production led to a dramatic rise in oil prices and in the revenue and wealth of OPEC with long-lasting and far-reaching consequences for the global economy. In the 1980s, OPEC began setting production quotas for its member nations; generally, when the quotas are reduced, oil prices increase. This has occurred most recently from the organization’s 2008, 2016 and 2020 decisions to trim oversupply.

The OPEC Reference Basket of Crudes has been an important benchmark for oil prices since 2000.

How influential is OPEC?

The influence of OPEC has closely followed the peaks and valleys of the world’s demand for oil.

However, the greatest challenge OPEC has so far faced in its history was the COVID-19 pandemic, an event which will go into history as the most destructive event that has hit the global economy in almost a century.  Indeed its impact is already far bigger than those of both the financial crisis of 2008-9 and the 2014 oil price crash. 3 There are indications that its adverse impact could be even bigger than that of the 1929 Great Depression.

Today, economists and analysts debate about how influential OPEC is. Conventional wisdom holds that OPEC has the world in its grasp. It can manipulate prices by tinkering with supplies. But the conventional wisdom is mostly wrong. For the most part, its actions lagged behind fundamental changes in oil supply and demand rather than leading them. OPEC looks like a masterful cartel when, in fact, it is mainly just riding the waves.

Decision-making inside OPEC is quite complicated most of the time. This is because the policies of its de facto leader Saudi Arabia sometimes differ radically from those of other OPEC members’ in relation to prices and supplies.

Three times since the early 1980s, Saudi Arabia has singlehandedly and unsuccessfully taken decisions which diverged from the interests of OPEC.

Early in the 1980s, Sheikh Ahmad Zaki Yamani, the veteran former oil minister of Saudi Arabia, suddenly awoke to Saudi Arabia’s need for market share. He flooded the market with oil causing the oil price to collapse to $10 per barrel. It later transpired that the Saudi need for a market share was just a cover for a CIA-Saudi conspiracy to expedite the downfall of the former Soviet Union with the Reagan administration starting a costly arms race and Saudi Arabia depressing oil prices by flooding the market. Saudi Arabia ended bankrupting itself in the service of the United States. 4

In the aftermath of the 2014 crude oil price crash, the oil price lost 54 percent of its value and there were no indications that it will stop there in the absence of a major production cut by OPEC. At one point the price fell to $30.

Instead of agreeing to production cuts with OPEC, Saudi Arabia ignored OPEC and flooded the global oil market with oil. Circumstantial evidence suggested some political collusion between Saudi Arabia and the United States behind the steep decline in oil prices aimed against Iran and Russia.

Saudi Arabia was forced to eventually discard its strategy and engineer with Russia an OPEC/non-OPEC production cut agreement whereby OPEC and Russia cut production in support of oil prices effective as of January 1, 2017. As a result, prices have recovered from $40 a barrel to almost $80. The agreement has since been extended to the end of 2018 with talks going on about converting it into a permanent mechanism for cooperation between OPEC and Russia in what has been dubbed as OPEC+.

And with prices falling by more than 50 percent as a result of the COVID-19 pandemic since hitting £60 in January, OPEC+ met on March 6 and 7 to discuss new production cuts or deepening existing ones. Saudi Arabia called for deeper cuts amounting to 1.5 million barrels a day (mbd).

Russia refused to agree to deeper cuts arguing that OPEC’s proposal for cuts of between 600,000 barrels a day (b/d) and 1.5 mbd would have been ‘a drop in the ocean’ in a market where oil demand is plunging fast. Considering that oil demand was already down by 15 mbd and could reach 20 mbd in coming weeks, influencing the market with the cuts proposed by Saudi-led OPEC would have been impossible. 5

Russia’s refusal was the last straw for Saudi Arabia so it decided rashly to wage a price war against Russia and flood the global oil market with oil. This exacerbated the destruction of global oil demand leading to prices sinking below $20 a barrel.

Anti-OPEC bill could be a game-changer for oil markets

In its effort to wrest more control over global oil markets away from foreign producers, the US Congress has been pushing a bill that would let the US sue OPEC for an alleged oil price fixing. The bill called ‘No Oil Producing and Exporting Cartels Act’, or ‘NOPEC’, was first introduced in May 2018. 6

  • source : Iran Daily