The Organization Of The Petroleum Exporting Countries

Published Date: 02 Nov 2017

The organization of the Petroleum Exporting Countries (OPEC) was formed by five oil-producing developing countries at the Baghdad Conference that took place on September 10-14 1960. The OPEC was formed at times of great distress, with wide decolonization and establishment of many new countries. At the time the international oil market was conquered by the "Seven Sisters" multinational companies. OPEC set its objective and established its Secretariat in Geneva and then in Vienna in 1965. In 1968 the OPEC adopted a Declaratory Statement which gave the right of all countries to have power over their natural resources in the interest of their national development. By this time the number of members has reached ten.

By the 1970s OPEC had risen to international eminence, as its members practiced more and more control of their own petroleum industries and the pricing of the crude oil in the world markets. Triggered by the Yom Kippur War Oil Embargo (Arab oil embargo) in 1973 and the eruption of the Iranian Revolution in the 1979, the oil prices rose steeply in the market. By 1975 the membership grew to 13.

After these events the prices began to fall early in the 1980’s until its crash in 1986. This was merely due to the surplus of oil at that time and the consumer turn away from this hydrocarbon. OPEC’s market share of the oil began to fall drastically and its total revenue dropped to almost a third below what it was earning at the beginning of the decade. This caused economic difficulties for many of its members. By the end of the decade, OPEC introduced a group production ceiling amongst its members and a reference basket for pricing, these decisions caused prices to rise, but about half of its earlier peaks.

In the 1990’s prices were much more stable than in the past two decades. Although actions taken by the OPEC reduced the impact of the Gulf War on the market in 1990-1991, the prices were generally low during this decade. Furthermore the South-East Asian economic recession and mild Northern Hemisphere winter of 1998-99 set the prices back as low as the 1980’s.

A creative OPEC oil price band method helped support and stabilize crude prices in the early years of the decade. In 2004 a mixture of market forces, rumor and other factors changed the situation, pushing up prices and increasing instability in the crude oil market. Prices increased to extremely high levels in mid-2008, before falling in the emerging global financial chaos and economic recession. OPEC’s second and third summits which took place in 2000 and 2007 in Caracas and Riyadh established stable energy markets, sustainable development and the environment as three guide lines, and it adopted a comprehensive long-term strategy in 2005. One country joined OPEC, another reactivated its Membership and a third suspended it.

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The above figures illustrate the crude oil price versus time from 1973 to 2011, annotating the major political events that took place at this time affecting the price. This has already been explained above.

Members

The OPEC currently consists of 12 oil producing and exporting countries, spread across America, Asia and Africa. These members are mentioned in the table below. For all of these countries, oil is the profit-making and foreign exchange earner for them. Thus oil is very important for them and its revenue is not just used for economic and industrial development but to provide the people with jobs, healthcare, good education and an acceptable standard of living.

The OPEC law states that any country with an extensive net export of crude oil and with similar interests as its former members can apply for a membership, if accepted by three-fourth of the members including the founders.

There are three categories of membership, Founder Member, Full Member and Associate Member. Founder Members are those which were present at the first conference in Baghdad on September 1960, and signed the original agreement. Full Members are the Founder Members in addition to those countries whose application have been accepted. Associate Members are those countries which do not qualify for membership but are admitted under special circumstances.

Country

Joined OPEC

Location

Algeria

1969

Africa

Angola

2007

Africa

Ecuador **

rejoined 2007

South America

IR Iran *

1960

Middle East

Iraq *

1960

Middle East

Kuwait *

1960

Middle East

Libya

1962

Africa

Nigeria

1971

Africa

Qatar

1961

Middle East

Saudi Arabia *

1960

Middle East

United Arab Emirates

1967

Middle East

Venezuela*

1960

South America

* Founder Members

** Ecuador joined OPEC in 1973, suspended its membership from Dec. 1992-Oct. 2007

OPEC Objectives and Function

The organization’s main targets are:

To synchronize and unite the petroleum policies of the Member Countries and to determine the best means for protecting their individual and group interests;

To find ways and methods of making sure that the prices are stable in the international oil markets, with a view to eliminating harmful and unnecessary changes or fluctuations in the oil prices.

To provide an efficient economic and regular supply of oil to consuming countries and a reasonable return on investment to those investing in the petroleum industry.

Function

Each year the Member Countries send their representatives to meet at the OPEC Conference. The aim of this meeting is to ensure and promote stability and harmony in the oil market by co-coordinating and unifying their policies regarding their oil production. This is done by considering the current situation and anticipating the future market essentials, such as supply and demand, and then considering the changes to be made to their policies in order to maintain stable prices and steady supply of oil to consumer countries. The Representatives from each Member Country is supported by the OPEC Secretariat, directed by the Board of Governors and run by the Secretary General.