When it comes to oil cartels, one of the most powerful cartels, not just in the oil industry but also throughout modern history, is the Organization of the Petroleum Exporting Countries more commonly referred to as OPEC.
Prior to the rise of OPEC, the oil industry was dominated by the large oil companies often known as the Seven Sisters. These seven companies were Anglo-Iranian Oil Company (now BP), Gulf Oil, Royal Dutch Shell, Standard Oil Company of California (SoCal), Standard Oil Company of New Jersey (Esso), Standard Oil Company of New York (Socony) and TexacoThese companies possessed the technology and skills for exploration and production that the countries lacked. However, the governments of the oil producing countries viewed the systems under which the companies operated as an outdated example of imperialist domination.
OPEC was born, to some extent, to reduce the influence of the oil multinationals.OPEC was thus created at the Baghdad Conference on September 10-14, 1960. It was an outgrowth of the 1st Arab Petroleum Congress in 1959 when the Oil Consultation Commission, created by a few of the oil producing countries, signed what was known as the Maadi Pact at the end of their meetings. Early members were Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela with Qatar, Indonesia, Socialist Peoples Libyan Arab Jamahiriya, United Arab Emirates, Algeria, Nigeria, Ecuador, and Gabon joining later. However, there are large producers who are not members of OPEC, notably Russia, Norway, Mexico, and the United States.Its goal is to co-ordinate and unify petroleum policies among Member Countries.
Issues Motivated for choosing the study Since its inception, OPEC has been viewed in a largely negative light. Much about the actual operations and decision making process of OPEC is unknown. The organization is quite secretive about itself so there is not much written about its internal workings. This secrecy has often lead to misunderstandings or conspiracy theories, which are prevalent in some books and articles written on OPEC. The aim of this study of oil cartels is to establish facts about the functioning of OPEC and their impact on global oil prices. The purpose of OPEC is to agree on the quantity and price of the oil their countries export.
They state their primary objectives as:? To coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry. ? There are three main organizational units which oversee the operations of the organization:OPEC Secretariat – This group functions as the Headquarters of OPEC. It is responsible for carrying out the executive functions of the Organization. It consists of the Secretary General and the Research Division, headed by the Director of Research, who oversees the Petroleum Market Analysis, Energy Studies, and Data Services Departments.Board of Governors – The Board is composed of Governors nominated by Member Countries and confirmed by the Conference for two years. The Board directs the management of the Organization, implements Resolutions of the Conference; draws up the Organization’s annual budget, and submits it to the Conference for approval.Research Division – is a specialized research oriented body operating within the framework of the Secretariat. It consists of three Departments, namely, Data Services, Energy Studies and Petroleum Studies.
Apart from OPEC, there’s also the International Energy Agency (IEA). The IEA is the energy forum for 26 industrialized countries. Formed by the Organization for Economic Cooperation and Development (OECD) as an autonomous intergovernmental entity within the OECD in 1974 in direct response to the oil crisis, its members include: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary Ireland, Italy, Japan, Republic of Korea, Luxembourg, The Netherlands New Zealand, Norway, (participates under a special Agreement), Portugal, Spain, Sweden, Switzerland, Turkey, United Kingdom, and the United States.
Review of LiteratureDoes oil consumption promote economic growth in oil producers? Evidence from OPEC countriesCitation – Jose Alberto Fuinhas, Antonio Cardoso Marques, Tânia Noélia Quaresma, (2015) “Does oil consumption promote economic growth in oil producers?: Evidence from OPEC countries”, International Journal of Energy Sector Management, Vol. 9 Issue: 3, pp.323-335, https://doi.org/10.1108/IJESM-03-2014-0003Abstract – The oil-growth nexus is studied in a panel of Organization of the Petroleum Exporting Countries (OPECs), for a long time span (1960-2011), controlling for the specific context of oil production. Their membership in the cartel put them under a common guidance, which originates phenomena of cross-section dependence/contemporaneous correlation in the panel.Design/methodology/approach – Recent panel data estimators and co-integration analyses are both pursued and discussed, namely, dealing with the heterogeneity of panels and the countries’ specific effects. The Driscoll–Kraay estimator proves to be appropriate in handling the panel properties.
Determinants of U.S. private foreign direct investments in OPEC nations : from public and non-public policy perspectivesCitation – Kingsley O. Olibe, C. Larry Crumbley, (1997) “Determinants of U.
S. private foreign direct investments in OPEC nations : from public and non-public policy perspectives”, Journal of Public Budgeting, Accounting & Financial Management, Vol. 9 Issue: 2, pp.331-355, https://doi.
org/10.1108/JPBAFM-09-02-1997-B007Abstract – Previous research demonstrates that non-public policy variables (wage rate, raw material, GDP, GDP/capita, inverse of tax rate, and population) have significant influence in determining the flow of U.S. investment.
Research has not, however, demonstrated that government accounting variables significantly affect Foreign Direct Investments (FDI) flow into either Organization of Petroleum Exporting Countries (OPEC) or non-OPEC countries. In light of this omission, the focus of this inquiry is on the examination of the potential influence of both government accounting and non-public variables in influencing the flow of the stock of U.S. foreign direct investment in the OPEC nations. To accomplish the objective, government accounting and non-public policy variables are employed to investigate whether they matter in determining investment flows into these countries.
The results of the study suggest a direct linkage between the flow of FDI and accounting variables.Scenario planning and futurology of the Persian Gulf post?oil economyCitation – Ali Asghar Pourezzat, Mostafa Nejati, Ghazaleh Taheri Attar, Seyed Mahdi Sharifmousavi, (2011) “Scenario planning and futurology of the Persian Gulf post?oil economy”, Foresight, Vol. 13 Issue: 6, pp.18-33, https://doi.org/10.
1108/14636681111179573Abstract – The purpose of this paper is to explore the economy of Persian Gulf countries following a post?oil economy. This is accompanied with a futurology study and planning of certain scenarios that can be applied to these countries.Design/methodology/approach – This study applies a futurology approach by investigating various scenarios to explore the Arab economy after oil. As such, a series of possible policies are proposed that can be undertaken by Arab countries depending on their public policy. Each of the suggested policies involves different scenarios that have been formed and analyzed using an era?based cellular planning system.
Modeling the impact of coal?to?liquids technologies on China’s energy marketsCitation – Haixiao Huang, Jerald J. Fletcher, Qingyun Sun, (2008) “Modeling the impact of coal?to?liquids technologies on China’s energy markets”, Journal of Chinese Economic and Foreign Trade Studies, Vol. 1 Issue: 2, pp.
162-177, https://doi.org/10.1108/17544400810884727Abstract – The purpose of the study is to evaluate the impact of China’s current coal?to?liquids (CTL) activities on its coal and oil markets from 2005 to 2025.Design/methodology/approach – A partial equilibrium multi?equation model of China’s oil and coal markets is developed based on data obtained from the existing literature.
The impact of CTL technologies on China’s oil and coal markets is evaluated using computer simulations by solving the model under scenarios with and without CTL production.Not all demand oil shocks are alike: disentangling demand oil shocks in the crude oil marketCitation – Zhuo Li, Hui Zhao, (2011) “Not all demand oil shocks are alike: disentangling demand oil shocks in the crude oil market”, Journal of Chinese Economic and Foreign Trade Studies, Vol. 4 Issue: 1, pp.28-44, https://doi.org/10.1108/17544401111106798Abstract – The purpose of this paper is to re?examine the structural origins of international crude oil price fluctuation.Design/methodology/approach – The paper establishes a structural vector auto-regression model based on the generalized supply and demand analysis of crude oil price fluctuation and performance the structural decomposition of price shocks with impulse response analysis of those factors.
Current Situation (2010-present)Following the ‘Arab Spring’ of 2011, prices of crude oil have become increasingly volatile. Please use the sharing tools found via the email icon at the top of articles. The International Energy Agency reports that oil production from Africa’s OPEC members Algeria, Angola, Libya and Nigeria has stagnated over the last five years at 7.
12m barrels a day, posting virtually zero growth from 2012 to 2017. the Arab spring of 2011 looked like a blip as production recovered quickly from the war in Libya, but the losses for OPEC’s African members continued on the back of higher security risks in the wake of the Arab spring, uncompetitive fiscal terms, challenging local content requirements and contract sanctity concerns. Increased violence by Islamist extremists and militants, against a backdrop of political instability across much of northern and west Africa since the Arab spring, has changed the equation for acceptable risks for international oil companies.
Major oil producers of the Middle East have dramatically higher spending levels than they did in the past. Ever since the Arab Spring, which saw widespread discontent and instability spread throughout the region, Saudi Arabia and other Gulf States had to shower their populaces in social spending in order to stave off rebellion. So, while they still have some of the lowest oil production costs in the world – costing just a few dollars to produce a barrel of oil – the real costs come from the broader government budget.Back in July 2013, the WSJ noted that the UAE can produce oil for about $12 per barrel, but it actually needs something like $67 per barrel to balance its budget – a price far above the prevailing market price for the last three years.
Lessons LearnedIn light of this, as oil prices wallow near multi-year lows, it’s becoming increasingly clear that the new cartel controlling oil prices is not OPEC but world credit markets. From Saudi Arabia’s record $100 billion deficit to shale oil’s continuing reliance on cheap credit funding, it’s clear that no major oil producer or company in the world right now is economically self-sufficient based on oil revenues alone. This situation has left the flow of oil and the decision on when to stop pumping the increasingly tarnished black gold in the hands of banks rather than oil men.The whole basis of a cartel’s existence is having the power to control production, but at this point it looks like the only group with any ability to actually curtail (or expand) production are the major banks that direct capital market flows, and not the OPEC.Recommendations for the futureIf the OPEC was a cartel, the banking market is an oligopoly and where the likes of Citi and Wells Fargo lead, smaller banks will follow. So far, banks have not been acting in a cartel like fashion and are more worried about their individual loans than they are coordinating credit decisions to try and help salvage loan recovery rates across the industry. But with the increasing chaos in the energy sector, banks could be forced to change their tunes as they did in the housing industry in 2009 which in turn would lead to a very interesting future for energy prices.