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The Next 100 Years: Must There Be an OPEC?

“The Prize,” Daniel Yergin’s sweeping history of the global oil and gas industry, includes an instructive anecdote about OPEC and its members.

OPEC called for a general meeting in Bali in December 1980. Iraq and Iran, two of OPEC’s founding members, had been at war with each other since September.

What’s more, Iraq had just captured Iran’s oil minister as he visited the battlefront near Abadan.

With OPEC member nations seated alphabetically, as was customary, Iraq and Iran would be adjacent at the meeting. Indonesian oil minister Subroto offered to seat his delegation between the two countries’ delegates in an attempt to lessen tensions.

The Iranians, who had earlier threatened a boycott, brought a large photograph of their captive oil minister into the meeting and insisted on displaying it, a portrait, as the head of their delegation.

In the end, the Iranian delegates were allowed to make the symbolic gesture. The OPEC oil ministers began their deliberations with a photo of the Iranian official staring out at them from an otherwise empty chair.

And the meeting went on as planned.

The terms “resilient” and “flexible” are not often used to describe OPEC. But they might be the best two words to characterize the organization.

Bhushan Bahree is senior director for global oil for IHS Markit in Washington, D.C., and a long-time OPEC observer. Asked if OPEC could continue to be an influential factor in the global oil business for the rest of this century, he offered an expressive response:

“Why not?” he said.

“I imagine it will just continue, because the rules are so flexible and the costs are so low,” Bahree said. “There is really no enforcement mechanism in OPEC, which is its weakness and also its strength, which has allowed it to survive.”

During the past 56 years, OPEC’s member countries have sometimes cooperated and sometimes refused to cooperate. Sometimes they have literally been at war. At times they have set and followed production quotas; many times they have cheated on them or ignored them.

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“The Prize,” Daniel Yergin’s sweeping history of the global oil and gas industry, includes an instructive anecdote about OPEC and its members.

OPEC called for a general meeting in Bali in December 1980. Iraq and Iran, two of OPEC’s founding members, had been at war with each other since September.

What’s more, Iraq had just captured Iran’s oil minister as he visited the battlefront near Abadan.

With OPEC member nations seated alphabetically, as was customary, Iraq and Iran would be adjacent at the meeting. Indonesian oil minister Subroto offered to seat his delegation between the two countries’ delegates in an attempt to lessen tensions.

The Iranians, who had earlier threatened a boycott, brought a large photograph of their captive oil minister into the meeting and insisted on displaying it, a portrait, as the head of their delegation.

In the end, the Iranian delegates were allowed to make the symbolic gesture. The OPEC oil ministers began their deliberations with a photo of the Iranian official staring out at them from an otherwise empty chair.

And the meeting went on as planned.

The terms “resilient” and “flexible” are not often used to describe OPEC. But they might be the best two words to characterize the organization.

Bhushan Bahree is senior director for global oil for IHS Markit in Washington, D.C., and a long-time OPEC observer. Asked if OPEC could continue to be an influential factor in the global oil business for the rest of this century, he offered an expressive response:

“Why not?” he said.

“I imagine it will just continue, because the rules are so flexible and the costs are so low,” Bahree said. “There is really no enforcement mechanism in OPEC, which is its weakness and also its strength, which has allowed it to survive.”

During the past 56 years, OPEC’s member countries have sometimes cooperated and sometimes refused to cooperate. Sometimes they have literally been at war. At times they have set and followed production quotas; many times they have cheated on them or ignored them.

The Comeback Cartel

Columnists, bloggers and pundits wrote OPEC off for dead as oil prices plummeted during the past three years and the organization’s members looked powerless. Texas Congressman Joe Barton signaled the demise of OPEC to CNN in February 2016.

“What we’ve done by repealing the export ban is put the U.S. producer in the driver’s seat. Quite frankly OPEC and Russia literally don’t know what to do. So we’ve killed OPEC. It’s gone,” CNN quoted Barton as saying.

“So should markets now take OPEC seriously? Can action by the cartel sustain higher crude prices over the long term? Probably not. Like a desert mirage, the image of an OPEC resurrection vanishes when approached,” wrote Emile Simpson last October in Foreign Policy.

Then OPEC re-emerged in dramatic fashion. It announced an agreement for broad production cutbacks to lift crude oil prices and, more importantly, to reduce the world’s chronic surplus of crude stores.

Saudi Arabia took a limited role as swing producer again.

And the agreement showed just how much the Saudis depended on cooperation from other OPEC members.

“If you look at the 1980s, OPEC ‘died’ many times over. OPEC doesn’t have to die. It just becomes dormant,” Bahree said. “It will continue to be effective at some times, and ineffective at some times.”

OPEC’s Mission

OPEC – which calls itself the Organization of the Petroleum Exporting Countries – was founded in Baghdad in September 1960, when Iran, Iraq, Kuwait, Saudi Arabia and Venezuela joined together to coordinate energy policy.

They later were joined by Qatar (1961), Indonesia (1962), Libya (1962), the United Arab Emirates (1967), Algeria (1969); Nigeria (1971), Ecuador (1973), Gabon (1975) and Angola (2007).

At first OPEC’s headquarters were in Geneva, Switzerland, then in 1965 the organization moved its offices to Vienna, Austria, its home for more than 50 years.

According to Article 2 of OPEC’s official operating statute, the organization has three aims:

  1. "The principal aim of the Organization shall be the coordination and unification of the petroleum policies of Member Countries and the determination of the best means for safeguarding their interests, individually and collectively."
  2. "The Organization shall devise ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations."
  3. "Due regard shall be given at all times to the interests of the producing nations and to the necessity of securing a steady income to the producing countries; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on their capital to those investing in the petroleum industry."

The average person might simplify that to say OPEC tries to set and meet higher price targets for oil, but is willing to increase production modestly to soften markets when high oil prices threaten consumption.

And those are exactly the two things OPEC has not been very good at doing, Bahree said.

“They’ve had much less success in curbing price increases when they’ve risen for supply and demand reasons,” he noted. “And they’re not so successful in getting prices up to targets.”

“To a large extent, the price formation is a product of the market. OPEC is an important part of that, but only one part,” he said.

Then and Now

In some ways, OPEC appears to have changed little over the decades. Bahree cited a 1983 announcement by Saudi Arabian oil minister Ahmed Zaki Yamani of a “landmark” OPEC deal on oil prices.

Yamani proclaimed “strong indications that this time everybody means business” and said the organization “was not ruling out a price war if non-OPEC producers want it,” Bahree recalled.

“That could have been last year. Or in 2014,” he observed.

But in some other ways, OPEC progressed and adapted.

Bahree identified three areas where OPEC has changed through the years:

  • A growing attempt to conduct market research and to understand the complexities of the global energy market: “Since the 1990s, they’ve become much more keen on market research. There used to be very little,” Bahree said.
  • A reduction in friction between OPEC and energy-consuming nations, particularly as represented by the International Energy Agency: “That hostility has slowly disappeared to the point where they now cooperate in many areas,” Bahree noted.
  • An interest in working together with non-OPEC producers, especially Russia: “The Russians have been involved in OPEC agreements before, mainly because OPEC tried to get them involved,” he said. “They need much more weight, which only Russia can deliver.”

In 2017, OPEC will hold the sixth go-round of annual discussions it has formally named the OPEC-Russia Energy Dialogues – either not noticing or not caring that this results in the acronym OPEC-REDs. Bahree said the outreach effort is something new for OPEC, but added, “I think it’s a bigger change for Russia.”

Looking back 40 years, in 1977 OPEC produced two-thirds of the non-Communist world’s oil supply. Its share of total world production has fallen, and now shale oil and other tight oil production in the United States has added a new twist.

OPEC’s interest in analyzing the global energy market and working with other producers as it moves into the future undoubtedly reflects that lessened clout in manipulating total crude production. Bahree sees this as a plus.

“Given that OPEC has a lot of data from its members, I think one of the positive developments has been their emphasis on trying to understand the industry better,” he said.

Bahree noted that in recent years, OPEC has also tried to have more communication with consumers, and has undertaken a continuous increase in communications in general.

“One aspect of that is that the past six months have shown how well OPEC has managed its public relations,” he observed. “They’ve learned how to manage market expectations better.”

“It’s soft gains there, but gains nonetheless,” he said.

Saudi Arabia in the Driver’s Seat

If there’s a feeling that OPEC exists because it has to, that it represents a necessary producers’ lever on output and prices, Bahree disagrees. He noted that various other entities, from Standard Oil to the Texas Railroad Commission in the United States to the oil majors at a later date, all have had an effect in the market at one time or another.

“I don’t know that OPEC needs to exist. If it didn’t exist, something else would,” he said.

Even though OPEC’s members have developed differing national goals and sometimes-conflicting strategies, “these are countries acting together for their own interest. If we take OPEC overall, it’s not joined together by much of anything other than oil,” Bahree observed.

“Essentially you have Saudi Arabia as the key enforcer or leader, just de facto, because it is the one with excess capacity,” he said. “A recurring theme of OPEC is Saudi Arabia’s massive production and its ability to vary it, which used to be considerable.”

As long as Saudi Arabia remains OPEC’s lynchpin, there’s a reason to believe that a somewhat dysfunctional organization could continue to exist and function for the next 100 years.

Why not?

“The day Saudi Arabia says, ‘We don’t want to be part of OPEC,’ for whatever reason, that would be different,” Bahree said.

Comments (2)

East Texas oil field to today: Someone has always regulated oil price.
Mr. Bahree is right that some organization has always regulated oil production and price: the Texas Railroad Commission, major international oil companies ("the Seven Sisters"). I add the Oklahoma Corporation Commission. Explorer space is limited - pages could have been written about the pre-OPEC oil-regulating institutions. My Sunday-morning letter focuses on the battles to regulate East Texas Oil field (where production regulation began), and on the ensuing oil-regulating events. After the discovery of the East Texas oil field in 1930, oil fell from 1 dollar a barrel to 13 cents by mid 1931.The Texas Railroad Commission was authorized to prevent "physical waste" (not regulate price). The TRC set proration orders. They were ignored. Production grew to 1 million barrels a day. Antipathy among East Texas oil driller was high. In August, 1931, Texas Governor Sterling declared East Texas was in a "state of insurrection" and sent in the National Guard and Texas Rangers to stop violence in the East Texas and enforce TRC proration orders. In 1933, "Hot Oil" sales undermined the price of oil. Under the Interstate Commerce Clause, the Federal government became the enforcer of oil production (Yergin, 1991). After that, the TRC and/or the Seven Sisters controlled production and price, until OPEC was formed to raise prices in 1960. The oil price collapse in 1998-1999 forced non-OPEC producers (notably Mexico and Norway) to cut production in concert with OPEC. History repeated in 2016, when Russia and other non-OPEC countries de facto joined OPEC. Today there is super-OPEC; Saudi Arabia and Russia alone control over 20 million bbls/day or 1/5 of global production. Cartels always form because it is in their interest to cooperate. In the 1970s, Western economies successfully dealt with "OPEC price shocks". Today, super-OPEC will successful deal with "American Supply Shocks" (e.g., deep-water drilling globally is moribund). Rumors of OPEC's death were greatly exaggerated.
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4/29/2018 10:39:50 AM
deliver AAPG Explorer
I enjoy reading about new geologic explorations.
4/26/2018 7:19:20 AM

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