Why OPEC Has Lost Its Influence
For many years, organizations get established on daily basis but very few have the strength to withstand the test of time. The operability of an organization as well as its’ vision and mission, dictates the direction it will take. Though there are factors beyond our control, it is always paramount to have water-tight strategies for smooth operation. The Organization of Petroleum Exporting Countries (OPEC) is a conglomeration of petroleum producing and exporting countries, established in 1960 (Seymour, 2005). At present, the conglomeration comprises of 12 countries who are the major oil producing countries in this global industry. These nations are Algeria, Angola, Ecuador, Iran, Iraq, Libya, Kuwait, Qatar, Nigeria, Saudi Arabia, Venezuela, and the United Arab Emirates. This paper seeks to analyze the organization of petroleum and exporting countries. In particular, it will address the issue regarding “Why OPEC has lost its influence”. In order to do so, the paper will go through, briefly, the history of the organization and how its’ operations have been managed over the years. The paper will then, extensively, look at the reasons why OPEC has lost its influence in the world markets. In conclusion, the paper will look into the possibility/probability of OPEC regaining its influence in the world market with regards to the export of oil (Skeet, 1991).
History of OPEC
The idea to establish an organization that brought together oil-producing countries was brought about by Venezuela. Four other countries were approached by Venezuela to see the establishment of the organization. These countries were; Saudi Arabia, Kuwait, Iran and Iraq. In 1960, the Minister for Energy was among the five nations that had gathered in Baghdad in order to find the solutions of increasing the crude oil price that is produced in their countries. It is however believed that American interference is what catalyzed the birth of OPEC. In 1960 a law was established by American President Dwight Eisenhower, which imposed rations on Venezuelan and Persian Gulf (present day Iraq, Iran and other surrounding countries) oil imports in support of the Canadian and Mexican oil industries. Just like in many other cases, the reason(s) given for this imposition of a mandatory law was that of “security reasons”. As expected, this move led to the decline in the prices of oil in these areas (Venezuela and the Persian Gulf) (John, 2005). The move by Eisenhower was basically a catalyst to the Venezuelan president’s reaction. Due to the falling prices of oil and other similar products in the region, Venezuela’s president hurriedly formed an alliance from oil producing Arab nations. This was a strategy to maintain the monopolistic position played by Venezuela as far as the export of oil and its products is concerned. OPEC was therefore founded in 1960, in Baghdad. Although America pre-empted the formation of OPEC, the true reason behind its formation was to unify and coordinate members’ petroleum policies. Apart from the original members, other major oil producing countries followed suit in joining the organization. Qatar joined the organization in 1961, Libya in 1962, the United Arab Emirates in 1967, Algeria in 1969 and Nigeria in 1971(Research, 2009).
In the introduction, we mention that the current membership of the organization stands at twelve countries. The word “currently” has been specifically used to imply that this number occasionally fluctuates. For example, in 1962, Indonesia joined the organization but in 2008, it terminated its affiliation with the organization due to differences in decision making with other affiliates who export similar merchandise, and by then, Indonesia had become a net importer of oil. Another case of a similar kind is that of Gabon and Ecuador. These two countries were members of the organization but eventually withdrew. In December 1992, Ecuador withdrew its membership from the organization. It is not clear why they decided to pull out as it is still uncertain whether they were unwilling or they were unable to pay the required $2 million membership fee. Gabon, withdrew its’ membership in 1995. On the other hand, some countries such as Angola have also recently joined the organization. The number of member states is not fixed/ permanent. It fluctuates from time to time subject to a myriad of factors (Richard, 2008).
So Why Has OPEC lost its’ Influence?
The main reason behind the formation of OPEC was to bring unity as well provide direction and coordination to its’ members’ petroleum policies. The organization had a significant influence and to this day, still plays a major role to the control and management of oil prices throughout the world (Richard, 2008). In recent years, however, the dominance of OPEC’s influence over the prices of oil has greatly declined.
Why Is Its Influence on the Decline?
There are quite a number of reasons why the organization’s influence over the oil market in the world is greatly declining. Reasons ranging from unexpected costly wars, harsh economic crises, disputes within the organization and discovery of new oil reserves out of OPEC regions are just some of the reasons why the organization is losing its influence in the oil market (Ibid). There are other oil reserves that have been discovered in other regions of the world including the Americas. Discoveries were recently made in Alaska, Mexico, Canada and the North Sea that are major oil reserves. Russia is also proving to be a major oil-producing nation. OPEC members account for forty percent of the world’s oil production and exportation, which is still a large number. However, before the discovery of these new oil reserves, OPEC was possibly accounted to be dominating the world’s oil over fifty percent of the world’s oil production and exportation. The implication behind this is that their control over the market has declined. This is because, unlike the initial case, new competition has been introduced in the market. The prices set by OPEC will now be greatly influenced by the other nations that have entered the industry. Decline of oil prices began in the 1980’s. By 1986, there was a cumulative drop of forty-six percent due to demand decrease and the production cost that had produced a surplus in the world market. This lead to OPEC losing the much valued unity it had enjoyed for many years. The grudge between America and some OPEC nations played a great role here. Since OPEC was hurriedly formed to prove a point to the then president of the United States, the new reserves that had been discovered in the Americas were basically ammunition against the organization in this war of control (Research, 2009).
War has played another great role in the decline of OPEC’s influence in the world market. A good example is the war in Israel that was originally initiated by Egypt and Syria. Also referred to as The Yom Kippur War, it had a great influence on the world’s oil market. The tension that was created throughout the region strained international relations between several OPEC countries and also the western part of the world.
How did OPEC come into the picture and how was it affected?
The United States of America and many other nations in the western world gave aid to Israel. Having seen this, several Arab exporting nations and Iran imposed a restriction on the countries that supported Israel. These restrictions related to the supplies of oil. Several of the Arab nations were OPEC members or were supporters and beneficiaries of the organization. The irony of this is that this restriction only led to the decline in the revenues generated by OPEC from the exportation of oil (Amer, 1991).
What Factors Favored it to Happen?
After OPEC decreased the production of barrels by 5 million per day, other countries which had oil reserves increased their production by a million barrels. This was a loss to OPEC. The prices of oil increased immensely as a result of the production changes and led to wide criticism of the organization. Another example is that of what happened in Iraq and Iran in 1979 and 1980. Following hostile events in the two nations, there was an increase of crude oil prices. It was at this time that many people in Iran were calling for a change of government. During the period the Iranian revolution broke out. Due to the revolution, there was a loss of 2.5 million barrels in a day, this was the production of oil from November 1978 to June 1979. Political instability has great influence on oil prices. This is increasingly true when the countries involved are those that are relied on by other nations throughout the world for their oil production and supplies. It reached an extent where the production of oil was almost stopped in this country. It was during this period that Saudi Prime Minister warned that high prices would lead to low demand. Following the laws of economics, when the prices are so high, most people may result in finding substitutes or using other alternatives, thereby reducing the demand of such commodity. In turn this will lead to low profit margin since the sale volume per specified time is limited. It was, however, no surprise that the other members failed to take his advice (Louis, 2008).
The US war on Iraq has also played a large role in the increase of oil prices. Since 2003, when the war began, the cost per barrel of oil has been on the rise. Harsh economic times and high oil prices have greatly led to the reduction of OPEC’s influence. Increasing oil prices made the consumers react differently. Just like in any market, consumer behavior dictates that an increase in a commodity price will lead to the consumer looking for cheaper supplementary commodities that will attain the same utility. As a result, the consumers necessitated more industrial processes energy and automobile with higher efficiency. The factors mentioned above along with a global recession caused a drop in demand which led to decline in crude prices. Cheaper sources of energy are the order of the day today. According to James Williams of WRTG Economics,” for OPEC only the global recession was temporary.” Due to the harsh economic times, people sought alternative measures of energy production and consumption. For this reason, the cheaper methods were maintained. Many of the clients and consumers of oil as a method of production therefore escaped. This meant low revenues for the organization (Amer, 1991).
Disputes between the members have also led to the decline in the influence of OPEC. Like many unsuccessful organizations, whenever unity lacks, there is also a decline in commitment and such organizations are more exposed to operate at deficit/loss. Just like all other countries in the world, there exist economic and political needs in the member countries of the organization. As much as the countries were united on the front concerning setting the prices and regulation of oil, each country has their own interests at heart. Between 1982 and 1985, the organization came up with rations of production and exportation low enough to stabilize prices. This was because the organization was facing stiff competition from other oil producing nations. The members agreed to this but not all were for it. Others thought it necessary to exceed the quotas set by the organization. The attempt to bring in rations of production and exportation met repeated failure as various members of OPEC produced beyond their quotas (Helm, 1996). A good example is Saudi Arabia, who tried for some time to adhere to these rules, but owing to the fact that not all the countries complied top this, they were fed up and began exceeding the set quotas. It was later discovered that some member states had advocated for reductions in production quotas in order to elevate the price of oil and thus enhance their own revenues. As mentioned earlier, Saudi Arabia was notion agreement with these avocations (Richard, 2008). It was in the strategy of Saudi Arabia, to be partners with the world’s economic powers. The logic behind this was to maintain a steady flow of oil that was believed would assist in supporting the economic expansion. It was however witnessed in Sept 2008, when Saudis walked out of an OPEC meeting. Like in any organization, what leads to its one of the reasons for collapse is the inability by the members to agree on matters that affect the organization. The world now views OPEC as an organization that cannot control its own members, how will the rest of the world entrust the organization to control the production and supply of oil for the world in totality (Economist, 2003).
Another reason to blame for the reduction of influence of OPEC is decrease in the production levels by some of the OPEC member countries. With specific reference to
Iraq and Venezuela, the organization is facing a case of high demands from the consumer met by low supply levels from the suppliers. The international demand for the commodity is always rising. For this reason, OPEC had to do away with the quota system and increase production to meet this demand. Due to its endeavor of increasing production and obtaining an international increased demand, its endeavor resulted to an erosion of excess capacity of oil production. WRTG evaluate that during the mid 2002, there was more than six million barrels in a day of surplus production capacity and by mid 2003, the surplus capacity decreased by two million.
A decline in the excess oil produced has led to consumers seeking other sources for oil. Since the organization cannot meet the entire world demand, the consumers will seek other sources that can meet their demand effectively without a problem (Dow,
2009). The issue of the dollar as the mode of transaction in as far as supply of oil is concerned has also led to the debate of who controls the production and supply of oil in the world. Worldwide, all the transactions concerning supply of oil are done in dollars, it is therefore common sense that any increase or drop in the value of the dollar compared to other world currencies have an impact on OPEC’s decisions on how much oil they should to produce.
For example, most of OPEC’s member countries wish for the value of the dollar to increase. If the dollars’ value decreases relative to the currency of other countries, the member states would receive lower revenues in (other) currencies for their traded oil, causing significant cuts in their buying power. OPEC was formed as a revolt against America’s attempt to control the oil market. Therefore, it is obvious that the organization members’ countries aren’t happy to use dollar as their medium of exchange. With the introduction of the Euro, most of the affiliated member countries have exhibited preference of being paid in Euros compared to US dollars. This is forcing OPEC to mull over changing its oil trade currency to Euros. Some states such as Venezuela, Iraq and Iran, have already taken the brave move from using dollar to the Euro (Influence, 2005).
Political instability in some of the member countries is also doing some great injustice to OPEC’s influence. A good example is Nigeria and in Iraq. In
Nigeria, there was a militant group that was known as the Movement for the Emancipation of the Niger Delta. A great extent of Nigeria’s oil is collected at the Niger Delta. The organization, MEND, exposes exploitation and oppression of the people of the Niger Delta and the devastation of the natural environment by the Federal Government of Nigeria and foreign multinational corporations involved in the extraction of oil in the Niger Delta (Louis, 2008). This makes it difficult for the government to control the extraction and hence supply of oil from its country. It is imperative that governments be in total control of any mineral in their respective countries. Nigeria’s oil extraction and supply has been greatly affected. Iraq is also another country that has faced great levels of political instability. The extraction and supply of oil has also been greatly affected as a result of this political instability. Due to these reasons, the oil produced by OPEC has declined. In other cases, organizations such as MEND sell the oil extracted from the Niger Delta at a higher cost than the required (Richard, 2008).
The idea behind the establishment of the organization was a good one and it would have helped many countries that up to today are still languishing in poverty. However, due to the reasons stated above, the organization has not been in a position to fully utilize its potential. In my view, the organization will totally disintegrate and lose its
10 influence entirely in the near future. This is because as the world population increases, demands will increase. In many countries, people will require more jobs in order to meet their daily needs. The oil reserves are some of the places where the governments can provide jobs for the population. With the quota system, it means that a country can only produce and supply a certain amount. Therefore, production of oil is limited. This means that the jobs available will also be limited. In this case, many countries will opt out of the organization to meet their populous demands (John, 2005).. In another situation, cheaper sources of energy will be introduced and therefore other people might opt for them. Many of the emerging Asian economies use solar energy for their production and other uses. They are not fully dependent on the oil producing countries. Independence of the member states will also lead to the disintegration of the organization. In the organization, there are quite a number of strings attached to it carried with the tag “terms and conditions”.
Many countries require their independence from this situation. Due to this, they may opt to leave the organization and work independently of the other member states. Be that as it may, the organization still has the potential of being a force to reckon with in as far as production and exportation of oil is concerned. In the highly unlikely event that they get their act together, the organization can work as a team and still meet its goals (Seymour, 2005).