OPEC — the Dominant Player of the World Oil Market


The aim of the article is to clarify the System of OPEC, how does it works, how OPEC does monopolize oil production and pricing.

Also we will highlight the historical conditions that caused such kind of monopoly and changes of the world demand conditions.
Oil, due to its specific nature, is a key product and a strategic commodity in today’s international society. All over the world industry is depending on it to survive and its cost will always affect the price of the finished product, thereby its control is a powerful tool in today’s international market. According to the EIA1 (U.S. Energy Information Administration), the world currently consumes 85.64 million barrels of crude oil daily – roughly equivalent to every single person on the planet using 2 liters of oil a day. With the current market prices of a barrel of oil being $113.05, global consumption of oil costs $8.7 billion every single day or $1.25 for every person. Of course, the global distribution of oil consumption is not evenly spread out and developed and oil-rich states consume far more oil than less developed states. Also, all of this oil is not simply consumed with an end product. Oil is involved in the manufacture of a large number of everyday items, such as plastics, asphalt, or fertilizers.
All the above leads to the fact that oil prices fluctuate around $ 110 whereas the cost of producing is approximately 20 times less. Despite this, there is no sharp increase in the supply and it has lasted for decades, since 1973. There is monopoly pricing and production – which is dictated by OPEC (Organization of Petroleum Exporting Countries).
The first move towards the establishment of the Organization of the Petroleum Exporting Countries (OPEC) took place in 1949, when Venezuela approached Iran, Iraq, Kuwait and Saudi Arabia and suggested that they should exchange views and explore revenues for regular and closer communications between them.
The need for closer cooperation became more apparent when, in 1959, the oil companies inexplicable reduced the posted price for Venezuelan crude between 5¢ to 25¢ per barrel and that for the Middle East by 18¢/b. This prompted the convening of the First Arab Petroleum Congress which took place in Cairo, Egypt. The Congress adopted a resolution calling on oil companies to consult with the governments of the producing countries before taking any decision on oil prices. It also set up the general agreement on the establishment of an “Oil Consultation Commission’.
In August 1960, the oil companies further reduced Middle East posted prices for crude by between 10¢ and 14¢/b. The following month, the Government of Iraq invited Iran, Kuwait, Saudi Arabia and Venezuela have to meet in Baghdad, to discuss the inexplicable reduction in prices of crude’s produced by their respective countries.
As a result, from 10-14 September 1960, a conference was held in Baghdad, attended by representatives of the Governments of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. It was this First Conference which established OPEC as a permanent intergovernmental organization of oil-exporting developing nations that coordinates and unifies the petroleum policies of its Member Countries. OPEC seeks to ensure the stabilization of oil prices in international oil markets, with a view to eliminate harmful and unnecessary fluctuations, due to being given at any time to the interests of oil-producing nations and to the necessity of securing a steady income for them. Equally important is OPEC’s role in overseeing an efficient, economic and regular supply of petroleum to consuming nations, and a fair return on capital to those investing in the petroleum industry.
OPEC member courtiers2:
OPEC’s monopoly position in the world oil market is determined by the several factors. Let discuss them in chronological order:
The First Oil Shock (1973 – 1975). The 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OPEC (consisting of the Arab members of OPEC, plus Egypt, Syria and Tunisia) proclaimed an oil embargo “in response to the U.S. decision to re-supply the Israeli military” during the Yom Kippur war; it lasted until March 1974.4 With the US actions seen as initiating the oil embargo and the long term possibility of high oil prices, disrupted supply and recession, a strong rift was created within NATO. Additionally, some European nations and Japan sought to avoid themselves from the US Middle East policy. Arab oil producers had also linked the end of the embargo with successful US efforts to create peace in the Middle East, which complicated the situation. Independently, the OPEC members agreed to use their leverage over the world price setting mechanism for oil to stabilize their real incomes by raising world oil prices. This action followed several years of steep income declines after the recent failure of negotiations with the major Western oil companies earlier in the month.
Impact of the 1973-1975 oil shock on the world economy5:
· The growth rate fell to 2.1% in 1974 and to 1.4% in 1975.
· The impact on worldwide trade also was tremendous: after a growth rate of 12% in 1973, growth was negative in the following two years -5.4% and -7.3% in 1975.
· Another factor which has changed significantly was the flow of Foreign Direct Investment. While the annual Foreign Direct Investment Growth reached 40% in 1973, the rate fell by half in 1974.
· The oil shock of 1973-1974 had had a big effect on the US economy; however its GDP growth fell from more than 5.7% in 1973 to -0.5% and -0.19% in 1974 and 1975.
· Another factor which was significantly affected by this oil shock is inflation, which was more than tripled from 1972 to 1974, from 3.3% to 11.1%.
· These changes also impacted upon the unemployment rate, which rose from 4.9% in 1973 to approximately 8.5% in 1975.6
The Second Oil Shock (1979 – 1980). The 1979 (or second) oil crisis in the world occurred in the wake of the Iranian Revolution. This crisis has an impact on the world economy which was emphasized in:
1. Worldwide economy growth slightly decreased from 4.7% in 1978 to 4% in 1979 to reach 0.8% in 1982.
2. greater fluctuation in the international trade, from 5.2% to -3.1% in 1982.
3. US GDP growth fell by 0.23% in 1980 and unemployment in the US rose from 5.8% in 1979 to 7.6% in 1981 and 9.7% in 1982. also US inflation rose from 7.6% in 1978 to 13.5% in 1980.
From the mid-1980s to September 2003, the inflation-adjusted price of a barrel of crude oil on NYMEX was generally under $25/barrel. During 2003, the price rose above $30, reached $60 by August 11, 2005, and peaked at $147.30 in July 2008. annalists were attributed these price increasing to many factors, including reports from the United States Department of Energy and others showing a decline in petroleum reserves,7 worries over peak oil,8 Middle East tension, and oil price speculation. But the most important in the dominant role of OPEC is the oil reserves which this organization has9 Alternative sources of energy are not so efficient as an oil or the business risks are higher. All mentioned above makes OPEC a dominant player in the world oil market.
The natural strength of OPEC arises from the distribution of oil production capacity among members. Countries with large populations and considerable development require to be tended to smaller oil reserves.10
When we are talking about OPEC we have to underline that OPEC is a non typical cartel. It has its own distinctive features, which makes it possible to operate efficiently and do not decompose, which contradicts the traditional theory of international cartels. So what has caused such a stability of OPEC? Certainly this is the specific nature of oil, the mentality of the participants, special flexible rules of quoting and the allocation. OPEC is a Cartel but the main difference is that it’s a cartel of countries of mostly one, Muslim ideology; the natural wealth of OPEC is not the case of one day. It has to save resources for the next generations even to the account of today’s profit. OPEC is a cartel which monopolies specific product – oil on the world market.
The success of OPEC is defined not only by the monopolization of oil but also by the Arabian mentalities of member countries and the overall ideas where the West is existed in the role of enemy. In spite of a profit it draws more attention to the unity of their Arabian originality.
OPEC Member Countries respond to market fundamentals and forecast developments by coordinating their petroleum policies.
Production quotas are one possible response. If demand grows, or some producers supply less oil, OPEC can increase its oil production to prevent a sudden rise in prices or shortfall in supply. OPEC might also reduce its oil production in response to market conditions, as a means of countering falling prices or a glut on the market.
The impact of OPEC output decisions on crude oil prices must be considered separately from the issue of changes in the prices of oil products, such as gasoline or heating oil. There are many factors that influence the prices paid by end-consumers for oil products. So even a major change in the price of crude might have only a minor impact on consumer prices.
In general most members have always produced within their quotas but there have been many cases when members cheat11. In their settlement among the OPEC countries Saudi Arabia is the most influential Member. Other member nations can produce as within their Quota limit (which is almost close to their maximum capacity) but Saudi Arabia works as a swing producer meaning that in case any fluctuation in oil production Saudi Arabia will cover any loss or gain in production. This way the overall production will be at stable limit. Nations can produce other hydrocarbon grades not within OPEC quota limits.
OPEC doesn’t have specific regulations of voting and allocation process. Neither OPEC statue, nor other standing orders contain the description of this issue. That’s why we will have to summarize the OPEC’s reports of final meeting. OPEC consumes the simple majority system. It will be extremely simple to explain only with this words the system of voting if we go through the issue deeper it will be found out that is very complicated and inexhaustible.
With in taking decision OPEC based on two backwards:
· On the one hand maximization goal of profit and
· Other hand interests of each member countries
It’s too complicated to reach balance between of these two sides. Saudi Arabia as a core producer and exporter which has main role to take the responsibility for itself.
Absence of voting rules and problems connected with it clearly revealed in OPEC’s quota system decision, where OPEC prefers to “close eye” to the cheating in order to avoid the official precedent of quoting changes.
In the picture 1 we see the world oil price curve which illustrate the rising of price
The US Energy Information Administration (EIA) and the International Energy Agency (IEA) should make official statements about declining world oil production now to renew the focus on oil conservation and alternative renewable energy sources12.
As it is already known the formation of prices depends on two factors: demand and supply. So to make a prediction about the future of oil prices we must take into account two aspects – the policy of OPEC as the major supplier, and the demand of oil consumer countries: where United States with 19,150,000 million bbl/day consumption is the first, China is the world’s second largest oil consuming country with 9.1 million bbl/day. Japan ranked third word’s oil consuming country with oil consumption of 4.6 million bbl/day. India is the fifth largest oil consuming country with 3.1 million bbl/day.
Over the past decade, China’s oil consumption has doubled to more than 9.1 million barrels a day. And many believes that the next decade could be seen as even larger increase, as the country’s demand has been growing at a 20%. It has even become the world’s second biggest importer of oil, relying on outside sources for about 5 million out of the 9.1 million barrels of oil a day it uses. In January 2010, China’s oil demand increased by 28% year by year, prompting the International Energy Agency to call it “astonishing.” That stems from not only the country’s rapid industrialization, but also its growing middle class and their growing needs.
China’s recently announced 12th Five Year Plan for the period 2011-2015 includes a focus upon increasing energy efficiency, decreasing carbon intensities, reducing the share of fossil fuels in the energy mix, pushing battery cell technology development, as well as sustaining economic growth at an average of 7% p.a. over the next five years. The Plan contains an energy consumption target no more than 2,800 million tones of oil equivalent p.a. by 2015. This is a challenging target considering that it is only 8.5% above 2010 levels. In the previous five-year period, China’s energy consumption actually increased by around 39%. A new carbon intensity reduction concept is also included; in terms of CO emissions per unit of gross domestic product, the Plan states that the country will look to reduce this by 17% by 2015 compared to 2010 levels.
Chinese oil demand is expected to grow the most world-wide despite of the government efforts to curb energy use within the country. Chinese oil demand is expected to inch up by 5.1% y-o-y. Along with China, the Middle East, India, Brazil, and the rest of the non- OECD countries will boost world oil demand by 1.2 mb/d or 1.4 % in 2012.
Based on the OPEC’s long-term strategy paper13 it seems that OPEC will reduce the production but the demand will grow up. So, it will inevitably increase the price of oil.
Oil prices are important for Georgia because it is an oil importer. Georgia’s oil consuming is 13,000 bbl/day when its produces about 984 bbl/day. According to this data we can make a simple conclusion – Georgia is a passive player in the world of oil market and totally depends on pricing of oil exporting countries.

As it’s already mentioned OPEC mostly consists from the member countries with one Arabian mentality and they are acting as a non traditional cartel which creates their main strength. The right policy, tactical decisions and the dominant place by the world oil reserves puts OPEC into the unbreakable and invincible position. Within taking decision OPEC based on two backwards: 1) On the one hand maximization goal of profit and 2) take into account national interests of each member countries. It’s too complicated to reach balance between of these two sides. Saudi Arabia as a core producer and exporter which has main role to take the responsibility for itself.
Absence of voting rules and problems connected with it clearly revealed in OPEC’s quota system decision, where OPEC prefers to “close eye” to the cheating in order to avoid the official precedent of quoting changes.
The global financial crisis of 2008 and the ensuing Great Recession had enormous implications for demand projections in both the short- and medium-term. For example, the WTO14 2009 documented how dramatically GDP forecasts for 2009 were revised: while in July 2008 expected economic growth in OECD regions for this year was in the range of 1.3-1.6%, OECD economies actually shrunk by an average of 3.4%. This, in turn, had consequences for oil demand, which in OECD countries contracted by 1.4 million barrels per day (mb/d) in 2009. Moreover, the WTO 2009 foresaw recovery from the recession as being only gradual, and this affected medium term oil demand prospects, which reached just 90.2 mb/d in 2015 compared to the 96.1 mb/d expected in the WTO 2008. This had already been factored into the WTO 2010, with increased medium term demand expectations. This process of re-evaluation has continued with global economic growth for 2010 at an average of 4.7%. As a result, the medium-term outlook for oil demand reflects an upward revision from last year’s assessment. However, it is worth stressing that risks appear skewed towards the downside, especially since the sovereign debt crisis in some EU countries seems to be spreading and the world economy slowing down further, with potential consequences for the global financial system.
The world economic outlook has been worsening due to the challenges facing to the OECD economies. The forecast for world GDP next year has been revised further down reflecting these uncertainties. Next year’s oil demand growth is expected to come from the non-OECD, mainly China, India, the Middle East and Latin America. By sector, industrial – particularly, petrochemical – and transport sectors will contribute the most expectations oil demand growth. US oil demand is expected to return to its normal growth mode; however, it will remain the wild card for 2012. Furthermore, petroleum product retail prices will play a major role in oil demand next years, mainly in the transport sector. The EU oil demand will continue to contact next years resulting not only from weak economic growth but also from maintaining its efficiency trend. OECD Pacific oil demand will be in better shape than Europe’s Japan’s oil consumption will reflect rebuilding projects. World oil demand is forecast to grow by 1.2 mb/d in 2012 to average 89.0 mb/d.
Based on World oil outlook paper15 and having considered the supply and demand perspectives made by OPEC oil basket price will be risen to $106 by 203016.
1 EIA official dates.
2 Ecuador suspended its Membership in December 1992 and reactivated it in December 2007. Gabon, which became a Full Member in 1975, terminated its Membership with effect from 1 January 1995. Indonesia, which became a Full Member in 1962, suspended its Membership in December 2008.
3 Ecuador suspended its Membership in December 1992 and reactivated it in December 2007. Gabon, which became a Full Member in 1975, terminated its Membership with effect from 1 January 1995. Indonesia, which became a Full Member in 1962, suspended its Membership in December 2008.
4Hubbert, Marion King (June 1956). “Nuclear Energy and the Fossil Fuels “Drilling and Production Practice’” (PDF). Spring Meeting of the Southern District. Division of Production. American Petroleum Institute. San Antonio, Texas: Shell Development Company. pp. 22-27.
5 The conclusions are based on IMF statistical annual publications.
6 Licklider, Roy (1988), “The Power of Oil: The Arab Oil Weapon and the Netherlands, the United Kingdom, Canada, Japan, and the United States”, International Studies Quarterly 32 (2): 205-226 [p. 206].
7 “Record oil price sets the scene for $200 next year”. AME. July 6, 2006.. Retrieved 2007-11-29.
8 “Peak Oil News Clearinghouse”. EnergyBulletin.net.
9 OPEC official site.
10 H. Houthakker. The world price of oil: A medium-term analysis p.13.
11 Emma, Ukpana: “OPEC as a Cartel: Can US antitrust laws are applied extraterritorially?”
12 EIA dates.
13 Official document of OPEC.
14 World trade Organization.
15 WOO official paper of OPEC.
16 For now its 94$.