OPEC Turns 60; Achievements, Survival and Challenges

TEHRAN (Shana) -- This year, the Organization of the Petroleum Exporting Countries (OPEC) is marking 60 years of its foundation. Every year an anniversary ceremony is held on September 14, i.e. the day of OPEC foundation, at the Secretariat of the Organization. In addition, this year a special ceremony was due to be held in Baghdad with OPEC Secretary General Mohammad Barkindo and heads of delegation of OPEC member countries in attendance to commemorate the 60th anniversary of OPEC establishment; however, despite all the required arrangements made by Iraq, due to global COVID-19 pandemic the ceremony was wisely agreed to be postponed to some other time.

An expert-level videoconference meeting had been held earlier on June 23, during which a large number of senior managers and exports from OPEC member states and other oil and energy producers exchanged views.

Barkindo said OPEC was an organization linking the past, the present and the future. He enumerated OPEC’s achievements six decades after its foundation, saying the group of petrostates had served its own member states and helped maintain a balance in the tumultuous oil market and stabilize the price of this vital energy product.

Experts and pundits present in the meeting underlined the necessity of OPEC’s involvement with the oil market, and exchanged views about the various aspects of its influence on the oil market and challenges lying ahead.

On a broader scale, we plan to highlight the performance and key experience of this organization during various periods of its activity and note its major achievements, as well as challenges it has already faced or it is set to face in the future.

Our review involves benefiting from 60 years of OPEC’s experience in interaction with other key actors of the petroleum industry, the impact of OPEC’s decisions on global economy, current challenges and influential future developments.

Review of 6 Decades of Activity

On September 14, 1960, the delegates of OPEC’s founding member states – Iran’s Fuad Rouhani, Venezuela’s Juan Pablo Pérez Alfonzo, Saudi Arabia’s Abdullah al-Tariki and Iraq’s Tala'at al-Shaibani – gathered in the historic conference in Baghdad and announced the foundation of OPEC.

The establishment of OPEC had extensive and positive ramifications for its member states and the oil market in general. At the beginning, there was little hope in the survival of this inter-governmental organization that had been established by several developing nations, particularly in the important oil market dominated by oil concerns. However, OPEC gradually won recognition in the oil market and painted a clear picture of the sovereignty of developing nations over their valuable resources. The main policy sought by OPEC member states over the past six decades has been to hold constructive talks with a view to reaching consensus on various issues, and this method has proven to be successful. One of the major reasons for this spirit of successful cooperation is a clearly-drafted Statute whose provisions are honored by all member states. Respecting OPEC’s Statute has led to consensus and cooperation among the founding members of OPEC in all ministerial conferences from the very beginning until now.

Over the past 60 years, representatives of OPEC member states have well realized that adapting their own states’ outlook and perspective with the common good of OPEC would finally serve their interests. In practice, it has also been proven that the member states’ interests would be pursued when they comply with the common goal of the Organization.

Some authors and Western government spokespersons have termed OPEC as an oil cartel, but the very fact is that OPEC has never been an economic cartel.

OPEC’s share of global oil production over recent years has been about one-third, while its share of oil market has been below 45%. Contrary to economic cartels, OPEC has not set divided markets between its member states as cartels do. OPEC has made efforts to maintain the stability of oil markets at fair prices for the most valuable energy carrier, i.e. oil.

For OPEC, a fair price is a price that would help attract necessary investment while preserving production capacity and responding to demand. But at the same time, such prices should not be so high to negatively affect the economic growth of oil consumers.

OPEC was in fact created to counter the “Seven Sisters” oil cartel, comprising Anglo-Iranian Oil Company (originally Anglo-Persian; now BP), Royal Dutch Shell, Standard Oil Company of California (SoCal, later Chevron), Gulf Oil (now merged into Chevron)

Texaco (now merged into Chevron), Standard Oil Company of New Jersey (Esso, later Exxon, now part of ExxonMobil), and Standard Oil Company of New York (Socony, later Mobil, now part of ExxonMobil). The Seven Sisters were dominating the oil markets from 1920 to 1970.  These seven oil giants had divided the oil markets among themselves and worked in collusion to set prices. They dominated approximately the entire oil market (outside the former Soviet Union), including upstream, refining and retail activities. They used to extract oil from oil-rich nations at lowest prices and paid very small portion in royalties. OPEC was established against the backdrop of falling oil prices. In the meantime, demand for oil as well as oil production was on the rise. That was not acceptable to petrostates.

When the Seven Sisters were dominating the oil market, oil production was carried out under concession contracts. Under these contracts, oil companies were awarded extraction and production rights, while the owners of oil resources received meager royalties.

Concession contracts had been designed within the framework of colonial relationships between Western powers and oil-rich nations in the Middle East, Africa and Latin America. One decade into its formation, OPEC was still trying to improve the legal and financial aspects of oil exploration and extraction contracts and was trying to pave the ground for the nationalization of oil reserves in the member states.

Iran was a leading country in fighting this anti-colonialist movement, whose struggles lead to the nationalization of the petroleum industry in early 1950s. Iran, as a founder member of OPEC, served as an example for other oil-rich countries to struggle for nationalization. This trend was completed in the 1970s as OPEC’s activities were in full swing and the member states had nationalized their petroleum industry. In the 1970s, Libya, Algeria, Iraq, Venezuela, Kuwait and Saudi Arabia moved to nationalize their petroleum industry. Without OPEC, oil-rich nations were unlikely to follow such a trend and struggle for oil nationalization. The UN General Assembly’s adoption of Resolution 1803 on the “Permanent Sovereignty over Natural Resources” put the seal of approval on the process of nationalization of the petroleum industry in these nations. Some countries owning other natural resources like cocoa and coffee sought in vain to establish OPEC-style bodies.

OPEC turned out to be specifically influential in the 1970s, during which OPEC was practically the most important player in the oil market and the main oil supply managing element. In the following decades, due to reasons which will be discussed later OPEC’s influence was weakened.

To understand such circumstances, it has to be noted that OPEC’s influence on the oil market (or any other similar organization like the Gas Exporting Countries Forum (GECF) and the gas market) is determined by three major parameters: OPEC’s oil market share, price elasticity of global demand for OPEC oil and price elasticity of supply by non-OPEC producers. In the 1970s, OPEC’s oil market share stood high (for instance in 1973 when Arab member states of OPEC imposed an oil embargo on the United States and several other nations, OPEC’s market share stood at 56%), the price elasticity of global demand for OPEC oil was extremely low due to few alternatives for OPEC oil and extremely high oil and energy intensity, and the price elasticity of demand for non-OPEC oil was extremely low. It meant that the technologies of that era did not let any quick increase in oil production to replace OPEC’s oil supply. For these reasons, OPEC was highly influential in the oil market in the 1970s. In the following decades, due to the relatively high oil prices, the efficiency of energy and oil consumption increased while in parallel other oil-rich nations like Norway, Britain and Canada became major producers. Consequently, OPEC saw its oil market share drop.

Since the late 1970s, there was growing concern that oil supply shortage might drive up prices. The 1970 Islamic Revolution and the 1980 outbreak of the imposed war on Iran added to those concerns. Therefore, consumer nations were forced to look for alternative sources of energy. In the meantime, industrialized nations expanded their crude oil and petroleum products storage facilities following the Arab oil embargo in order to create a buffer zone when oil exporting nations may decide to cut output. Shale oil production technology had yet to be developed and therefore coal consumption for electricity production increased.

For its part, OPEC set quotas for its member states in the early 1980s in a bid to prevent a supply glut in the market. OPEC’s production ceiling stood at 17.5 mb/d in that time.

Since mid-1980s onwards, Saudi Arabia ended its balancing role in the oil market and consequently, Saudi Arabia’s oil production cut policy for saving market prices was forsaken. The market faced supply glut that slashed prices.

The market and oil prices instability continued up to early 1990s. By the end of the 1980s, the Iraq-Iran war ended after eight years and both nations moved to increase their production. The Union of Soviet Socialist Republics (USSR) collapsed, causing disruption in the Soviet Union’s oil production level. Oil prices dropped significantly in the 1990s once more due to an economic crisis in Southeast Asian nations, as well as OPEC’s policy of oil market share preservation. This reduction continued until OPEC member states agreed to modify their output level to help stabilize the market. OPEC ministers’ agreement in Jakarta in 1998 on increasing production to preserve OPEC’s market share against the backdrop of an economic crisis in Southeast Asia – a major oil consumption zone – led to significant slump in oil prices and taught OPEC a big lesson. This experience was used later under other circumstances.

In the 2000s, more specifically until 2008, the world was faced with growing demand for oil, caused mainly by the fast global economic growth rate, particularly in China. Therefore, OPEC was increasing its production capacity in a bid to prevent any extreme shortage of supply or sharp increase in prices.

When the global economic downturn struck in the second half of 2008, demand for oil and energy fell sharply, driving oil prices down. Therefore, OPEC decided in its historic meeting in Algeria to reduce its supply. Owing to this decision, the oil market trickled back to stability and oil prices became reasonable in the second half of 2009.

Over recent years, particularly with the shale oil and gas production in the United States that made this country a major oil producer, scattered comments have spread about OPEC’s undermined position and even ineffectiveness in the oil markets. The Foreign Policy magazine in its October 2013 issue ran an article under the title “The End of OPEC”. Seven years have passed and despite unfavorable cycles in the oil prices,especially from 2014 to 2016 due to OPEC’s refusal to cut its production to preserve the market share in the face of increased US oil production and the 2020 cycle of Covid-19 pandemic and the unprecedented decline in demand for oil and subsequently declining oil prices, OPEC continues to stand tall and still remains influential in the oil market.

Over these years, OPEC’s role in talks with key energy consumers like China and India and other influential energy bodies like the International Energy Agency (IEA), establishment of the International Energy Forum (IEF) and the energy data initiative has been significant.

OPEC was also involved in the issue of energy poverty eradication as a global objective defined under the UN sustainable development program through “OPEC Fund for International Development” (OFID)’s investment in developing nations. OFID was established in 1976 by member states.

OPEC has also been engaged in UN climate change talks and it has offered support for the Paris climate deal. OPEC has encouraged its member states to make efforts for mitigating greenhouse gases emission.

OPEC has encouraged its member states to embrace economic diversification and energy saving in light of the harmful impacts of greenhouse gases caused by fossil energy consumption. In the leading producers and exporters of oil and gas, fossil fuel prices are normally lower than international levels.

Past Experience Helps Restore Market Stability

It has to be noted that the recent decline in oil prices was not caused only by the COVID-19 outbreak; rather it was the product of several other key factors in the oil market.Overflown oil and petroleum products storage tanks in major oil consuming countries, significant increase in the US oil production, particularly from the Permian Basin in Texas and somewhat from the Bakken fields in North Dakota, and finally increased supply by other oil producers were instrumental. For instance, in 2019 Brazil, Norway, Canada, Russia and the United States altogether produced more than OPEC. Therefore, with the COVID-19 outbreak in early 2020 and the subsequent shutdown of economic activities, particularly international and inter-urban travels in industrialized nations, oil prices fell to their lowest levels since 1991. These structural changes along with unprecedented shocks like pandemics posed serious challenges to OPEC, particularly at a time when some key members like Iran and Venezuela are under unjust US sanctions and some others like Libya and Iraq are dealing with domestic political unrest. On the one hand, OPEC’s share in the oil market has been affected while on the other, the price elasticity of demand for OPEC oil and the price elasticity of supply by non-OPEC have increased. Therefore, OPEC has concluded that the best option for restoring stability to market would be to cooperate with non-OPEC producers with a view to increasing its market share and boosting its influence in the market.

Thanks to its experience over the past six decades – periods when oversupply has led to price slump – OPEC has learned a lot. The oil price cycle through 2014 to 2016 and particularly the recent oil price cycle caused by the COVID-19 outbreak inflicted serious harm on the oil prices.

In 2016, i.e. three years before the coronavirus outbreak, OPEC reached agreement with Russia-led group of oil producers to manage the oil market and restore stability to it. This agreement resulted in an important statement known as the “Declaration of Cooperation” between OPEC and 11 non-OPEC countries (they became 10 after Guinea joined OPEC). The OPEC+ agreement continued to remain effective in 2017. A modified version of the agreement was put into effect in 2018. In the aftermath of the COVID-19 outbreak and lack of coordination that led to a short-lived rivalry between Saudi Arabia and Russia over market share, OPEC and Russia-led non-OPEC stuck with the “Declaration of Cooperation” in April 2020 and made a historic decision to cut 9.7 mb/d from their output as of May 2010 for two months. The agreement was then extended for another one month. By implementing the agreement with non-OPEC producers, OPEC managed to avoid a deeper slump in oil prices. However, due to the huge supply glut of 15 mb/d to 20 mb/d of oil in the market, oil prices kept falling. The historic decision to cut 9.7 mb/d from oil production by OPEC+ in May and June was a result of OPEC’s longtime experience in restoring stability to oil markets. Along with partners complying with the “Declaration of Cooperation”, OPEC has become more influential in the oil market. Under such exceptional circumstances, OPEC managed even to win the agreement of two oil producers: Canada and Norway, although not being among OPEC+ states. Owing to such activities, the oil market crash was averted.

The report presented by OPEC Secretary General during the 20th videoconference meeting of the Joint Ministerial Monitoring Committee (JMMC) on July 15, 2020 showed 87% compliance with the May production cuts. According to the report, all countries complying with the “Declaration of Cooperation” had offered support for full compliance with the April 2020 agreement. It was also decided that the countries that had failed to adapt their production with the quotas adjust their production in coming months to make up for their delays. Despite a record glut of 29 mb/d in the oil storage tanks of industrialized nations during April, May and June (totally 270 million barrels), the ground has been paved for oil market stability due to a relative increase in oil demand over three months and the gradual decline in the number of oil floating storages. Since call on OPEC is estimated at 23.4 mb/d this year, down 5.9 mb/d year-on-year, it is clear that OPEC would remain committed to its production cut pledge until the global economy is back to normal.

OPEC Necessity and Consequences of OPEC Absence

Many oil market analysts have noted that without OPEC, the oil market would experience more instability and tensions. Since heavy fluctuations in the oil price would give rise to adverse consequences, the very existence of this oil producer body and its decisions for market stability would be of great significance and value for the global economy. OPEC’s spare capacity is much more important than the US shale oil capacity in absorbing shocks and maintaining the oil market stability. The bulk of US shale oil production cannot continue with prices below $40 a barrel, but OPEC can survive even with prices hovering around $20. Therefore, non-OPEC producers cannot continue to keep producing at low prices, but OPEC can. In any case, OPEC would continue to contribute to the oil market stability for the purpose of sustained production in the long-term by preserving its spare production capacity and maintain prices at levels to be profitable for oil producers in terms of production and sales. On this basis, OPEC’s spare production capacity is acting like a shock absorber to spare the global economy any harm. Without OPEC, these shocks would become much more devastating.

With regard to the experience of recent years, it becomes clear that the “Declaration of Cooperation” between OPEC and its partners has been important because of its quick reaction to market instability. Meanwhile, it has to be recalled that significant decline in OPEC’s oil supply at a time of capacity building would mean an increase in the volume of OPEC spare capacity. In other words, without OPEC, in the light of continued supply by OPEC and allies the world would see a big gap between oil supply and demand, which would push down prices sharply to harm both producers and consumers in the long-term. But as it was noted, JMMC’s reports showed OPEC+ was 90% committed to its production obligations and was trying to reach full compliance. It has to be noted that in the global oil market, an actor like OPEC will remain influential if it can adapt itself with changing conditions in the oil supply and demand. That requires extending OPEC’s perspective and adoption of a strategy to proceed with upstream activities, while maintaining competitive superiority in production in comparison with other producers. Only through adopting such strategies can OPEC’s decisions influence the world economy and the welfare of energy consumers. Since OPEC’s spare capacity significantlycontributes to the market stability, the major challenge faced by OPEC is not economic stagnation or demand shortage, but economic prosperity and low capacity due to the lack of required investment. Energy is essential for human life, economic activities and national security. Energy supply in a stable environment is of high importance for economic development. Oil continues to have the highest share among energy carriers and it remains the largest commercial commodity in the world. By adopting an effective and realistic strategy, OPEC will be able to fulfil its role for the market stability.

Future Challenges

In order to remain influential in the oil and energy market, and even guarantee its own survival, OPEC is faced with major challenges. One of these challenges results from climate changes caused by fossil fuel production and consumption, which is directly linked with OPEC’s existence and survival. It seems that the international community, in recent years, has inevitably reduced coal, oil and even natural gas production and consumption in the transportation and construction sectors and has adopted policies to that effect. As signs of climate changes grow on a daily basis, the issue of protecting the environment takes up added significance and global efforts increase for making energy consumption more efficient in the vehicles and buildings and switching from the consumption of fossil energy carriers like coal, oil and natural gas to renewableenergies. Some experts say if the Earth’s temperature rise is to be curbed by 1.5 degrees Celsius over 30 years, consumption of fossil fuels particularly coal and oil have to be cut sharply and even reach zero.

Many cities in developed nations have already started planning to cut down to zero their fossil energy consumption over 30 years.

Climate changes under conditions due to any rise in the Earth’s temperature from its current levels could prove destructive for Earth and making the Earth uninhabitable. That could bring about serious consequences particularly for some parts of the Earth like in the Middle East where temperature is often above the global average. Therefore, some oil experts are referring to the current era as the last generation of oil. That poses a serious challenge for OPEC nations whose conventional oil reserves make up 75% of world’s total. As currently about 60% of OPEC member states’ revenue depends on the recovery and export of oil reserves, the significance of challenge to OPEC member states becomes clearer. These challenges highlight the necessity of expert discussions regarding the perspective of OPEC’s future. It seems that a three-point strategy could help OPEC overcome these challenges:

- Necessary investment in oil production capacity along with the carbon capture and storage (CCS) technology development and using emitted carbon in oil and gas production and consumption;

- Enhancing energy efficiency and diversifying the economy in OPEC member states for increasing non-oil exports and reducing dependence on oil; and

- Using crude oil (and natural gas) not for supplying fuel and thermal needs in the transportation sector and buildings, but as raw materials for oil and gas-based commodities in the downstream industry, particularly petrochemical industries.

Such strategy would help stabilize OPEC member states’ economy which has always been affected by oil price fluctuations and its ascending and descending cycles. It can also extend the duration of using oil resource well into the second half of the current century. That would allow OPEC member states to make better use of their oil reserves and spend more time on reducing their governments’ dependence on crude oil export revenues.

Therefore, OPEC has to extend its research and focus further on innovations and initiatives related to the development of low-carbon fossil fuel technologies, CCS technologies and using carbon dioxide. To that end, OPEC may further cooperate with international energy research institutes and modern technologies’ think tanks studying energy issues. Supporting initiatives, as well as bilateral and multilateral cooperation for low-carbon oil technology and oil value chain projects and participating in global forums and international debates with the subject of setting regulations for using energy resources have to be take into consideration. Through the process of energy transmission, key uncertainties like the outbreak of the COVID-19 pandemic and its impacts on the oil markets are unavoidable. In the energy transmission process, rapidity in action, adopting expert decisions, governments’ well thought out support for the private sector and companies operating in energy technologies, as well as the orientation of investments are effective.

In general, uncertainties are increasing both in the supply sector due to quick changes in the production technologies and in the demand sector due to changes in the behavior of consumers and replacing alternative energy carriers. In the meantime, political and economic rivalries in the world are growing, which would add to uncertainties. Therefore, OPEC will have no option but to prepare itself for a totally different future. Reconsidering OPEC’s Statute to incorporate some new points which would be necessary for dealing with future challenges could prove fruitful. OPEC may define new missions for itself, including providing member states with help to diversity their economies and develop necessary technologies for low-carbon oil and gas recovery and leading member states throughout the energy transmission process.

OPEC can conduct targeted research on upgrading its capacity and efficiency in dealing with oil market shocks and upgrade its knowhow on management of critical conditionssimilar to what followed the COVID-19 outbreak across the globe. In short, OPEC has to take into account future challenges risks.

Future Challenges to Iran Oil Sector

The same conditions explained for OPEC as necessary to influence the oil market would apply to every single member state, including Iran. In other words, Iran’s share of global oil market (and within OPEC), the price elasticity of demand for Iran’s oil and the price elasticity of supply of oil by every other producer including Iran’s fellow OPEC producers are among factors which would determine Iran’s influence in the oil market.

Given the global oil production capacity of more than 100 mb/d versus Iran’s production capacity standing below 4 mb/d and the possibility of replacing Iran’s oil with that of other countries and the more flexibility of production technologies, it is clear that Iran cannot by itself influence the global oil market. Furthermore, it has already been observed that removing Iran’s oil from the global market, particularly under conditions of global economic stagnation, would cause the world no problem.

As over recent decades, despite the huge proven oil reserves in Iran, the country’s oil production capacity has not increased sufficiently due to the lack of necessary investment, Iran’s share in OPEC and global oil production has dropped. It was such that the US’s unjust sanctions imposed on Iran and the subsequent removal of Iran’s oil from the market did not have any impact on the oil market and oil prices remained unfazed.

That is why adopting a suitable strategy similar to the three-point one explained here would be necessary for the country. Iran is required to invest in developing its oil and gas recovery capacity and gradually shift away from crude oil exports towards producing and exporting petroleum products and petrochemicals.

I personally believe that it would be possible for Iran to create a 7 mb/d oil production capacity, 1mb/d of which would be exported as crude oil and the rest would feed refineries and downstream industries for supplying high-quality petroleum products, as well as petrochemicals. In parallel, it is necessary for the country to invest in developing efficiency upgrade technologies and energy saving, as well as CCS technologies in a bid to be able to use huge oil and gas resources in the best possible way over coming decades.

Due to structural reasons including the history of industrialization of Iran, the extent of Iran, young and educated population, Iran’s experience in global trading, Iran has more possibilities than fellow OPEC producers to diversity its economy. 

Iran can and should reform its financial system and taxation regime in order to reduce the government’s dependence on oil revenues so that oil and gas resources would be realistically used for national economic development.

Mehdi Assali

News Code 307217

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