The rise and decline of OPEC’s Power

The Organization of petroleum exporting countries (OPEC):

OPEC is a permanent intergovernmental organization, founded in Baghdad on September 1960. The founding members were Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The founders were later joined by numerous countries, as of today, the organization counts fourteen members, even though Ecuador has announced that it will withdraw on January 2020. The headquarters are located in Vienna, Austria since September 1965.

The Mission of the Organization is “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”.

Creation and Progress:

OPEC was born due to the need of oil-exporting countries to establish a form of counterpower to the concentration of economic and political power of the Multinational oil companies. The “Seven Sisters oil companies” the famous name used by the Italian director of Eni, Enrico Mattei in the 1950s pointed out the existence of seven multinational companies that possessed the control of the petroleum sector from the mid-1940s to the early 1970s. They controlled up to 85 percent of global oil reserves before the 1973 oil Embargo.

Therefore, oil-exporting countries decided to cooperate to regain power over the production and export of their natural resource. The countries regained the control over petroleum through the oil nationalizations. And the power of the OPEC rapidly increased in the 1970s.

Oil Embargo: in between proof of strength and disincentive

In reaction to the aids of industrialized nations to Israel in the 1973 Yom Kippur War, the Organization of Arab petroleum exporting countries declared significant production cuts and an oil embargo. This strategy had a devastating impact on the economy of industrialized countries, in consequence of the rapid oil price increase. This historic event could be the first sign of the great power OPEC had over the world due to their position of control over the petroleum offer. Even though the embargo was lifted in 1974, the impact on the world would be long-lasting. The world suffered a global economic recession.

This sign would be the first thrust for industrialized countries to review their position over energy consumption. Numerous countries reviewed their policies on the excessive use of oil of the population, trying to decrease the daily use of this resource as an example some Europeans nations banned non-essential Sunday driving. Those countries also started to invest in the development of alternative energies and searching for alternative suppliers. Furthermore, as a reaction to the crisis, the International Energy Agency was created “to ensure reliable, affordable and clean energy for its members”.

Internal conflicts: Different opinions over market positioning

As a result of the growth of OPEC, the organization counts countries with divergent opinions overproduction and exporting strategies. Generated by heterogeneous economical needs of the different members. On the first hand proposed by impoverished countries the strategy is based on important production cuts to create a heavy oil demand and doing so increasing the prices and hence the revenues. On the second hand, this proposition collides with the strategy that Saudi Arabia has been developing for the long term. Which is a partnership with the economic powers to establish a reliable offer of oil that sets the foundation for economic growth. Those different views created recurrent debates over Production quotas and contributed to geopolitical tensions in between member countries. And as a reaction to divergences members preferred to leave the organization, the main illustration is the decision of Qatar that left OPEC after a 57 years membership. Or the recent announcement of Ecuador to leave in 2020 are clear signals of the power loss of OPEC power on the market. The reputation of the organization has suffered from recurrent internal problems and the often-cited domination of Saudi Arabia. Not to mention the strong participation in the governance of Non-OPEC nations such as Russia.

Energy independence and Environmental issues:

As a consequence of the price volatility in the late 2000s industrial countries, with the United State of America as the first mover invested capitals and reviewed their policies to promote energy independence, or as an alternative more energetic diversity. The USA firmly developing its own oil production increasing its traditional production but also by innovation using shale oil and discovering new deposits beneath the Gulf of Mexico. The USA increased petroleum production from 394 millions of tons in 2012 to 571 million in 2017.

European Union not only driven by price instability of oil, supply insecurity and the unavoidable disappearance of fossil fuels in the long term. But also, by environmental issues such as carbon impact largely discussed as one of the most important topics of the 2015 Paris agreement, that leads to climate instability and destruction of ecosystems. Decided to impose a renewable energy directive to the member countries by setting a 20% target of final energy consumption from renewable energies (such as solar, biomass…)  by 2020. And this target will grow steadily over the next decades.

Conclusion:

To conclude, OPEC is still nowadays the biggest producer of petroleum in the world, in 2016 they represented 44% of total production and accounted for 81,5% of proven oil reserves. They keep a large influence and power over the world’s energy market. But as we exposed before their position of domination is under strong pressure. This pressure is both internal where the organization is experiencing a lack of unity that affect its price making power. And extern from other nations and international organizations, that are redefining the rules of the market and creating new ones.

Sources

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