The Organization of the Petroleum Exporting Countries, also known as OPEC or OPEP in a few languages, is an international supranational organization that was founded by five countries. 1960 is opec established year. These five countries, that is, Iraq, Iran, Kuwait, Saudi Arabia and Venezuela were represented in a meeting in Baghdad. At this time, OPEC established its own vision with its headquarters initially being in Geneva for the first five years of existence and was then moved to Vienna in 1965.
The five countries convened with the aim of eliminating the Seven Sisters which was a group of private multinationals that dominated the oil market. This was the main reason as to why OPEC was formed. Other reasons as to why OPEC was formed can be deduced from their mission statement. OPEC was established to harmonize the petroleum policies enacted by its members, ensure that stability is achieved in the oil markets and that its consumers have a stable supply of oil. The company’s mission mainly addressed the shortfalls in the supply of oil as a result of numerous wars and civil unrest in various countries at that time, for example the Iranian Revolution that occurred in 1979.
To date, this organization is comprised of thirteen countries which make up approximately forty percent of the world’s oil production and up to 74% of the world’s recognized oil reserves. This has enabled OPEC to have significant influence over the oil prices on a global scale. The organization’s main challenge has been the uncontrollable forces that affect the demand for oil, mainly the increased desire to conserve the environment that is mainly advocated for by the United Nations.
As mentioned above, OPEC is made up of thirteen member states which are: Saudi Arabia, Ian, Iraq, Venezuela, Kuwait, United Arab Emirates, Qatar, Indonesia, Algeria, Angola, Gabon, Nigeria and Ecuador. Saudi Arabia is considered to be the group’s de facto leader.
OPEC has its headquarters in Vienna which is also known as the OPEC Secretariat. This is also the organization’s executive body as it is charged with the mandate of carrying out resolutions and decisions passed by the Conference and those that have been made by the Board of Governors.
The Conference is OPEC’s supreme governing body that is made up of the Heads of delegation who are normally the Ministers of Oil, Energy or Petroleum in the various member countries. This body meets twice every year and is responsible for the organization’s policy formation and establishing suitable implementation strategies of the same. The Conference is also charged with the responsibility of vetting and accepting suitable member states that seek to join OPEC. It also approves the appointment of the members of the Board of Governors, elects a suitable Chairman for the Board of Governors and decides on OPEC’s budget as prepared and submitted by the Board of Governors.
The Board of Governors is made up of a governor who is appointed by every member country and who is officially confirmed as the governor by the Conference for a period of two years. The board is the body that directs the management of OPEC’s operations; implements the decisions made by the Conference and comes up with OPEC’s annual budget. They also communicate with the Conference on any important issues that need to be dealt with that relate to OPEC. The Board of Governors is made up of Ahmed Messili-Algeria, Felix Manuel Ferreira-Angola, Wilson Pastor-Morris- Ecuador, Hossein Kazempour-Iran, Dr. Falah Almari-Iraq, Ms Nawal Al-Fezeia-Kuwait, Samir Salem Kamal-Libya, Dr. Jumila Shuara-Nigeria, Issa Shahim-Qatar, Dr. Mohammed S Al-Madi-Saudi Arabia, Dr. Bernard Mommer-Venezuela and Dr. Ali Obaid Al-Yabhouni who is the Chairman of the board-United Arab Emirates.
The Secretariat is made up of the Secretary General, currently HE Abdalla Salem El-Badri. The Secretary General acts as the organization’s Chief Executive Officer. Under the Secretariat, there are also other offices and divisions that ensure the smooth management of OPEC’s operations. These include the Legal Office, the Research Division, and the Office of the Secretary General, the Internal Audit Office and the Support Services Division.
Within the Secretariat, is the Economic Commission which is a special organ that is charged with the responsibility of promoting and maintaining stability within the global oil markets. This commission is made up of the Secretary General, National Representatives selected by member states and a Commission Coordinator.
For the financial year ended 2014, OPEC had revenue margins of up to 730 billion U.S dollars excluding Iran which was facing economic sanctions. This for the year 2015 took a significant decline as the revenue margins generated in the same year were valued at 380 billion U.S dollars. This decline is as a result of the significant reduction in the prices of crude oil in the year 2015. At the same time, OPEC continues to supply the same amount of oil as it did in the year 2015. This is represented by the graphs and the table below.
In the year 2015, the economic growth globally stood at 3.0% while the global oil demand in the same year stood at 1.54 million barrels on a daily basis. OPEC makes up to 81% of the global crude oil reserves which is represented by approximately 1,206 billion oil barrels. Non-OPEC members own the remaining 19% of the crude oil reserves that is represented by 287 billion oil barrels. 66% of OPEC’s oil reserves reside in the Middle East making it a significant player and contributor in OPEC’s total revenue evidenced by the graph on the value of petroleum exports.
As mentioned above, the Organization of the Petroleum Exporting Countries was set up with the aim of reducing the dominance that monopolists had on the oil market in the 1960’s. This was achieved by unifying the oil reserves and oil prices for the member states. As these members own up to 80% of the world oil reserves, the change in the oil prices would therefore affect the price of oil in countries that imported oil from OPEC members. For example, in Venezuela, 95% of their exports are as a result of crude oil.
To respond to fluctuations in the demand for oil, OPEC adjusts the production levels in relation to the global demand for oil. If OPEC aims at increasing the price of oil, they reduce the supply of oil which enables them to increase the oil prices. However, they do not actually reduce much of the supply of oil as this would reduce their revenue margins. They just pledge and speculate that the supply of oil will reduce, which increases the demand of this precious resource. The organization is then able to increase oil prices as people are willing to pay more to acquire oil. OPEC does not directly control the prices of oil.
In a situation where the supply of oil seems to be more than what is being actually demanded, member countries end up pursuing different strategic decisions. On one hand there are the ‘price doves’ which comprise of member states that have stable economies and significant wealth funds that are generated by oil. These member countries are Saudi Arabia, the UAE, Qatar and Kuwait and in such situations they prefer to maintain their production levels, so as to maintain their market share and dominance in this market. This for them however will mean that the oil prices will remain low.
On the other hand, there are the OPEC member states that have poor economies. These are known as the ‘price hawks’ and comprise of Iraq, Iran, Venezuela, Libya, Angola, Algeria, Nigeria and Ecuador. These members prefer to cut on the production of oil so as to boost the prices of oil hence increasing their revenue margins.
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