OPEC (Organization of Petroleum Exporting Countries) is an intergovernmental group whose main objective – expressed in resolutions 1 and 2 of Baghdad (09/14/1960) – is to serve as a consultative body for its member countries to coordinate and unify respective oil policies.
In other words, OPEC tries to formulate programs that ensure the stability of oil prices in international markets, in such a way that undesirable or dangerous fluctuations are eliminated.
All this taking into account the interests of the producing nations in ensuring a stable profit, an efficient and safe supply for the consuming countries, and, in the face of investors in the oil industry, a fair profit.
Origin of OPEC
The history of this organization dates back to 1949, the year in which an official delegation from Venezuela visited Saudi Arabia, Iran, Egypt, Iraq, Kuwait, and Syria, in order to exchange different points of view with the governments of these countries on the oil issue and to strengthen ties that led to the regular delivery of information on the same issue.
Various sporadic meetings were subsequently held between the oil-producing countries of the Middle East and Venezuela, but it was not until 1959, at the opening of the first Arab Petroleum Congress, that oil experts from the producing countries began to discuss technical issues of common interest. And it was these first reconciliations of criteria that a short time later bore fruit in the initiative to found the Organization of Petroleum Exporting Countries.
September 10, 1960, marks the date of what is known as the Baghdad Conference, attended by Venezuela, Iraq, Iran, Saudi Arabia, and Kuwait, four days later, on the 14th of that same month, to reach the famous pact which marked the official birth of OPEC; in fact, the organization has been registered with the United Nations Secretariat since November 6, 1962.
The organization’s first headquarters were established in Geneva (Switzerland) and later, in 1965, moved to Vienna (Austria), an enclave where it continues today. Other member countries joined the group over the years: Qatar, in 1961; Libya and Indonesia, in 1962; the United Arab Emirates, in 1967; Algeria, in 1969; Nigeria, in 1971; and, finally, Angola, in 2007. Thus, OPEC is currently made up of twelve countries -six in the Middle East, four in Africa, and two in South America-.
Analysts of the subject that concerns us assure that “among the main causes that motivated the creation of the organization, is the fact that all its participants are underdeveloped countries, exporters of a non-renewable natural resource; with common interests that largely depend on oil revenues to finance their budgets and economic development programs; and that, lastly, they have to deal with practically the same parent companies of the concessionaire companies that operated in each of their territories. All these factors made them aware of the need to unite and coordinate their oil policies”.
However, the immediate reason that determined the birth of OPEC was the unilateral reduction of the quoted oil prices, carried out by the oil companies in 1959 and 1960. “The first of these restrictions put the producer’s countries on alert, causing great concern for its negative effects on the level of their tax revenues and on the execution of their budgets and development plans”, add the experts.
It does not hurt to remember in this sense that in the 1950s, seven large international oil companies such as Esso, Texaco, Royal Dutch Shell, Mobil Oil Company, Gulf, British Petroleum (BP), and Standard Oil of California, dominated the oil scene trading the crude they produced in their extensive concessions around the world and for which they paid modest sums of money to the corresponding governments. These companies were known as “The Seven Sisters” and had absolute control over oil prices and the market, which gave them immense profits and power, which contrasted dramatically with what the countries that owned the reserves received.
Thus, the beginnings of OPEC were not easy since its foundation provoked the rejection of the industrialized countries and the big oil organizations. In addition, it was quite difficult to consolidate a group that was unprecedented and that tried to unify for the first time common objectives of countries and peoples that are very different from each other.
The commercial value of oil
However, when the oil begins to find its true commercial value as a result of the actions taken by the OPEC countries, the industrialized nations found it necessary to adjust their energy consumption patterns, through different conservation measures, efficient use, and fuel savings. In other words, awareness is raised about a good that in practice is not only perishable but also needs to be managed within the margins established by the environment.
Those same industrialized countries undertook negotiations with other non-OPEC nations to develop exploratory programs and thus find and control new hydrocarbon resources. As a result, new producing areas such as the North Sea, Alaska, Egypt, Malaysia, and Colombia appeared on the world oil scene, where oil existed, but the costs of exploration and production could not be sustained with low prices.
When prices rose, they risked investing with positive results, as was the case in the North Sea, whose oil fields were developed by Norway and England. However, the incorporation of these new volumes of oil outside OPEC took away a market from the organization and, in addition, stimulated the development of other alternative sources of energy such as nuclear, wind, geothermal and solar.
Organizational structure of OPEC
OPEC is organized as follows:
- Board of Governors: Made up of senior officials from each member country, this Board prepares OPEC’s “agenda”, that is, the approach to the various issues that are going to be discussed at ordinary meetings. Its decisions are transferred to the ministers of each country so that they can be carried out.
- General Secretariat: It is the spokesperson and legal representative of the Organization, coordinating public relations and the legal department. Its role is to study the oil market and its conditions.
- Economy Commission: It is a purely technical body that is responsible for studying the conditions of supply and demand in the oil market and preparing the draft resolutions of the Organization that must be discussed and approved at the conferences.
The importance of OPEC in the oil market
OPEC’s influence on the oil market is unquestionable. Approximately 43% of world production and 81% of world oil reserves are in OPEC member countries, its dominance in oil exports is around 34.9% of the world and concentrates practically all of crude oil production capacity, and it can be said that OPEC has become a kind of central bank for the oil market. So much so that according to Gonzalo Escribano, head of the Elcano Royal Institute’s “Energy and Climate Change” program, OPEC is expected to control 50% of the oil market by 2040 thanks to the fact that it has the largest oil reserves.
There are other oil-producing areas located in non-OPEC countries (the North Sea, Alaska, Egypt, Malaysia and Colombia), but extracting oil in these areas at low prices was unsustainable. However, there were countries such as Norway and England that risked investing in the North Sea deposits with positive results, subtracting market share from OPEC.