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Prince Amir Al Saud

The Future of the Organization of Petroleum Exporting Countries

The Future of the Organization of Petroleum Exporting Countries

 

Background

OPEC or Organization of Petroleum Exporting Countries was established in September of 1960 by five nations. These were Saudi Arabia, Kuwait, Iraq, Islamic Republic of Iran, and Venezuela. From 1961 until 2007, nine other countries joined the OPEC. These include Qatar, Indonesia, Libya, United Arab Emirates, Algeria, Nigeria, Ecuador, Gabon, and Angola. However, Gabon and Ecuador have already terminated their nation’s membership in 1995 and 2007 respectively. Indonesia suspended its membership with the organization starting January of 2009. OPEC is left with only 12 members.

 

Worldwide Cartel

The OPEC can be described as a consortium or conglomerate that has the power to increase oil prices globally by putting a ceiling on production. Member-nations are capable of imposing premium prices at will due to practically inflexible demands. This cartel collaborates with Mexico and Russia which also produce crude oil.

At one time, the OPEC imposed a price of $70 to $80 for very barrel of unrefined oil. Once the costs fall below that mark, the group can agree to hold back supply so costs will go up considerably in the world market. Oil-exporting nations increase supply to generate more profits. Tight competition will force prices to drop down and accelerate additional demand. Meanwhile, the OPEC will produce only enough oil to maintain a high price for the organization’s members.

When the prices become very expensive, other countries especially those with rich economies turn to other alternatives. For instance, Canada opted to explore the possibility of using shale oilfields while the United States resorted to hydraulic fracturing and opened up the Bakken oil-producing area for production. Members of the Organization of the Petroleum Exporting Countries have sufficient supply of oil to last for more than one century given present rates. Hence, it is capable of reducing unpredictability of raw oil prices.

Crude oil is relatively expensive to generate. Oil extraction must operate 24/7 for absolute efficiency. Besides, shutting down oil facilities can damage oil installations and fields. Ocean drilling is a very complex process and costly to close down. For that reason, it is in the best interest of OPEC to maintain the stability of world prices.

Is OPEC willing to pay the price?

 

Possible Consequences

It is true that OPEC has extensive influence on world prices in the short-term. Nonetheless, it is doubtful if this pricing monopoly can be sustained forever. While it is true that the group was able to trigger excessive price increases from the seventies until the eighties by curbing production and shutting down surplus. The result was an outpouring of competition, substantial increase in storing up among consumer countries, and growing disputes among OPEC members specifically the declining market share.

In fact, the organization’s share of international production went down from 51 to merely 28 percent between 1973 and 1985. Another factor that led to this decrease was the increasing rising production from the United States, Mexico, the former Soviet Union and North Sea. Demand for unprocessed oil plunged even as supply soared. World powers consisting of the United States, European Union and Japan exerted efforts to build up energy-efficiency and prop up alternative fuels.

The monopolist ways and days of OPEC may just have ended!

The situation is not the same as it was 40 years ago. 

At long last, the oil market is at a crossroads wherein oil production in non-OPEC countries is in full gear, demand has gone down and world economics may have landed a bright position in the process of globalization. After all these years, the oil production industry in the free world is slowly beginning to succeed.

 

Pitfalls of OPEC

The Organization of Petroleum Exporting Countries has lost the supremacy to control oil prices. According to http://www.peakprosperity.com, the power of this “infamous cartel” has at long last waned. For so long, the OPEC has wielded the most considerable pressure in crude oil prices. Nonetheless, this supply monopoly is not enough to overwhelm the latest economic turmoil. Oil prices have dropped just like the stock market. Demand for oil crashed because of global economic downturn. This can be the eventual drawback since the dominance of OPEC may not be restored.

Significant reductions in production by the OPEC have started to cut down oversupply in recent months. The demand for crude oil seems to have stabilized and 2014 could be a makeover year due to decreases in prices as there has been augmented supply of oil from North America and overproduction by the traditional oil-producing countries. The cartel vows that the daily 30 million-barrel production will not change. However, restrictions on Iran and OPEC monetary issues can affect the organization’s control of the oil market.

The website http://article.wn.com disclosed that there were apprehensions that the whole world will even have no more supply of oil but hydraulic fracturing has allayed these apprehensions. The OPEC used to manipulate prices but the United States and Europe are producing more oil instead of importing from the OPEC.  Oil production in the U.S. has gone up to roughly 8 million barrels daily. The same level of production is expected to happen in Brazil and North America (Canada). Meanwhile, both Iraq and Iran have plans that are contrary to the self-imposed quota of Saudi Arabia. This can lead to hostilities between KSA and these two countries.

The OPEC is confronted with two serious tests. The United States, which is the group’s largest consumer, continues to increase local production. Likewise, it has to contend with the expanded initiatives of the two countries which can bring down prices compared to what the interest group prefers. In the end, up-and-coming markets in the Asian region will establish international demand. Their yearning will sooner or later settle on the magnitude of the issue confronting the Organization of Petroleum Exporting Countries.

 

OPEC’s Future

The OPEC is faced with provisional and long-term trials. For one, mounting production in the U.S. and Canada has been unpredictably fast. This has increased to one million barrels every day for the past two years. While this upsurge was compensated by the volatility in Libya, additional exports by the super power has compelled the Kingdom of Saudi Arabia to diminish production levels once in a while to keep up prices. The American oil output is expected to multiply by another one million barrels this year. This can affect the partisan price points of OPEC.

More than this, the quantity churned out by Iraq and Iran can be the major factor.  In case, the two countries heighten production to 11 million barrels daily by 2020, this will correspond to an increase of up to six million barrels on top of the present quantities. Ever since, the shares of OPEC have always been the source of tension among member nations. The producers may no longer be able to avoid this scenario.

The domestic consumption of Iran will intensify considerably but the prospective increases in export will still be very high for Saudi Arabia to overcome. The result is an escalation of conflict within OPEC among the three main protagonists. What can be the immediate scenario? Saudi Arabia can ask both countries to curb export growth. However, this may not be possible especially if this is not within the economic interests or either nation. There should be other motivations for this to happen.

There are also other issues aside from the rivalry in exports such as the civil war in neighboring Syria, the power of Iran in border locations of Saudi Arabia, and the Shiite-controlled Eastern Province which also produces crude oil. In the past, Saudi Arabia has always clamored for enhanced production by OPEC to preserve the group’s market share because high prices have encouraged alternative energy development to another place. On the contrary, the two allies have always supported average production levels and robust prices.

Saudi Arabia can sell oil at $85 for one barrel while other nations surrounding this kingdom require prices at more than $100 per barrel. Iran and Iraq look forward to continuing production without having to reduce prices by depending on enhanced demand from emerging markets in Asia. Right now, this region is the largest importer even bigger compared to North America and Europe put together.  

This development has brought about greater than before mutual relationship between OPEC and other developing nations in Asia. China and India are among these countries. China has existing collaborative projects with all three countries. China has also expanded radically in Venezuela and imports approximately 15 percent of oil products from other OPEC countries such as Angola. India has also widened its connections with OPEC countries and is currently the largest customer of Nigeria.

Asia is expected to maintain its demand for oil in the near future. This indicates that the pressure on OPEC will not result in reduced prices of crude oil. Effects on long-term prices will not be definite. Furthermore, the price will be determined worldwide supply of oil from OPEC and magnitude of development in Asia within the next few years. The cartel has often been utilized as a political bargaining chip to raise the prices of crude oil or impose a ban on oil exports. This was clearly seen during the 2008 global oil price shock.

The challenge at present for the Organization of Petroleum Exporting Countries is to maintain prices of oil or keep it low for consumers to afford. Prohibitions are out of the question. The OPEC has no Choice but to maintain prevailing market prices and see to it that developing Asian markets can afford to purchase their oil and stop alternatives like shale oil or natural gas to become economically viable all over the world. 

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