The Future of the Organization of Petroleum Exporting Countries
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.
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?
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.