When it comes to oil cartels, one of the most powerfulcartels, not just in the oil industry but also throughout modern history, isthe Organization of the PetroleumExporting Countries more commonly referred to as OPEC. Prior to the rise ofOPEC, the oil industry was dominated by the large oil companies often known asthe Seven Sisters. These sevencompanies were Anglo-Iranian Oil Company (now BP), Gulf Oil, Royal Dutch Shell, Standard Oil Company of California (SoCal), Standard Oil Company of New Jersey (Esso), Standard Oil Company of New York (Socony) and TexacoThese companies possessed the technology and skills forexploration and production that the countries lacked.
However, the governmentsof the oil producing countries viewed the systems under which the companiesoperated as an outdated example of imperialist domination. OPEC was born, tosome extent, to reduce the influence of the oil multinationals.OPEC was thus created at the Baghdad Conference on September10-14, 1960. It was an outgrowth of the 1st Arab Petroleum Congress in 1959when the Oil Consultation Commission, created by a few of the oil producingcountries, signed what was known as the Maadi Pact at the end of theirmeetings. Early members were Iran, Iraq, Kuwait, Saudi Arabia, and Venezuelawith Qatar, Indonesia, Socialist Peoples Libyan Arab Jamahiriya, United ArabEmirates, Algeria, Nigeria, Ecuador, and Gabon joining later. However, thereare large producers who are not members of OPEC, notably Russia, Norway,Mexico, and the United States.Its goal is to co-ordinate and unify petroleum policiesamong Member Countries. IssuesMotivated for choosing the study Since itsinception, OPEC has been viewed in a largely negative light.
Much about theactual operations and decision making process of OPEC is unknown. Theorganization is quite secretive about itself so there is not much written aboutits internal workings. This secrecy has often lead to misunderstandings orconspiracy theories, which are prevalent in some books and articles written onOPEC. The aim of this study of oil cartels is to establish facts about thefunctioning of OPEC and their impact on global oil prices. The purposeof OPEC is to agree on the quantity and price of the oil their countriesexport. They state their primary objectives as:? To coordinate and unify the petroleumpolicies of its Member Countries and ensure the stabilization of oil markets inorder to secure an efficient, economic and regular supply of petroleum toconsumers, a steady income to producers and a fair return on capital for thoseinvesting in the petroleum industry. ? There arethree main organizational units which oversee the operations of theorganization: OPEC Secretariat – This group functions as the Headquarters of OPEC. It is responsible for carrying out the executive functions of the Organization.
It consists of the Secretary General and the Research Division, headed by the Director of Research, who oversees the Petroleum Market Analysis, Energy Studies, and Data Services Departments. Board of Governors – The Board is composed of Governors nominated by Member Countries and confirmed by the Conference for two years. The Board directs the management of the Organization, implements Resolutions of the Conference; draws up the Organization’s annual budget, and submits it to the Conference for approval.
Research Division – is a specialized research oriented body operating within the framework of the Secretariat. It consists of three Departments, namely, Data Services, Energy Studies and Petroleum Studies. Apart fromOPEC, there’s also the International Energy Agency (IEA).
The IEA is the energyforum for 26 industrialized countries. Formed by the Organization for EconomicCooperation and Development (OECD) as an autonomous intergovernmental entitywithin the OECD in 1974 in direct response to the oil crisis, its membersinclude: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark,Finland, France, Germany, Greece, Hungary Ireland, Italy, Japan, Republic ofKorea, Luxembourg, The Netherlands New Zealand, Norway, (participates under aspecial Agreement), Portugal, Spain, Sweden, Switzerland, Turkey, UnitedKingdom, and the United States.Reviewof LiteratureDoes oil consumption promote economicgrowth in oil producers? Evidence from OPEC countriesCitation –Jose Alberto Fuinhas, Antonio Cardoso Marques, Tânia Noélia Quaresma, (2015)”Does oil consumption promote economic growth in oil producers?: Evidencefrom OPEC countries”, International Journal of Energy Sector Management,Vol. 9 Issue: 3, pp.323-335, https://doi.
org/10.1108/IJESM-03-2014-0003Abstract –The oil-growth nexus is studied in a panel of Organization of the PetroleumExporting Countries (OPECs), for a long time span (1960-2011), controlling forthe specific context of oil production. Their membership in the cartel put themunder a common guidance, which originates phenomena of cross-sectiondependence/contemporaneous correlation in the panel.Design/methodology/approach– Recent panel data estimators and co-integration analyses are both pursued anddiscussed, namely, dealing with the heterogeneity of panels and the countries’specific effects.
The Driscoll–Kraay estimator proves to be appropriate inhandling the panel properties. Determinants of U.S. private foreigndirect investments in OPEC nations : from public and non-public policyperspectivesCitation -Kingsley O. Olibe, C. Larry Crumbley, (1997) “Determinants of U.S. privateforeign direct investments in OPEC nations : from public and non-public policyperspectives”, Journal of Public Budgeting, Accounting & FinancialManagement, Vol.
9 Issue: 2, pp.331-355, https://doi.org/10.
1108/JPBAFM-09-02-1997-B007Abstract -Previous research demonstrates that non-public policy variables (wage rate, rawmaterial, GDP, GDP/capita, inverse of tax rate, and population) havesignificant influence in determining the flow of U.S. investment. Research hasnot, however, demonstrated that government accounting variables significantlyaffect Foreign Direct Investments (FDI) flow into either Organization ofPetroleum Exporting Countries (OPEC) or non-OPEC countries. In light of thisomission, the focus of this inquiry is on the examination of the potentialinfluence of both government accounting and non-public variables in influencingthe flow of the stock of U.
S. foreign direct investment in the OPEC nations. Toaccomplish the objective, government accounting and non-public policy variablesare employed to investigate whether they matter in determining investment flowsinto these countries.
The results of the study suggest a direct linkage betweenthe flow of FDI and accounting variables. Scenario planning and futurology ofthe Persian Gulf post?oil economyCitation –Ali Asghar Pourezzat, Mostafa Nejati, Ghazaleh Taheri Attar, Seyed MahdiSharifmousavi, (2011) “Scenario planning and futurology of the PersianGulf post?oil economy”, Foresight, Vol. 13Issue: 6, pp.
18-33, https://doi.org/10.1108/14636681111179573Abstract –The purpose of this paper is to explore the economy of Persian Gulf countriesfollowing a post?oil economy.This is accompanied with a futurology study and planning of certain scenariosthat can be applied to these countries.Design/methodology/approach– This study applies a futurology approach by investigating various scenariosto explore the Arab economy after oil.
As such, a series of possible policiesare proposed that can be undertaken by Arab countries depending on their publicpolicy. Each of the suggested policies involves different scenarios that havebeen formed and analyzed using an era?based cellular planning system.Modeling the impact of coal?to?liquids technologieson China’s energy marketsCitation –Haixiao Huang, Jerald J. Fletcher, Qingyun Sun, (2008) “Modeling theimpact of coal?to?liquids technologies on China’s energy markets”, Journal of ChineseEconomic and Foreign Trade Studies, Vol. 1 Issue: 2, pp.162-177,https://doi.org/10.1108/17544400810884727Abstract –The purpose of the study is to evaluate the impact of China’s current coal?to?liquids (CTL) activities on its coal and oil markets from 2005 to 2025.
Design/methodology/approach– A partial equilibrium multi?equation modelof China’s oil and coal markets is developed based on data obtained from theexisting literature. The impact of CTL technologies on China’s oil and coalmarkets is evaluated using computer simulations by solving the model underscenarios with and without CTL production.Not all demand oil shocks are alike:disentangling demand oil shocks in the crude oil marketCitation –Zhuo Li, Hui Zhao, (2011) “Not all demand oil shocks are alike:disentangling demand oil shocks in the crude oil market”, Journal ofChinese Economic and Foreign Trade Studies, Vol. 4 Issue: 1, pp.28-44,https://doi.org/10.1108/17544401111106798Abstract –The purpose of this paper is to re?examine the structural origins of international crude oil pricefluctuation.
Design/methodology/approach– The paper establishes a structural vector auto-regression model based on thegeneralized supply and demand analysis of crude oil price fluctuation andperformance the structural decomposition of price shocks with impulse responseanalysis of those factors.CurrentSituation (2010-present)Following the ‘Arab Spring’ of 2011, prices of crude oilhave become increasingly volatile. The International Energy Agency reports that oil productionfrom Africa’s OPEC members Algeria, Angola, Libya and Nigeria has stagnatedover the last five years at 7.
12m barrels a day, posting virtually zero growthfrom 2012 to 2017. The Arab spring of 2011 looked like a blip as productionrecovered quickly from the war in Libya, but the losses for OPEC’s Africanmembers continued on the back of higher security risks in the wake of the Arabspring, uncompetitive fiscal terms, challenging local content requirements andcontract sanctity concerns. Increased violence by Islamist extremists and militants,against a backdrop of political instability across much of northern and westAfrica since the Arab spring, has changed the equation for acceptable risks forinternational oil companies.Major oil producers of the Middle East have dramaticallyhigher spending levels than they did in the past.
Ever since the Arab Spring,which saw widespread discontent and instability spread throughout the region,Saudi Arabia and other Gulf States had to shower their populaces in socialspending in order to stave off rebellion. So, while they still have some of thelowest oil production costs in the world – costing just a few dollars toproduce a barrel of oil – the real costs come from the broader governmentbudget.Back in July 2013, the WSJ noted that the UAE can produceoil for about $12 per barrel, but it actually needs something like $67 perbarrel to balance its budget – a price far above the prevailing market pricefor the last three years. LessonsLearnedIn light of this, as oil prices wallow near multi-year lows, it’s becoming increasinglyclear that the new cartel controlling oil prices is not OPEC but world creditmarkets.
From Saudi Arabia’s record $100 billion deficit to shale oil’scontinuing reliance on cheap credit funding, it’s clear that no major oilproducer or company in the world right now is economically self-sufficientbased on oil revenues alone. This situation has left the flow of oil and thedecision on when to stop pumping the increasingly tarnished black gold in thehands of banks rather than oil men.The whole basis of acartel’s existence is having the power to control production, but at this pointit looks like the only group with any ability to actually curtail (or expand)production are the major banks that direct capital market flows, and not theOPEC. Recommendations for the futureIf the OPEC was acartel, the banking market is an oligopoly and where the likes of Citi andWells Fargo lead, smaller banks will follow. So far, banks have not been actingin a cartel like fashion and are more worried about their individual loans thanthey are coordinating credit decisions to try and help salvage loan recoveryrates across the industry. But with the increasing chaos in the energy sector,banks could be forced to change their tunes as they did in the housing industryin 2009 which in turn would lead to a very interesting future for energyprices.