The Organization of Arab Petroleum Exporting Countries

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About this sample


Words: 1593 |

Pages: 4|

8 min read

Published: Jan 4, 2019

Words: 1593|Pages: 4|8 min read

Published: Jan 4, 2019

Economists often cite OPEC as a textbook example of a cartel that cooperates to reduce market competition, but whose consultations are protected by the doctrine of state immunity under international law. However, their influence on international trade is periodically challenged by the expansion of non-OPEC energy sources, and by the recurring temptation for individual OPEC countries to exceed production ceilings and pursue conflicting self-interests.

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Organization of the Petroleum Exporting Countries is an intergovernmental organization of 14 nations as of May 2017, founded in 1960 in Baghdad by the first five members (Iran, Iraq, Kuwait, Saudi Arabia, Venezuela), and headquartered since 1965 in Vienna. As of 2016, the 14 countries accounted for an estimated 44 percent of global oil production and 73 percent of the world’s “proven” oil reserves, giving OPEC a major influence on global oil prices that were previously determined by American-dominated multinational oil companies.

OPEC’s stated mission is “to coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets, in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry”. The organization is also a significant provider of information about the international oil market.

Other cartels are:

The International Energy Agency (IEA) is one of the larger organizations involved in the oil and gas industry. The IEA is the energy forum for 26 industrialized countries. Formed by the Organization for Economic Cooperation and Development (OECD) as an autonomous intergovernmental entity within the OECD in 1974 in direct response to the oil crisis, its members include: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary Ireland, Italy, Japan, Republic of Korea, Luxembourg, The Netherlands New Zealand, Norway, (participates under a special Agreement), Portugal, Spain, Sweden, Switzerland, Turkey, United Kingdom, and the United States. One of the overall objectives of the IEA, which reflects the original reason for the group’s establishment, is to seek ways to reduce the members’ vulnerability to a supply disruption.

The Organization of Arab Petroleum Exporting Countries (OAPEC) was established in 1968 and is based in Kuwait. Membership is limited to petroleum producing Arab countries. The three founding members were Kuwait, Libya, and Saudi Arabia. The OAPEC is not a cartel in the same sense as OPEC. OAPEC is devoted to developmental activities and increasing the cooperation among its members.

At various times, OPEC members have displayed apparent anti-competitive cartel behavior through the organization’s agreements about oil production and price levels. In fact, economists often cite OPEC as a textbook example of a cartel that cooperates to reduce market competition, as in this definition from OECD’s Glossary of Industrial Organisation Economics and Competition Law:

International commodity agreements covering products such as coffee, sugar, tin and more recently oil (OPEC: Organization of Petroleum Exporting Countries) are examples of international cartels which have publicly entailed agreements between different national governments.

OPEC members strongly prefer to describe their organization as a modest force for market stabilization, rather than a powerful anti-competitive cartel. In its defense, the organization was founded as a counterweight against the previous “Seven Sisters” cartel of multinational oil companies, and non-OPEC energy suppliers have maintained enough market share for a substantial degree of worldwide competition. Moreover, because of an economic “prisoner’s dilemma” that encourages each member nation individually to discount its price and exceed its production quota, widespread cheating within OPEC often erodes its ability to influence global oil prices through collective action.

In 1949, Venezuela and Iran took the earliest steps in the direction of OPEC, by inviting Iraq, Kuwait and Saudi Arabia to improve communication among petroleum-exporting nations as the world recovered from World War II. At the time, some of the world’s largest oil fields were just entering production in the Middle East. The United States had established the Interstate Oil Compact Commission to join the Texas Railroad Commission in limiting overproduction. The US was simultaneously the world’s largest producer and consumer of oil; and the world market was dominated by a group of multinational companies known as the “Seven Sisters”, five of which were headquartered in the US following the breakup of John D. Rockefeller’s original Standard Oil monopoly. Oil-exporting countries were eventually motivated to form OPEC as a counterweight to this concentration of political and economic power.

OPEC is mainly Saudi Arabia, the dominant producer, and some other sub-groups and Saudi alone acts like a dominant producer. (Alhajji and Huettner, 2000)

Dermot Gatley (1984) conducted one of the early surveys and grouped OPEC behavior modeling approaches into either a dominant theoretical approach based on the wealth maximizing model or a simulation approach based on the target capacity utilization model. (Dermot Gatley, 1984) In 1998, Mabro surveyed and criticized the literature on OPEC behavior for the period 1960-1998 and grouped it into six categories including: history, previous literature surveys, economic modeling, political economy, policy proposals, and trade journals reporting. (Mabro, 1998) OPEC behaves more like an oligopoly with Saudi Arabia as a price leader and largest producer. (Plaut, 1981)

OPEC can control the world oil market via restricting supplies to increase prices and achieve certain revenues. (Tussing, 1989)

By the time of the 2011 Libyan Civil War and Arab Spring, OPEC started issuing explicit statements to counter “excessive speculation” in oil futures markets, blaming financial speculators for increasing volatility beyond market fundamentals.

On 10 September 2008, with oil prices still near US$100/bbl, a production dispute occurred when the Saudis reportedly walked out of a negotiating session where rival members voted to reduce OPEC output. Although Saudi delegates officially endorsed the new quotas, they stated anonymously that they would not observe them. The New York Times quoted one such delegate as saying: “Saudi Arabia will meet the market’s demand. We will see what the market requires and we will not leave a customer without oil. The policy has not changed”.[33] Over the next few months, oil prices plummeted into the $30s, and did not return to $100 until the Libyan Civil War in 2011 During 2014–2015, OPEC members consistently exceeded their production ceiling, and China experienced a slowdown in economic growth. At the same time, US oil production nearly doubled from 2008 levels and approached the world-leading “swing producer” volumes of Saudi Arabia and Russia, due to the substantial long-term improvement and spread of shale “fracking” technology in response to the years of record oil prices. These developments led in turn to a plunge in US oil import requirements (moving closer to energy independence), a record volume of worldwide oil inventories, and a collapse in oil prices that continued into early 2016. In December 2017, Russia and OPEC agreed to extend the production cut of 1.8million barrels/day until the end of 2018. The term cartel can be defined as “a group of parties, factions, or nations united in a common cause; a bloc” as well as “a combination of independent business organizations formed to regulate production, pricing, and marketing of goods by the members”.

History shows many examples of successful and not so successful cartels - they have been around for hundreds of years. The steel industry and diamond industries are some examples. However, one of the most powerful modern cartels is the Organization of the Petroleum Exporting Countries more commonly referred to as OPEC.

Prior to the rise of OPEC, the oil industry was dominated by the large oil companies often known as the Seven Sisters that possessed the technology and skills for exploration and production that the countries lacked. OPEC was born, to some extent, to reduce the influence the oil multinationals. As Skeet suggests in his book, “The governments of the oil producing countries in varying degree, but in all cases with increasing fervor, viewed the systems under which the companies operated as an outdated example of imperialist domination”. In fact, one of the first things written in the 1st OPEC Conference Resolution in Baghdad states, “Members can no longer remain indifferent to the attitude heretofore adopted by the Oil Companies in effecting price modifications”.

With oil prices rallying above $60 per barrel, Russia has questioned the wisdom of extending existing cuts of 1.8 million barrels per day (bpd) until the end of next year as such a move could prompt a spike in U.S. production.

Russia needs much lower oil prices to balance its budget than OPEC’s leader Saudi Arabia, which is preparing a stock market listing for national energy champion Aramco next year and would hence benefit from pricier crude.

Six ministers from OPEC and non-OPEC oil producers including Saudi Arabia and Russia met in Vienna on Wednesday - one day ahead of a full OPEC gathering - and recommended extending the cuts to the end of 2018. At present, the cuts expire in March. Several sources familiar with the talks have said Russia had suggested an option of reviewing the deal at the next OPEC meeting in June in case the oil market overheats.

Some Russian producers including Rosneft, run by an ally of President Vladimir Putin, Igor Sechin, have questioned the rationale of prolonging the cuts, saying it will lead to a loss of market share to U.S. firms, which are not reducing output.

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OPEC, which comprises 14 countries, has traditionally been much less worried about exit strategies as its members have been known for reducing compliance and cheating on their quotas towards the expiry of such deals. “Russia seems to be pushing OPEC to have a concrete plan to phase out the cuts when appropriate... compared to the typical undisciplined OPEC strategy”, U.S. bank Tudor, Pickering, Holt & Co, which is active in the shale industry, said.

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The Organization of Arab Petroleum Exporting Countries. (2019, January 03). GradesFixer. Retrieved May 21, 2024, from
“The Organization of Arab Petroleum Exporting Countries.” GradesFixer, 03 Jan. 2019,
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