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OPEC

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OPEC, the Organization of Petroleum Exporting Countries, is "an international Organization of eleven developing countries which are heavily reliant on oil revenues as their main source of income. Membership is open to any country which is a substantial net exporter of oil and which shares the ideals of the Organization. The current Members are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela."[1]

"Since oil revenues are so vital for the economic development of these nations, they aim to bring stability and harmony to the oil market by adjusting their oil output to help ensure a balance between supply and demand. Twice a year, or more frequently if required, the Oil and Energy Ministers of the OPEC Members meet to decide on the Organization's output level, and consider whether any action to adjust output is necessary in the light of recent and anticipated oil market developments."[2]

"OPEC's eleven Members collectively supply about 40 per cent of the world's oil output, and possess more than three-quarters of the world's total proven crude oil reserves."[3]

Also see Wikipedia: OPEC.

History

The following was copied from The Concise Encyclopedia of Economics: OPEC by Benjamin Zycher.

"Few people are aware of it today, but OPEC (the Organization of Petroleum Exporting Countries) was formed in response to the U.S. imposition of import quotas on oil. In 1959 the U.S. government established a Mandatory Oil Import Quota Program (MOIP) restricting the amount of crude oil (and refined products) that could be imported into the United States. The MOIP gave preferential treatment to oil imports from Mexico and Canada. This partial exclusion of the U.S. market to Persian Gulf producers depressed prices for their oil. As a result oil prices 'posted' (paid to the selling nations) by the major oil companies were reduced in February 1959 and August 1960. In its early years the U.S. import quota program also discriminated against oil from Venezuela.

"In September 1960 four Persian Gulf nations (Iran, Iraq, Kuwait, and Saudi Arabia) and Venezuela formed OPEC, the purpose of which was to obtain higher prices for crude oil. By 1973 eight other nations (Qatar, Indonesia, Libya, the United Arab Emirates, Algeria, Nigeria, Ecuador, and Gabon) had joined OPEC. Ecuador withdrew on the last day of 1992.

"OPEC was unsuccessful in its first decade. Real (that is, inflation-adjusted) world prices for crude oil continued to fall until 1971. In 1958 the real price was $10.85 per barrel (in 1990 dollars). By 1971 it had fallen to $7.46 per barrel. However, real prices began to rise slowly beginning in 1971, and then jumped dramatically in late 1973 and 1974 from roughly $8 per barrel to over $27 per barrel in the wake of the Arab-Israeli ('Yom Kippur') War.

"Contrary to what many noneconomists believe, the 1973 price increase was not caused by the oil 'embargo' (refusal to sell) directed at the United States and the Netherlands that year by the Arab members of OPEC. Instead, OPEC reduced its production of crude oil, thus raising world oil prices substantially. The embargo against the United States and the Netherlands had no effect whatever: both nations were able to obtain oil at the same prices as all other nations. The failure of this selective embargo was predictable. Oil is a fungible commodity that can easily be resold among buyers. Therefore, sellers who try to deny oil to buyer A will find other buyers purchasing more oil, some of which will be resold by them to buyer A.

"Nor, as is commonly believed, was OPEC the cause of oil shortages and gasoline lines in the United States. Instead, the shortages were caused by price and allocation controls on crude oil and refined products, originally imposed in 1971 by President Richard M. Nixon as part of the Economic Stabilization Program. By preventing prices from rising sufficiently, the price controls stimulated desired consumption above the quantities available at the legal maximum prices. Shortages were the inevitable result. Countries that avoided price controls, such as West Germany and Switzerland, also avoided shortages, queues, and the other perverse effects of the controls.

"OPEC is a cartel--a group of producers that attempts to restrict output in order to keep prices higher than the competitive level. The heart of OPEC is the Conference, which comprises national delegations, usually at the level of oil minister. The Conference meets twice each year to assign output quotas, which are upper limits on the amount of oil each member is allowed to produce. The Conference may also meet in special sessions when deemed necessary, particularly when downward pressure on prices becomes acute.

"OPEC faces the classic problem of all cartels: overproduction and cheating by members. At the higher cartel price, less oil is demanded. That is why OPEC assigns output quotas. Each member of the OPEC cartel has an incentive to produce more than its quota and 'shave' (cut) this price because the cost of producing an additional barrel of crude is typically well below the cartel price. The methods available to shave official OPEC prices are numerous. Credit can be extended to buyers for periods longer than the standard thirty days. Higher grades (or blends) of oil can be sold for prices applicable to lower grades. Transportation credits can be given. Buyers can be offered side payments or rebates.

"This tendency for individual producers to cheat on the cartel agreement is a long-standing feature of OPEC behavior. Individual producers usually have exceeded their production quotas, and so official prices have been unstable. But OPEC is an unusual cartel in that one producer--Saudi Arabia--is much larger than the others. That is why the Saudis are the 'swing' producer. When prices start downward, they cut their production to keep prices up. One reason the Saudis have behaved that way is that departures from the official prices impose larger total losses on them than on other OPEC members in the short run. Because other producers have huge incentives to produce in excess of their quotas, the Saudis, in order to defend the official OPEC price, have had to reduce their sales dramatically at times. This erosion of Saudi production and sales has tended to reduce their revenues and profits substantially. In 1983 and 1984, for example, the Saudis found themselves producing only about 3.5 million barrels per day, despite their (then) production capacity almost three times that level.

"How successful has OPEC been since the early seventies? Not as successful as many people perceive. Except in the wake of the 1979 Iranian revolution, and in anticipation of possible destruction of substantial reserves in the 1990-91 Persian Gulf conflict, real (inflation-adjusted) prices of crude oil have fallen since 1973. Prices began dropping very rapidly in the early eighties after the Saudis concluded that lower prices and higher production were in their best interests. Official prices fell from $34 (for the benchmark crude oil, Arabian light) to $29 in 1983, $24 in 1984, and about $18 in 1986 to 1988. Indeed, even prices unadjusted for inflation often have fallen."

See remainder of article and tables. Also see OPEC History.

Management

From OPEC.org:

"The Secretariat carries out the executive functions of the Organization in accordance with the provisions of the OPEC Statute and under the direction of the Board of Governors. It provides the Conference with support facilities; carries out research into energy, economics and finance; prepares reports and statistics; provides information on the Organization and its activities through various publications; receives visitors from different parts of the world; and organizes seminars, briefings and lectures. The Secretariat is equipped with an excellent library, and serves officials from Member Countries (MCs) as well as researchers, scholars and students from MCs and elsewhere.

"Financed by MCs on the basis of equal contributions, the Secretariat is staffed by nationals of MCs called officers, and by support staff, recruited locally and abroad, together with secretarial and clerical staff. The Chief Executive of the OPEC Secretariat is the Secretary General, who is the legally authorized representative of the Organization."

Public relations

Saudi Arabia's oil ministry paid the PR firm Hill & Knowlton $1 million, to promote OPEC's "message of hope and reassurance" around its November 2007 summit in Riyadh. The PR firm said the event came at a "uniquely challenging period for OPEC and the world with oil prices at record highs as producers strain to keep pace with demand and global economic growth, and all exacerbated by economic and financial turbulence and a falling dollar." [1]

"Global media outreach ranked as the biggest chunk of that tab," reported O'Dwyers PR Daily. "H&K charged $20K per market for China, Japan, U.K., U.S., Canada and the Gulf States, plus $30K for Europe."[1]

Contact details

Obere Donaustrasse 93
A-1020 Vienna, Austria
Telephone/Media Relations Officer: + 43-1-21112 270
Secretary: + 43-1-21112 279
Fax + 43-1-2149 827
URL: www.opec.org

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External links

References

  1. 1.0 1.1 "H&K Slips Saudis $1M Bill," O'Dwyer's PR Daily (sub req'd), February 1, 2008.

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