The Role of OPEC in the Middle East
OPEC, the Organization of the Petroleum Exporting Countries, was established in September 14, 1960 by five countries including Venezuela, Saudi Arabia, Iran, Kuwait and Iraq. Other countries including the United Arab Emirates, Libya, Algeria and Nigeria, Qatar and Indonesia later joined the organization bringing the total number of Organization of the Petroleum Exporting Countries member countries to eleven.
The headquarters of the organization was located in Geneva, Switzerland before it was relocated to its present location in Vienna, Austria. Organization of the Petroleum Exporting Countries permits oil producing societies to join the organization. The estimated population of the nation’s comprising Organization of the Petroleum Exporting Countries is half a billion (Wirl and Kujundzic 50). People from different cultural backgrounds, religions and languages also characterize different countries.
Members of Organization of the Petroleum Exporting Countries according to Wirl and Kujundzic (56) have a common feature; they depend on revenue generated from sale of oil to develop. The goal of the organization is to make ideal adjustments in oil production and to create a balance between its demand and supply in the market, to promote harmony as well as stability because oil forms income create the backbone of a country’s economy.
Member countries utilize revenue to start development projects. Delegates from Organization of the Petroleum Exporting Countries member countries organize annual meetings at least twice to discuss if there is need for adjustments in oil production as way of ensuring there is balance between supply and demand. They also hold talks on developments that should be generated in oil market to ensure smooth business operations.
Together, Organization of the Petroleum Exporting Countries member states own three quarters of crude oil reserves across the globe and 40 percent of oil production across the globe and this is generated by member states (Wirl and Kujundzic 57). The organization was created as a reaction against the seven sister’s oil producing companies, a western governments association that has been dominating the global oil market.
The main reason for the creation of the organization was also based on the fact that developing countries were not happy of exploitation by western governments. Petroleum pricing was also very low. What’s more, the main objective of the organization was to ensure there is an oil reserve in every country. This could enhance development in the countries based on the fact that Organization of the Petroleum Exporting Countries was not just a union of oil producing nations. There are other benefits that member states obtained directly from it to initiate a wide range of development projects (Barsky and Kilian 120).
Role of the Organization of the Petroleum Exporting Countries
The main role of the organization was to unite and coordinate rules governing oil production as well as petroleum sell in member countries and to defend the people as well as their collective needs to the latter. The organization additionally ensured that there is flow of income to member states continuously and that clients enjoy normal and resourceful supply of petroleum. The organization also guarantees investors of profit in the petroleum industry (Dixit and Pindyck 100).
Organization of the Petroleum Exporting Countries’ responsibility is to ensure stability of petroleum global market. It is also the organization’s commitment to ensure that client needs are fully met via consistent oil supply. To achieve the objective, Organization of the Petroleum Exporting Countries works with other nonmember states producing oil when it comes to making vital decisions on oil supply across global markets.
The purpose of reaching a decisive decision is to ensure that both consumers and petroleum producers are satisfied with oil prices. For producers and other stakeholders in the industry to achieve a fair oil return, the price should be increased. Additionally, increase in prices leads to more investment and in return, enhances production capacity in the future.
Even so, if petroleum prices are set to increase, clients are more likely to shun from purchasing it. The result is creation of a small market and a reduction of Organization of the Petroleum Exporting Countries share. Naturally, oil prices are unstable. To ensure stability in supply and of global oil market, Organization of the Petroleum Exporting Countries should ensure that oil producers gain more profits and that at the same time; clients get oil at a price that is reasonable (Tang and Hammoudeh 578).
Organization of the Petroleum Exporting Countries organization sets petroleum prices. Its decision is quite influential in determining oil prices based on the fact that it is a major producer. For example, some oil producing member states declined to export its products to western countries in the event of energy crisis in 1973. This was as a result of the fact that Israel received a lot of support from western countries in Yom Kippur War, as they fought against Egypt and Syria.
This led to a fourfold increase in petroleum prices between October 17, 1973 and March 18th 1974. Organization of the Petroleum Exporting Countries member states decided to settle for a 13 percent increase in crude oil price in January 7th 1975. All Organization of the Petroleum Exporting Countries member states gave in to the global policy aimed at enhancing economic growth. A meeting on the same was held in Algiers where member countries agreed to stabilize the prices of its commodities.
To ensure oil prices are maintained, Organization of the Petroleum Exporting Countries had to ration oil production. The purpose of stabilizing the prices was to eliminate the instability of prices which affects the economy of member countries. It is therefore very clear that Organization of the Petroleum Exporting Countries plays a very crucial role in determining petroleum prices because it is a major producer (Tang and Hammoudeh 580).
The organization also aims at promoting member states development by ensuring oil reserves benefits trickle back to respective nation’s development purposes. The Declaratory Statement of Petroleum Policy initiated in 1968 enacts this kind of provision. The policy called for domination of natural resources by every state so that they can be utilized in developing nations.
Organization of the Petroleum Exporting Countries s activities also aimed at maintaining peace in global petroleum markets, setting good prices and enabling member states to choose the destinations of their products (Mead 356). The revolutionary movements in Arab countries called the Arab Spring have also been a major threat to the growth of the organization. Arab Spring refers to a period from December 2010 to date during which Arab countries witnessed riots, civil wars violent and peaceful protests and demonstrations.
The revolution’s wave saw the removal of rules from Egypt, Tunisia, Yemen and Libya from power by the end of 2013. Bahrain and Syria have also witnessed a wave of civil wars and countries such as Kuwait, Morocco, Jordan and Saudi Arabia among others in Arab world have witnessed major and minor protests (Chapman and Khanna 375).
Oil producing countries are negatively affected by recent uprisings in the Middle East as well as North African regions bearing in mind that revenue is essential for states to meet their social policy expenses and to get rid of conflicts effectively. To overcome other challenges, member countries are also forced to increase petroleum prices.
The demand for oil is also more likely to generate consequences. This is based on the fact that subsidized oil prices leading to increase demand of the products. If price changes are effected in the mentioned countries, members will also directly account for extra pay needed by the organization.
By doing so, this will lead to reduced demand. Increased in price as required by organize will also led to increase in demand and reduced supply. The Arab Spring led to reduced oil production in Organization of the Petroleum Exporting Countries member countries. The monthly cartel report in 2013 revealed that social conflicts have led to reduction in oil production. Production of Oil in Iraq for example has reduced significantly and Libya hasn’t regained its position as a result of civil wars.
Additionally, following attacks by Al Qaeda in January 2013, oil production in Algeria has deteriorated a great deal (Horn 279).
Organization of the Petroleum Exporting Countries since its inception to date plays a wide range of roles. Its roles and objectives are clearly outlined in the Organization of the Petroleum Exporting Countries statute that was created upon the institutions development. These roles are still relevant and applicable in today’s age and era and seemingly, they will continue to be used to run the organization in the coming years.
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Barsky, Robert, and Lutz Kilian. “Oil and the Macroeconomy since the 1970s.” Journal of Economic Perspectives, 2004, 18, 115–134. Print.
Chapman, Duane, and Neha Khanna. “An Economic Analysis of Aspects of Petroleum and Military Security in the Persian Gulf.” Contemporary Economic Policy, 2001, 19, 371–381. Print.
Dixit, Avinash, and Robert Pindyck. Investment under Uncertainty, Princeton: Princeton University Press, 1994. Print.
Horn, Manfred. “Organization Of The Petroleum Exporting Countries ’s Optimal Crude Oil Price.” Energy Policy, 2004, 32, 269–280. Print.
Mead, Walter. “The Performance of Government Energy Regulation”. American Economic Review, 1979, 69, 352–356. Print.
Tang, Linghui, and Shawkat Hammoudeh. An empirical exploration of the world oil price under the target zone model. Energy Economics, 2002, 24, 577–596. Print.
Wirl, Franz, and Azra Kujundzic. “The Impact of Organization Of The Petroleum Exporting Countries Conference Outcomes on World Oil Prices 1984–2001.” The Energy Journal, 2004, 25, 45–62. Print.
Originally posted 2015-06-02 09:38:06.
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