OPEC

Through co-ordination of production, the Organisation of Petroleum Exporting Countries (OPEC) stands as the single most important supply-side influence in global oil and energy markets. Accounting for around 42% of world oil production but over 55% of the oil traded internationally, OPEC has substantial influence over the direction of crude pricing, and one that looks likely to increase given that the countries that comprise OPEC account for almost 80% of the world’s proven oil reserves. At its simplest, OPEC effectively works as a supplyside swing, with the members seeking to co-ordinate their production through periodically agreed production allocations thereby ensuring that the market for oil remains roughly ‘in balance’ at a particular price band.

The Organization of the Petroleum Exporting Countries (OPEC) is a permanent, intergovernmental Organization, created at the Baghdad Conference on September 10–14, 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The five Founding Members were later joined by nine other Members: Qatar (1961); Indonesia (1962) – suspended its membership from January 2009; Socialist Peoples Libyan Arab Jamahiriya (1962); United Arab Emirates (1967); Algeria (1969); Nigeria (1971); Ecuador (1973) – suspended its membership from December 1992-October 2007; Angola (2007) and Gabon (1975–1994). OPEC had its headquarters in Geneva, Switzerland, in the first five years of its existence. This was moved to Vienna, Austria, on September 1, 1965.

OPEC’s Charter

The OPEC charter -to coordinate and unify petroleum policies among member countries in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry’

How does OPEC work?

In essence OPEC works by virtue of its members collectively agreeing on the level of supply that is necessary to keep the market in balance and the oil price within a pre-determined range. Represented by the Oil and Energy Ministers of the OPEC member countries, the cartel meets at least twice a year to assess and review the current needs of the oil market and alter, if necessary, its level of production. Dependent upon market conditions, meetings

can, however, be more frequent. Introduced in 1982, through collective agreement each member of OPEC is allocated a production quota. Although OPEC has never defined how the production quotas of the different member countries are established they are believed to be representative of each country’s ‘proven’ reserves base, amongst others. The quota represents the oil output that a member state agrees to produce up to assuming no other restrictions are in place and assuming the country remains in compliance (which as the charter says is at the discretion of the member country). Frequently, however, different member states will produce well above or below their official quota, with production more likely proving representative of a member’s production capability then its actual quota level. Thus where Indonesia retains a production quota of 1.45mb/d, its current production capacity is little more than 850kb/d. By contrast although Algeria has a production quota of only 890kb/d, it regularly produces nearer

1.3mb/d.

What is established at each OPEC meeting is the extent to which OPEC believes that the world crude oil market is over or under supplied. In making this decision the organisation will consider inventories, expected demand and the current price of crude oil, amongst others. Politics will also invariably play its role. Having considered the supply position the organisation will then determine whether it needs to supply more or less crude to the market.

Should less supply be required it will set a production ceiling for the organisation as a whole with each member state agreeing a reduction in its current level of production (and vice versa). In this way OPEC seeks to ensure that the market is adequately supplied. Importantly, member countries must agree by unanimous vote on any such production ceilings and output allocations. A majority cannot overrule a minority and central to the OPEC charter is that each member country retains absolute sovereignty over its oil production. It should, however, be noted that Saudi Arabia’s clear dominance of production and ‘swing’ (or spare) capacity mean that its acceptance of policy will almost certainly be required if a proposal is to succeed.

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