The Organization of Petroleum Exporting Countries - Essay Example

IN THE 1980S, WHY DID OPEC FAIL TO KEEP THE PRICE OF OIL HIGH? Thesis ment Presented to XYZ by Aaaaa Bbbbbb June 2008 Table of Contents Introduction 3 Argument 3 Conclusion 7 Works Cited 8 Introduction The Organization of Petroleum Exporting Countries (OPEC) was created in 1960 during a conference in Baghdad by the five major oil producing countries Iran, Iraq, Kuwait, Saudi Arabia and Venezuela (www.opec.org). Later on it was joined by nine more countries. Presently it has its headquarters at Vienna, Austria. The objective of OPEC is 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.” (www.opec.org). Petroleum and its by products are still the major fuel source of the world although efforts are on to find alternate sources of energy due to the impending petroleum shortage, growth of the automobile sector and the pollution fears threatening the Earth’s ecology. The OPEC was formed out of a necessity of the oil producing nations of the world to safeguard their economic interests so that they could have a mutually beneficial relationship and have a uniform relationship with the major oil refining and distribution companies of the world which controlled most of the world markets. The OPEC though being constituted of the major oil producing nations of the world could not totally influence the oil prices in the world at its own discretion due to its dependence on the oil marketing giants of the world as well as availability of oil from non – OPEC countries. Factors both within and outside the OPEC have been responsible for the oil prices in the world’s history. Argument Oil started dominating the world politics ever since its requirement grew as the primary fuel for the rapidly developing technology in the last century. Mankind was more arrogant and careless when the oil reserves were high and the prices low. For a long period the world superpowers were self sufficient in their requirement for fossil fuels. But as soon as the petroleum industry increased its monopoly by forming trusts and reaping huge profits in the process, the world superpowers realized the crunch that oil producing nations would exert on the economic scenario. Accordingly much of the world politics in the 20th century was heavily influenced by this natural resource. Historically oil did not assume much significance as bitumen was the choice fuel in the early parts of the nineteenth century (Rockefeller D. John). The discovery of drilling oil by the Chinese using bamboo was the stimulating factor which initiated the first major drilling operations in the Eastern United States of America (Rockefeller D. John). The major use of oil at that time was as kerosene and the supply exceeded demand which kept the prices low. There were sporadic gluts of oil as soon as newer oilfields were discovered and harvested. The second major innovation after drilling became a routine was the ‘oil pipeline’ which facilitated rapid transportation of oil to railheads where tankers could be filled and easily transported (Rockefeller D. John). Till the end of the 19th century the Standard Oil Company became the giant of the oil industry in the United States which met almost 50% requirement of Europe too (Rockefeller D. John). The oil potential of the Middle East was realized in the early parts of the twentieth century and it was first struck in Iran in 1908. Almost half of The Anglo- Persian Oil Company was acquired by the British Government. Battleships were till then powered by coal and Britain was quick to realize the switch to oil as the fuel for a better military strategy. The First World War dominated the world scene form 1914 to 1918. After the end of the war, the dominating countries realized the strategic importance of controlling fossil fuels in order to continue their domination. The Middle East was dominated by British Oil Companies and America soon realized the potential of the area and started making inroads. This followed a saga of oil exploration and oil was struck in many countries of the Middle East which included Bahrain, Iraq and Saudi Arabia. World War II then intervened and oil export from the area started only after 1946 (Rockefeller D. John). At that time seven major Oil companies were controlling the oil industry of the world and they were so dominant that they acquired the name of ‘The Seven Sisters’. The Seven Sisters comprised of Exxon, Mobil, Chevron, Texaco, Gulf, BP (British Petroleum) and Shell. They dominated the scene in the Middle East till 1972 (Rockefeller D. John). It had become clearly evident at this stage that the oil industry was in control of the refining and the marketing giants. Huge profits were made by the controlling companies as they sold oil at a very high price as compared to the procurement rate. Saudi oil exports to the United States and Europe were initiated and a number of political, economic and taxation measures were employed during the period to influence the finances which were usually in the favor of the oil companies. OPEC came into being in 1960 (www.opec.org) and the member countries were naturally interested in and pressed for the increase in revenue sharing. The Oil Companies manipulated their finances in a way in which they did not loose their own profit and at the same time the coffers of the OPEC countries started filling at a better rate. Greed and profit making dominated the oil industry during this time. The ultimate victim was the US taxpayer. From 1955 – 1965, the Libyan oil production started influencing world markets as they were controlled by independent operators rather than the major oil companies (Rockefeller D. John). The major players started nursing fears of losing their dominance in the world market. Colonel Qaddafi managed to reap huge profits for his country by dictating the price in his area. The OPEC had not been able till yet to achieve this and held an emergency meeting in Venezuela in December 1970 and demanded a similar price increase as Libya. The major Oil Companies however were non compliant and they managed their resources in a manner in which the OPEC countries were sometimes bypassed when they attempted to cut back supplies to any of the major Oil Companies. Colonel Qaddafi meanwhile made a major blunder by expelling the independent western refiners and marketers from the country thereby decreasing output, to the delight of the major Oil companies who were again in charge of the major chunk of the world oil industry. OPEC increasingly became aware of its own power and they almost raised the price of the oil barrel by six times over a span of time from 1970 ($ 1.80) to1974 ($ 11.65) (Rockefeller D. John). In 1975 there was a genuine drop in oil production which further contributed to price rise. Both OPEC and the major oil companies shared the profits consistently during the above period. After 1975 the major companies followed their own diktat and were in a position to dominate the OPEC countries as they were free to source their oil from other areas of the world including non-OPEC countries like US, Russia, Britain and Norway (Rockefeller D. John). The OPEC’s endeavor has always been to benefit the member countries by keeping the oil price high in the world market, but it suffered thereafter due to the lack of commitment by some of its own member countries. The OPEC tries to keep production of oil within limits to keep the price high by assigning quotas to the member countries for a particular period. Some member countries however indulged in cheating (Norris, 2000) by overproducing and selling in the international markets for quick cash. In the 1980s the OPEC did not have any monitoring and policing facilities to counteract and control such cheating. The major oil companies which had such facilities were wise enough not to share this information with OPEC and thereby maintain their dominance. This cheating by the member countries was one of the major factors due to which the OPEC failed to keep the oil prices high during the 1980s. The price control of oil was in the hands of OPEC till the mid 1980s, but it is no longer the case now (www.opec.org). The member countries just restrain the production to influence the price. The world crude prices are now determined by the three major international petroleum exchanges in New York, London and Singapore. Conclusion The formation of the OPEC was a timely effort by the countries involved to offset the diktat of the major oil companies. However the international demand and political scenario has great influence on oil prices and individual requirements or greed of the member countries did influence the lack of coordination between the OPEC in the 1980s. The organization is wiser by experience and keeps abreast with changing times. Works Cited Norris Floyd, March 28, 2000, THE MARKETS: Market Place; OPEC Pricing Revisited: What a Difference 20 Years Makes. Right? The New York Times, Thursday, June 12, 2008 Available at: http://query.nytimes.com/gst/fullpage.htmlres=9F03E5D61E3DF93BA15750C0A9669C8B63&sec=&spon=&pagewanted=all Rockefeller D. John, Chapter 13: OPEC and Crude Oil, Available at: http://www- geology.ucdavis.edu/~cowen/~gel115/115CH13oil.html www.opec.org, Brief History, The Organization of the Petroleum Exporting Countries (OPEC) Available online at: http://www.opec.org/aboutus/history/history.htm www.opec.org, Does OPEC Set Crude Oil Prices? Available online at:http://www.opec.org/library/FAQs/aboutOPEC/q20.htm Read More