OPEC

O rg a n i z a t i o n
of The
Petroleum
Exporting
Countries

MOHD ASAD
KHUSHI SHARMA
INGELA RIZVI
TANISHA
ASTHA
 WHAT IS OPEC
• Organization of The Petroleum Exporting Countries

• OPEC is a permanent intergovernmental organization of oil-

exporting developing nations .

• Currently consist of 12 oil producing and exporting countries .

• For these countries oil is the vital key to development .

• OPEC was founded on September 14, 1960 in Baghdad, Iraq, by

five Founder Members .

• The stated mission of the organization is to coordinate and unify the

petroleum policies of its member countries .
 MEMBERS OF THE OPEC

• The Organization comprises 13 Member

Countries namely :
• Algeria
• Angola
• Congo
• Equatorial Guinea
• Gabon
• Iran
• Iraq
• Kuwait
• Libya
• Nigeria
• Saudi Arabia
• United Arab Emirates
• Venezuela
• The formation of OPEC marked a turning point
toward national sovereignty over natural
resources .

• The effect can be particularly strong during wars

or civil disorders .

• For example :1970s, restrictions in oil

production led to a dramatic rise in oil prices .
 MAIN PURPOSE AND
OBJECTIVE OF OPEC
The Main purpose of OPEC is to coordinate and unify petroleum policies among Member
Countries to ensure a steady income to the producing countries, a steady supply of petroleum
to the consuming nations as well as a fair return of capital for investors in the petroleum
industry itself.

Main Objectives are-

 Stable oil market, with reasonable prices and steady supplies to consumers.
 OPEC was made to make sure that the price of the oil in the world market will be properly
controlled.
 Their main goal is to prevent harmful increase in price of oil in global market and make
sure that nations that produce oil have a fair profit
 SIDELINE OBJECTIVES

 Manipulate supply of oil in the market, in hopes of keeping prices, and profits, high by
producing less oil than the market needs .
 While OPEC always wants to maximize profits for themselves, they also don't want to kill
the golden goose by driving prices so high that alternative energy exploration becomes a
top priority .
 OPEC tracks the oil production of NON-OPEC nation sand then adjusts its own production
to maintain its desired barrel price.
The organization's principal objectives are :

 To determine the best means for safeguarding their individual and collective
interests.

 To seek ways and means of ensuring the stabilization of prices in

international oil markets, with a view to eliminating harmful and
unnecessary fluctuations.

 To provide an efficient economic and regular supply of petroleum to

consuming nations and a fair return on capital to those investing in the
petroleum industry.
OPEC Statute & Membership

"Any country with a substantial net export of crude petroleum, which has
fundamentally similar interests to those of Member Countries, may become a Full
Member of the Organization, if accepted by a majority of three-fourths of Full
Members, including the concurring votes of all Founder Members“

The Statute further distinguishes between three categories of membership:

 Founder Members of the Organization are those countries which were represented at
OPEC's first Conference, held in Baghdad, Iraq, in September 1960, and which
signed the original agreement establishing OPEC.
 Full Members are the Founder Members, plus those countries whose
applications for Membership have been accepted by Conference.

 The Associate Members are the countries which do not qualify for full
membership, but which are nevertheless admitted under such special
conditions as may be prescribed by the Conference.
 FUNCTIONS
• Representatives of OPEC Member Countries(Heads of Delegation) meet at
the OPEC Conference to coordinate and unify their petroleum policies in
order to promote stability and harmony in the oil market.

• The Member Countries consider the current situation and forecasts of

market fundamentals.

• Any changes to be made in the petroleum policies are considered.

• Cartel enforcement problem: overproduction and price cheating by members.
• The methods available to engage in such cheating:
i. Extending credit longer then the standard 30 day period.
ii. Selling high grade oil at the price of low grade oil. Crediting for the

transportation cost.
• Rivalry between two groups within OPEC:
i. Hawks-Countries having lower production ask for higher prices to get maximum
revenue.(Iran and Iraq)
ii. Doves-Countries having Higher output can set lower prices to achieve economies of
scale and make sure that the demand of oil is maintained in the market and people do not
switch to substitutes(Saudi Arabia, Kuwait, United Arab Emirates)
• Does OPEC control the Oil Prices?
Yes-, OPEC's crude oil exports represent about 60 per cent of the crude oil traded
internationally.
No-OPEC Member Countries produce about 42 per cent of the world's crude oil and 18 per
cent of its natural gas.
The price of crude oil is set by movements on the three major international petroleum
exchanges.
i. The New York Mercantile Exchange
ii. The International Petroleum Exchange in London
iii. The Singapore International Monetary Exchange

• OPEC is trying to price the OIL in Euros rather then in Dollars- As the imports from Europe
for OPEC countries is increasing and the US dollar is becoming unstable in the market.
 GOALS
• OPEC seeks to ensure the stabilization of oil prices
in international oil markets, with a view to
eliminating harmful and unnecessary fluctuations.

• OPEC's role in overseeing an efficient, economic

and regular supply of petroleum to consuming
nations.

• Ensure a fair return on capital to those investing in

the petroleum industry.

• Have stability in the market.

• Deliver steady supply of oil to
consumers.

• Get oil to people at reasonable and fair

prices.

• To obtain these goals, OPEC voluntarily

produces less oil.
WHY OPEC
• Stable oil market, with reasonable prices and steady supplies to consumers :
OPEC was made to make sure that the price of the oil in the world market will be
properly controlled. There main goal is to prevent harmful increase in price of oil
in global market and make sure that nations that produce oil have a fair profit
• Mandatory Oil Import Quota Program (MOIP) : In 1959, the U.S. government
established the Mandatory Oil Import Quota program (MOIP), which restricted
the amount of imported crude oil and refined products allowed into the United
States and gave preferential treatment to oil imports from Canada, Mexico, and,
somewhat later, Venezuela. This partial exclusion of Persian Gulf oil from the
U.S. market depressed prices for Middle Eastern oil; therefore the Persian Gulf
nations formed OPEC in order to obtain higher prices for crude oil
• Seven Sisters : The international oil market was dominated by the “Seven
Sisters” multinational companies and was largely separate from that of
the former Soviet Union (FSU) and other centrally planned economies
(CPEs). OPEC developed its collective vision, set up its objectives and
established its Secretariat, first in Geneva and then, in 1965, in Vienna. It
adopted a ‘Declaratory Statement of Petroleum Policy in Member
Countries’ in 1968, which emphasised the inalienable right of all
countries to exercise permanent sovereignty over their natural resources
in the interest of their national development. Membership grew to ten by
1969.
IMPACT OF OPEC
• OPEC's oil exports account for roughly 60% of the total petroleum traded
worldwide. The Energy Information Agency also reports that more than
80% of the world’s proven crude oil reserves lie within the boundaries of
the OPEC countries. Of that, roughly two-thirds lay within the Middle
Eastern region in 2018.6Additionally, all OPEC member nations have
been continuously improving technology and enhancing explorations
leading to further enhancements to their oil production capacities at
reduced operational costs.
• Within the OPEC group, Saudi Arabia is the largest crude oil producer in the world
and remains the most dominant member of OPEC. It is also the leading exporter of
crude oil globally. Each time there is a cut in Saudi oil production, there is a sharp
rise in oil prices, and an increase in Saudi oil production stimulates a drop in oil
prices.7 Since the 1973 Arab oil embargo, Saudi Arabia has managed to call the shots
as far as oil prices are concerned, by controlling supply. All major oil price
fluctuations in recent history can be attributed to changing production levels in
Saudi Arabia, along with other OPEC nations
OPEC+ controls over 50% of global oil supplies, according to Tamas Varga, senior
analyst at PVM Oil Associates and quoted by CNBC.OPEC+ remains influential due to
three primary factors:
• An absence of alternative sources equivalent to its dominant position.
• A lack of economically feasible alternatives to crude oil in the energy sector.
• The comparatively low-cost price advantage against the relatively high-cost non-
OPEC production.

• In short, OPEC+ has the economic capability to disrupt or enhance the supply of oil to
substantial levels at any time, severely affecting oil prices. For example, the 1973 Arab
oil embargo by OPEC saw prices quadruple from $3 to $12 per barrel and, more
recently, the sudden ramp-up in production by Saudi Arabia in March 2020 led to a
sharp decline in the price of oil.
 • India, the world's third-biggest oil
importer and consumer .

• In the period from 2000 to 2015,

overall imports of India from

OPEC AND OPEC Member Countries .

• India shares with OPEC, and with

INDIA oil producers and consumers
around the world, a common
interest in oil market stability on a
sustainable basis.

• OPEC is critical for India’s energy

requirements .
 OPEC’s World Oil Outlook is part of
OPEC AND the Organization’s commitment to
market stability.
THE WORLD According to current estimates, 79.4%
of the world's proven oil reserves are
located in OPEC Member Countries,
with the bulk of OPEC oil reserves in
the Middle East, amounting to 64.5% of
the OPEC total.

As OPEC members grew weary of a

multi-year supply-contest
with diminishing returns and shrinking
financial reserves, the organization
finally attempted its first production cut
since 2008. Despite many political
obstacles
 OPEC
CHALLENGES
CHALLENGES
• Uncertainty
in Global Demand Structural shift in demand from
developed world to developing world.
• Non-OPEC oil-producing nations (Russia , Norway, Canada,
Mexico etc.)often increase production when OPEC cuts it.
• Russia overtook Saudi Arabia as the world’s biggest crude
supplier in 2009.
• OPEC’s share of production has gone down from around 51%
in the mid-1970s to just over 40% now.
• Problem of Member Cohesion within OPEC nations:- Maintaining
quota discipline within the cartel.
• Existence of factions within OPEC, which are generally classified into
three groups:
• 1. The group led by Saudi Arabia, the UAE and Kuwait, who are in
favour of increased supplies and moderate pricing.
• 2. The group led by Libya, Iran and Algeria, who are insistent on
decreasing output for higher prices
• 3. The in-between group including Nigeria, Venezuela, Indonesia who
have been known to take sides depending on their own
economic/political agenda.
• Middle-Eastern Strife & Political instability in OPEC oil-producing
countries
• Mostly authoritarian states that use oil money as a means of sustaining
political power.
• Future technological developments in areas of renewable energy
sources
• According to IEA (International Energy Agency), the increase in
renewable usage will far outstrip annual growth in energy liquids(crude
oil and natural gas) as a source of the worlds power ,Crude oil, OPEC
will become less important in the energy equation.
HOW OPEC EXERTS ITS INFLUENCE
• OPEC sets individual production quotas for each member country that
serve as “production targets” to ensure that there supply isn’t greater
than demand
• These “production targets” for each country add up to a “ceiling” that
OPEC desires not to exceed.
• However they rarely stay under their proposed ceiling. The quota is
always been surpassed by over few million barrels per day.
• Iraq is not included in the quota system because their exports are
controlled by the U.N. based on the “food for oil” program.