Organization of the Petroleum Exporting Countries (OPEC)

Organization of the Petroleum Exporting Countries (OPEC)

Introduction

The Organization of the Petroleum Exporting Countries (OPEC) is an organization that was created by various governments of the countries that produce and export oil. The creation of OPEC was done in 1960. This was at a time when the global oil market was chiefly under control of the companies that were transnational. The intergovernmental relationship is currently among 12 countries. These countries are: the Islamic Republic of Iran, Nigeria, the United Arab Emirates, Libya, Kuwait, Ecuador, Angola, Algeria, Iraq, Saudi Arabia, Iraq, and Qatar.

The OPEC organization was formed mainly due to three principal objectives. These objectives were to unify the laws and guidelines of petroleum among the countries that were members of OPEC and to prevent the fluctuations of oil prices. This is done through OPEC’s strategy of making sure that there was stability of the oil prices in the international markets. OPEC had, furthermore, envisioned an effective economic and steady supply of petroleum products to the world. This would result in OPEC’s objective of making sure that its member states and other investors get fair returns for their contributions and investments.

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The past few decades have seen the emergence and growth of countries that produce and export oil and are not affiliated with the OPEC organization. These countries have kept a straight head and more effort in the production of petroleum oil. Furthermore, more and more countries are coming to the realization that they possess wealthy amounts of oil under their lands and waters. The objectives and operations of OPEC have, however, been facing potential challenges as a result of the increase in the production of oil by countries that are not affiliated to the organization. This increase in oil production by non-OPEC countries poses an even bigger risk to the power of OPEC in the global oil industry. This may be manifested in a number of ways.

Control of Oil Prices

OPEC has been operating as an alliance in the preservation of power of regulation of the costs of petroleum oil and its associated products. OPEC has over time ensured that its power in the control of these costsis preserved. It has done this through a myriad of ways that have sought to strategically maintain the price levels in direct relation to the supplies of petroleum oil as supplied by the organization. This has been mainly realized through the keeping of high costs in the oil market in accordance with the pressure that comes from a rise in the need for oil. OPEC had been facing short run volume limits in the past, but it did not increase the output of oil from it or get the costs to a lower level, which would be convenient. On the contrary, the OPEC organization cut the production of oil intermittently. This conduct by OPEC was instigated by the organization in order to test the limit of the market and what it could bear in terms of an increase in price.

The rise in the production of oil by the countries that are non-OPEC poses a threat to OPEC’s power in the regulation of global oil markets. This threat may show itself through the availability of oil supplies from the non-OPEC countries that may not be easily availed by OPEC. This results in a challenge and counteract to the strategy of controlling the prices of oil through the use of demand and supply. The demand and supply approach is used by OPEC. The move by OPEC to retain quite low supplies of oil in order to raise its demand that would result in the economic move to increase oil prices is, consequently, thwarted (Flynn, 2011).

If the control of the prices of oil in the global market by OPEC is done away with, OPEC will experience a major loss in its oil production, exportation and marketing volumes and strategies. This could mainly happen as a result of the exposure they would have faced. This exposure of OPEC’s negative influence of oil prices and practices would lead to the loss of credibility and trust by other countries. Ultimately, OPEC would be bound to lose a lot in its sales and relations with its member countries and other countries all over the world.

Non-OPEC countries producing oil at an increased rate have their independent business moves in the global oil industry rather than are faced with the OPEC regulations of the market. Such independence would result in the non-OPEC countries releasing their supplies of oil into the global market with a rather business-oriented aim instead of the thirst for total control of the global market. With the global oil industry operating in a rather independent environment free of OPEC’s oligopolistic control, the prices of oil are then bound to follow the various natural and physical causes of their shifts. Such forces include the natural supply and demand shifts, weather, financial markets and factors of production. The generality of the removal of the oligopolistic nature of OPEC will result in a much fair trading of oil in the world over (Flynn, 2011).

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Pulling Out by Countries

The increment in the production of oil by countries that are non-OPEC poses a great threat to OPEC in the sense that the members may withdraw from the union. The effective production, marketing and distribution of oil by other non-OPEC countries have also played a role in threatening the power of OPEC over the global oil industry. Some of the OPEC members are now feeling that the effectiveness of OPEC as an association and its influence over oil is almost waning. Separate countries are now forming pacts with other countries, thus enabling the funding of oil production and the successful dispensing of oil and its products. This helps countries control their own prices and set up their own rules regarding the handling of their oil and oil products. Rather than being controlled by the inflexible policies and rules of OPEC, non-OPEC countries can freely determine the prices to put on their oil or oil products depending on the market’s demand and supply. For example, Saudi Arabia has been holding the threads on global oil costs. Saudi Arabia has been in a position of increasing and decreasing its own huge production, thus keeping prices on a level keel (Learsy, 2007).

The disregarding of OPEC’s quotas of three million containers per day, despite the impact on the market by the Iranian oil minister, may also lead to the pulling out of countries from OPEC. This policy is proving hard to be met by some of the OPEC members such as Iran, which thus may decide to carry out its oil business privately. It is known that not more than a third of the global oil production comes from the countries that may break-even at any number significantly not above US$100 per barrel. OPEC, therefore, as an association will have to take measures to support its prices (Flynn, 2011).

The rising of other high world producing oil countries is further threatening the unity of OPEC. The United States of America’s shale uprising has already made the production of oil to increase by a third from 2005. By the year 2015, the US is projected to emerge as the biggest oil producer globally. China and Russia have also anticipated to make exploitation for the new drive for shale (United States. Energy Information Administration.Office of Oil and Gas, 1999).

Black Market Sales of Oil

The rise in the production of oil by nations that are not affiliates of the OPEC group would result in an increase in the selling of oil in the black market. The increased oil production by the non-OPEC countries would have an increase in the volumes of oil in the world and country reservoirs of petroleum. An increase in the reservoirs volumes may lead to a rise in the number of people conducting oil sales in the black market. There may be more oil lagging in the channels and tanks due to the improved production. This may also be due to the more oil in circulation within the worldwide market. A rise in the production of petroleum globally results in the reduction of the need for oil worldwide. This, in turn, leads to the loss of ground and profits by OPEC. OPEC, being majorly dependent upon its power to alter and control the supply of oil, faces the risk of being faced out or losing many of its business partners the world over (Gehlhar, 2011).

OPEC’s supply and control power is further accentuated by the existence of the black market sales. The latter make OPEC lose ground in the countries that they do business with. They lose ground in terms of volumes of oil traded and control of prices in the countries. This is mainly due to the characteristic nature of black market affairs being a platform founded on extremely low prices. Black marketers do not rely on the control of volumes and prices as regulated by OPEC. Countries that do not produce oil would enter into deals with black marketers and get to purchase bulky volumes of oil. These countries may, subsequently, cancel any contracts entered into with OPEC for the supply of oil. The existence of surplus as a result of an increased production of oil by non-OPEC countries bears a potential for black market selling of oil. This results in a danger to OPEC’s volume sales and governing of the market (Gehlhar, 2011).

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