OPEC

opec-mapCreated at the Baghdad Conference in September of 1960, OPEC has become the most important organization on the planet in regards to the world’s oil production. Formed when the oil market was separate from centrally-planned economies, the organization has continued to gain influence throughout the years and is seen in both a good and bad light in the 21st century.

History

With Venezuela and Iran moving towards creating OPEC, they approached Iraq, Kuwait and Saudi Arabia in 1949 about creating the organization. In 1960, the organization would be created at the initiative of Venezuelan minister Juan Pablo Perez Alfonso. The founding members were Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.

Created to unify and co-ordinate member policies, the organization expanded from 1960 to 1976, with several more countries including Qatar, Indonesia and Nigeria joining its ranks.

In October of 1973, OPEC declared an oil embargo due to the support of Israel in the Yom Kippur War of the United States and Western Europe. The result was that gas prices rose from three dollars per barrel to $12, resulting in gas rationing. This embargo had a huge impact on the United States, and resulted in citizens buying fuel-efficient cars for the first time ever.

This also resulted in the United States bringing in the national speed limit of 55 mph to conserve gas. The decrease in speed reduced consumption, and fatal crashes. Daylight Savings Time was extended year-round to reduce electrical use as well.

Due to the higher oil prices in the 1980s, Industrial Nations took steps to reduce dependence upon oil, resulting in a switch to natural gas and nuclear power. Demand for oil dropped by five million barrels per day, while production rose by 14 million barrels per day by 1986. The percentage of oil produced by OPEC fell from 50 per cent to 29 per cent as well, creating a six-year decline in prices.

Oil prices stayed at $15 a barrel into the late-1990s and in 2000, the first OPEC summit in 25 years was held. In 2007, OPEC announced the potential for going towards the Euro and away from the dollars. Indonesia also withdrew from OPEC in 2009 to protect its oil supply. Currently, OPEC’s net oil export is near levels seen in the late-1970s and early-1980s.

Currently, OPEC has 12 members, six in the Middle East, four in Africa and two in South America. The newest members are Angola and Ecuador, who both joined in 2007. Today, OPEC members produce 33 million barrels of oil per day. Two members have left OPEC in its history. Gabon joined in 1975 and left in 1994, and Indonesia, who joined in 1962.

Indonesia was no longer a net exporter of oil and could no longer fill the needs of the country because demand outstripped the output. Some consider the United States to be a de facto member of OPEC, due to its Coalition Provisional Authority in Iraq, but no representative from the United States has ever sat with OPEC in any official capacity.

Swing Producer

OPEC is called a swing producer because its decisions have a huge impact on oil prices. As has been mentioned, the refusal to ship to western countries in 1973 caused a four-fold increase in the price of oil, lasting five months. In 1975, OPEC members agreed to raise prices 10 per cent, again creating higher prices in the industrialized world.

Today, due to their ability to control prices somewhat, OPEC’s earnings have broken past $1 trillion for the first time.

Changing Views

Today, after prices rose to record-high levels in 2008, before falling after the economic crisis lessened, OPEC held a summit in 2007 to look at creating a stable energy market, as well as sustainable oil production and being environmentally-sustainable.

One issue facing OPEC is the productivity of its oil wells. Research has shown that while technological advances have increased productivity of oil wells, the rate of decline of oil wells will only increase as time goes on. Several analysts accuse OPEC of under-predicting future oil demand by 2030, which they believe is being inflated by 25 per cent, or 28 million barrels per day.

That is twice the amount currently supplied by Saudi Arabia. Current quotas for OPEC members vary between 10,099,000 barrels per day for Saudi Arabia and 520,000 barrels per day for Ecuador. In total, the quota per day is 29 million barrels per day, with production being just under that, creating a capacity of 32 million barrels per day.

The Saudi Arabia economy

ghawar-fieldThe oil reserves in Saudi Arabia are proven to be some of the largest in the world. In fact, they are the second largest. They come in with over 260 billions barrels reserves. They were actually the largest before, but according to reports in 2011, Venezuela ended up surpassing them. In 2011, they had increased their supply, making them the largest.

When looking at the world view of oil, they cover about 1/5 of the total number. Most of these reserves come from large oil fields. The other supplies comes from reserves that have been around for the past few years.

Did you know that only half of the oil reserves are contained in about 8 of the oil fields? One of those fields just happens to be Ghawar Field. Did you also know there are about 70 billion barrels in reserves in this field? Most of Saudi Arabia makes their money with oil from five of these fields. About 60% comes from the Ghawar Field alone.

So let’s get into the production. Over 10 millions barrels used to be produced on any given day. That number was calculated back in 1980. Based on the readings in 2009 and beyond, the Saudi oil production has increased to over 114 billion barrels per day.

But as the years go by, their oil reserves have been in decline. In fact, according to many reports, the decline of oil reserves has plummeted to as low as 40%. So what does that mean for money and how Saudi Arabia will rank in the coming years? It’s hard to say really. Though Saudi has ranked second only to Russia and Venezuela for a long time, their money ranking has gone down. Much of their foreign relations come from the production of oil. With oil production going down in recent years, those relations have also been in decline a bit.

The one thing that Saudi has on it’s side is the leverage. There aren’t many places to keep the oil reserves that are in stock. So Saudi does have leverage with that. But as the reserves go down, there isn’t much in production in certain places. Once some of those supplies dwindle down and leave, there aren’t any reserves to build up. The reserves aren’t there to take the place of what is left.

What some countries have commented on is how some suppliers have used the oil in excess. Many comes from the mentality of “we can always get more”. But that is simply not true. Once it’s gone, it’s gone. Some have taken for granted over the years how much oil has been in the reserves. Instead of having discipline in the use of the oil. they have been excessive and downright indulgent.

Another issue is the stability and the direction of the market. Some aren’t sure which markets are stable enough to give them a good price. Oil is a good investment for many. The more stable the market, the more money that can be made. The less stable the market, the less money that will be made.

With the market being so uncertain right now, many don’t know what to do. Some are pulling their money out and placing their money in other reserves. That also has an impact on the market price point for oil.

But what happens when those oil reserves are gone? What happens when the money that people make off these reserves ends? That will not only have an impact on the market, but it will also have an impact on the business that Saudi does. Saudi does business with people like the US, Russia, China, and various other places. Saudi is still a major player when it comes to the game of oil. But they do need to watch out how much they play.

Their economy may be somewhat stable now, but who knows how long they can sustain that. In the long run, not only will their business dealings take a hit, but their investments will also take a hit both home and abroad.