OPEC-Dhaval & group.pdf

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World crude oil reserves andcurrent issues on crude oil

pricingA Project report – International Economic Organizations

Prepared by

Dhaval Baria (14M48)

Akash prajapati (14F41)

Jagdish Ramm (14M11)

Rahul Chhatrodiya (14F30)

GHPIBM

2014-2016 Batch

Submitted to

Prof. (Dr.) Yogesh. C. Joshi

GHPIBM

A Study of


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Acknowledgement

At outset, we would like to thank G. H. Patel Post Graduate Institute of Business Management

for designing such a curriculum that help us in in-depth understanding of the industry and

providing us opportunity to do this project work.

We would like to extend our gratitude to Dr. (Prof.) Y.C. Joshi under whose guidance the project

was successfully completed. The major part of success should be attributed to the efforts and

direction provided by her who acting as mentors was supportive not only in explaining the

complexities of the project but also to guide and support at all times.

At last but not least we would like to thank all who have directly or indirectly supported us in

successful completion of this project.


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Table of Contents

Chapter 1 Introduction ............................................................................................................................ 4

Introduction ........................................................................................................................................ 4

Objectives ........................................................................................................................................... 4

Methodology ....................................................................................................................................... 4

Importance and Significance ................................................................................................................ 4

Chapter 2 History of OPEC ....................................................................................................................... 5

Mission Statement............................................................................................................................... 5

Values ................................................................................................................................................. 5

History ................................................................................................................................................. 5

Objectives of OPEC ............................................................................................................................ 10

Member Countries ............................................................................................................................ 11

Functioning of OPEC .......................................................................................................................... 12

Chapter 3 Current Issues ....................................................................................................................... 14

Chapter 4 OPEC and the World – A Comparative study .......................................................................... 27

Macro economic indicators................................................................................................................ 28

Oil and Gas Reserves ......................................................................................................................... 31

OPEC’s benefit to the member country .............................................................................................. 37

OPEC Influence on Economic Growth of the Member Countries ........................................................ 38

OPEC as a Promoter of Sustainable Development .............................................................................. 45

Chapter 5 OPEC & its influence .............................................................................................................. 60

OPEC and history of oil prices ............................................................................................................ 60

Assessment of OPEC in managing oil prices........................................................................................ 62

Setting the target range for oil price .................................................................................................. 63

Managing spare capacity ................................................................................................................... 64

Influence of OPEC on price ................................................................................................................ 66

Impact of Kyoto protocol on OPEC ..................................................................................................... 70

Chapter 6 Challenges to OPEC ............................................................................................................... 71

Conclusion ............................................................................................................................................. 75

Bibliography .......................................................................................................................................... 76


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Chapter 1 Introduction

Introduction

Oil is the blood of world economy. Out of top 10 Fortune 500 companies’ list published in July

2010, five are Petroleum companies. Therefore any increase in world oil prices impacts every

sector of the economy causing inflation. The Oil policies form an important part of national

policy making in all oil consuming countries. Some countries provide subsidy on oil and

petroleum products to promote domestic industries and check inflation, whereas some countries

impose tax on oil consumption to check demand and conserve. Economies all over the world

constantly monitor the oil price movements. Organisation of Petroleum Exporting Countries or

OPEC has the largest oil reserves in the world and is responsible for the supply and prices of

petroleum products to major extent.

Objectives

1) To study challenges to OPEC countries

2) To study the reasons of falling of oil prices.

3) To study the impact of price drop of oil globaly .

Methodology

Secondary data collection through OPEC’s website.

Importance and Significance

This report will provide insights to the management students about the whole Organization of

Petroleum Exporting Countries. This will help them to understand the current oil supply and

demand by the OPEC and role of OPEC in stabilizing the oil prices world over. They will come

to know about various functions and objectives of OPEC and its significance for oil demand and

supply balance world over.


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Chapter 2 History of OPEC

Mission Statement

To coordinate and unify the petroleum policies of its Member Countries and ensure the

stabilization of oil markets in order to secure an efficient, economic and regular supply of

petroleum to consumers, a steady income to producers and a fair return on capital for those

investing in the petroleum industry.

Values

We believe in transparent, honest, and auditable governance procedures.

We are responsive to our Members, stakeholders in trade, and society.

History

Venezuela and Iran were the first countries to move towards the establishment of OPEC by

approaching Iraq, Kuwait and Saudi Arabia in 1949, suggesting that they exchange views and

explore avenues for regular and closer communication among petroleum-producing nations. In

1959, the International Oil Companies (IOCs) reduced the posted price for Venezuelan crude by

5¢ and then 25¢ per barrel, and that for Middle Eastern crude by 18¢ per barrel. The First Arab

Petroleum Congress convened in Cairo, Egypt, where they established an ‘Oil Consultation

Commission’ to which IOCs should present price change plans to authorities of producing

countries.

In 10 – 14 September 1960, at the initiative of the Venezuelan Mines and Hydrocarbons

minister Juan Pablo Pérez Alfonso and the Saudi Arabian Energy and Mines minister Abdullah

al-Tariki, the governments of Iraq, Iran, Kuwait, Saudi Arabia and Venezuela met in Baghdad to

discuss ways to increase the price of the crude oil produced by their respective countries.

Oil exports imports difference

OPEC was founded to unify and coordinate members' petroleum policies. Between 1960 and

1975, the organization expanded to include Qatar (1961), Indonesia (1962), Libya (1962), the

United Arab Emirates (1967), Algeria (1969), and Nigeria (1971). Ecuador and Gabon were


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early members of OPEC, but Ecuador withdrew on 31 December 1992 because it was unwilling

or unable to pay a $2 million membership fee and felt that it needed to produce more oil than it

was allowed to under the OPEC quota, although it rejoined in October 2007. Similar concerns

prompted Gabon to suspend membership in January 1995. Angola joined on the first day of

2007. Norway and Russia have attended OPEC meetings as observers. Indicating that OPEC is

not averse to further expansion, Mohammed Barkindo, OPEC's Secretary General, asked Sudan

to join. Iraq remains a member of OPEC, but Iraqi production has not been a part of any OPEC

quota agreements since March 1998.

1973 oil embargo

In October 1973, OPEC declared an oil embargo in response to the United States' and Western

Europe's support of Israel in the Yom Kippur War of 1973. The result was a rise in oil prices

from $3 per barrel to $12 and the commencement of gas rationing. Other factors in the rise in

gasoline prices included a market and consumer panic reaction, the peak of oil production in the

United States around 1970 and the devaluation of the U.S. dollar. U.S. gas stations put a limit on

the amount of gasoline that could be dispensed, closed on Sundays, and limited the days gasoline

could be purchased based on license plates. Even after the embargo concluded, prices continued

to rise.

The Oil Embargo of 1973 had a lasting effect on the United States. The Federal government got

involved first with President Richard Nixon recommending citizens reduce their speed for the

sake of conservation, and later Congress issuing a 55 mph limit at the end of 1973. Daylight

savings time was extended year round to reduce electrical use in the American home. Smaller,

more fuel efficient cars were manufactured. Nixon also formed the Energy Department as a

cabinet office. People were asked to decrease their thermostats to 65 degrees and factories

changed their main energy supply to coal.

One of the most lasting effects of the 1973 oil embargo was a global economic recession.

Unemployment rose to the highest percentage on record while inflation also spiked. Consumer

interest in large gas guzzling vehicles fell and production dropped. Although the embargo only

lasted a year, during that time oil prices had quadrupled and OPEC nations discovered that their

oil could be used as both a political and economic weapon against other nations.


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1975 hostage incident

On 21 December 1975, Ahmed Zaki Yamani and the other oil ministers of the members of

OPEC were taken hostage in Vienna, Austria, where the ministers were attending a meeting at

the OPEC headquarters. The hostage attack was orchestrated by a six-person team led by

Venezuelan terrorist Carlos the Jackal (which included Gabriele Kröcher-Tiedemann and Hans-

Joachim Klein). The self-named "Arm of the Arab Revolution" group called for the liberation of

Palestine. Carlos planned to take over the conference by force and kidnap all eleven oil ministers

in attendance and hold them for ransom, with the exception of Ahmed Zaki Yamani and

Iran's Jamshid Amuzegar, who were to be executed.

The terrorists searched for Ahmed Zaki Yamani and then divided the sixty-three hostages into

groups. Delegates of friendly countries were moved toward the door, 'neutrals' were placed in the

centre of the room and the 'enemies' were placed along the back wall, next to a stack of

explosives. This last group included those from Saudi Arabia, Iran, Qatar and the UAE.

Carlos arranged bus and plane travel for the team and 42 hostages, with stops in Algiers and

Tripoli, with the plan to eventually fly to Aden then Baghdad, where Yamani and Amuzegar

would be killed. All 30 non-Arab hostages were released in Algiers, excluding Amuzegar.

Additional hostages were released at another stop. With only 10 hostages remaining, Carlos held

a phone conversation with Algerian President Houari Boumédienne who informed Carlos that

the oil ministers' deaths would result in an attack on the plane. Boumédienne must also have

offered Carlos asylum at this time and possibly financial compensation for failing to complete

his assignment. Carlos expressed his regret at not being able to murder Yamani and Amuzegar,

then he and his comrades left the plane. Hostages and Carlos and his team walked away from the

situation.

Sometime after the attack it was revealed by Carlos' accomplices that the operation was

commanded by Wadi Haddad, a Palestinian terrorist and founder of the Popular Front for the

Liberation of Palestine. It was also claimed that the idea and funding came from an Arab

president, widely thought to be Muammar al-Gaddafi. In the years following the OPEC

raid, Bassam Abu Sharif and Klein claimed that Carlos had received a large sum of money in

exchange for the safe release of the Arab hostages and had kept it for his personal use. There is


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still some uncertainty regarding the amount that changed hands but it is believed to be between

US$20 million and US$50 million. The source of the money is also uncertain, but, according to

Klein, it was from "an Arab president." Carlos later told his lawyers that the money was paid by

the Saudis on behalf of the Iranians and was, "diverted en route and lost by the Revolution".

The 1980s oil gluts

In response to the high oil prices of the 1970s, industrial nations took steps to reduce dependence

on oil. Utilities switched to using coal, natural gas, or nuclear power while national governments

initiated multi-billion dollar research programs to develop alternatives to oil. Demand for oil

dropped by five million barrels a day while oil production outside of OPEC rose by fourteen

million barrels daily by 1986. During this time, the percentage of oil produced by OPEC fell

from 50% to 29%. The result was a six-year price decline that culminated with a 46 percent price

drop in 1986.

In order to combat falling revenues, Saudi Arabia pushed for production quotas to limit

production and boost prices. When other OPEC nations failed to comply, Saudi Arabia slashed

production from 10 million barrels daily in 1980 to just one-quarter of that level in 1985. When

this proved ineffective, Saudi Arabia reversed course and flooded the market with cheap oil,

causing prices to fall to under ten dollars a barrel. The result was that high price production

zones in areas such as the North Sea became too expensive. Countries in OPEC that had

previously failed to comply to quotas began to limit production in order to shore up prices.

Responding to war and low prices

Leading up to the 1990 – 91 Gulf War, The President of Iraq Saddam Hussein recommended that

OPEC should push world oil prices up, helping all OPEC members financially. But the division

of OPEC countries occasioned by the Iraq-Iran War and the Iraqi invasion of Kuwait marked a

low point in the cohesion of OPEC. Once supply disruption fears that accompanied theseconflicts dissipated, oil prices began to slide dramatically.

After oil prices slumped at around $15 a barrel in the late 1990s, joint diplomacy achieved a

slowing down of oil production beginning in 1998. In 2000, Venezuela President Hugo Chávez

hosted the first summit of OPEC in 25 years in Caracas. The next year, however, the September


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11, 2001 attacks against the United States, and the following invasion of Afghanistan, and 2003

invasion of Iraq and subsequent occupation prompted a sharp rise in oil prices to levels far higher

than those targeted by OPEC themselves during the previous period.

On 19 November 2007, global oil prices reacted violently as OPEC members spoke openly about potentially converting their cash reserves to the euro and away from the US dollar.

In May 2008, Indonesia announced that it would leave OPEC when its membership expired at

the end of that year, having become a net importer of oil and being unable to meet its production

quota. A statement released by OPEC on 10 September 2008 confirmed Indonesia's withdrawal,

noting that it "regretfully accepted the wish of Indonesia to suspend its full Membership in the

Organization and recorded its hope that the Country would be in a position to rejoin the

Organization in the not too distant future." Indonesia is still exporting light, sweet crude oil and

importing heavier, more sour crude oil to take advantage of price differentials (import is greater

than export).

Production disputes

The economic needs of the OPEC member states often affects the internal politics behind OPEC

production quotas. Various members have pushed for reductions in production quotas to increase

the price of oil and thus their own revenues. These demands conflict with Saudi Arabia's stated

long-term strategy of being a partner with the world's economic powers to ensure a steady flow

of oil that would support economic expansion. Part of the basis for this policy is the Saudi

concern that expensive oil or supply uncertainty will drive developed nations to conserve and

develop alternative fuels. To this point, former Saudi Oil Minister Sheikh Yamani famously said

in 1973: "The stone age didn't end because we ran out of stones."

One such production dispute occurred on 10 September 2008, when the Saudis reportedly

walked out of OPEC negotiating session where the organization voted to reduce production.Although Saudi Arabian OPEC delegates officially endorsed the new quotas, they stated

anonymously that they would not observe them. The New York Times quoted one such

anonymous OPEC delegate as saying “Saudi Arabia will meet the market’s demand. We will see

what the market requires and we will not leave a customer without oil. The policy has not

changed.”


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OPEC aid

OPEC aid dates from well before the 1973/74 oil price explosion. Kuwait has operated a

programme since 1961 (through the Kuwait Fund for Arab Economic Development).

The OPEC Special Fund "was conceived in Algiers, Algeria, in March 1975", and formally

founded early the following year. "A Solemn Declaration 'reaffirmed the natural solidarity which

unites OPEC countries with other developing countries in their struggle to overcome

underdevelopment,' and called for measures to strengthen cooperation between these countries",

operating under a reasoning that the Fund's "resources are additional to those already made

available by OPEC states through a number of bilateral and multilateral channels." The Fund was

later renamed as the OPEC Fund for International Development (OFID).

The Fund became a fully fledged permanent international development agency in May 1980 and

was renamed the OPEC Fund for International Development (OFID), the designation it currently

holds.

Objectives of OPEC

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.

To ensure a fair return on capital to those investing in the petroleum industry.

• To deliver steady supply of oil to deliver steady supply of oil to consumers.

• To get oil to people at reasonable and fair prices.


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Member Countries

Current members

OPEC has twelve member countries: six in the Middle East, four in Africa, and two in South

America.

Country RegionJoined

OPEC

Algeria Africa 1969

Angola Africa 2007

Ecuador South America (1973) 2007

Iran Middle East 1960

Iraq Middle East 1960

Kuwait Middle East 1960

Libya Africa 1962

Nigeria Africa 1971

Qatar Middle East 1961

Saudi Arabia Middle East 1960

United Arab Emirates Middle East 1967

Venezuela South America 1960

Total


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Former members

Country Region Joined OPEC

Gabon Africa 1975

Indonesia South East Asia 1962

Some commentators consider that the United States was a de facto member during its

formal occupation of Iraq due to its leadership of the Coalition Provisional Authority. But this isnot borne out by the minutes of OPEC meetings, as no US representative attended in an official

capacity.

Indonesia left OPEC in 2009 because it ceased to be a net exporter of oil. It could not fulfill the

demand of its own country's needs, as growth in demand outstripped output. The situation was

made worse because of weak legal certainty and corruption that deterred foreign investors from

investing in new reserves in Indonesia. In recent times, the government has increased financial

incentives for foreign firms to invest in exploration and extraction but has found itself forced toimport more supplies from the likes of Iran, Saudi Arabia and Kuwait. Indonesia's departure

from OPEC will not likely affect the amount of oil it produces or imports.

Functioning of OPEC

Representatives of OPEC Member Countries (Heads of Delegation) meet at the OPEC

Conference to co-ordinate and unify their petroleum policies in order to promote stability and

harmony in the oil market. They are supported in this by the OPEC Secretariat, directed by the

Board of Governors and run by the Secretary General, and by various bodies including the

Economic Commission and the Ministerial Monitoring Committee.

The Member Countries consider the current situation and forecasts of market fundamentals, such

as economic growth rates and petroleum demand and supply scenarios. They then consider what,


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if any, changes they might make in their petroleum policies. For example, in previous

Conferences the Member Countries have decided variously to raise or lower their collective oil

production in order to maintain stable prices and steady supplies to consumers in the short,

medium and longer term.


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Chapter 3 Current Issues

Global oil prices have fallen sharply over the past six months, leading to significant revenue

shortfalls in many energy exporting nations, while consumers in many importing countries are

likely to have to pay less to heat their homes or drive their cars.

From 2010 until mid-2014, world oil prices had been fairly stable, at around $110 (£68) a barrel.

But since June prices have almost halved. Brent crude oil has fallen below $60 a barrel for the

first time since July 2009 and US crude is below $55 a barrel.

The reasons for this change are twofold - weak demand in many countries due to insipid

economic growth, coupled with surging US production.

Added to this is a determination by the oil cartel Opec that it is not going to prop up prices by

cutting production.

REASONS FOR FALLING OF ALL PRICES

1. The U.S. Oil Boom

America’s oil boom is well documented. Shale oil production has grown by roughly 4

million barrels per day (mbpd) since 2008. Imports from OPEC have been cut in half and

for the first time in 30 years, the U.S. has stopped importing crude from Nigeria.

2. Libya is Back

Because of internal strife, analysts have until recently assumed that Libya’s output would

float around 150,000-250,000 thousand barrels per day. It turns out that Libya has sorted

out their disruptions much quicker than anticipated, producing 810,000 barrels per day in

September. Libyan officials told the Wall Street Journal last week that they expect to

produce a million barrels per day by the end of the month and 1.2 million barrels a day by

early next year.

3. OPEC Infighting

There have been numerous reports about the discord between OPEC members, leading

many to believe that OPEC will not be able to reign in production like it has done so in

the past. The Saudis and Kuwaitis have reportedly been in an oil price war, repeatedly

lowering their prices in order to maintain their market share in Asia. John Kingston, the

news director at Platts, believes that the Saudis will not be willing to give up market

share like they have done during previous price drops.


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4. Negative European Economic Outlook

European Central Bank president Mario Draghi has left investors concerned about the

continent’s slow growth. Germany’s exports were down 5.8 percent in August, stoking

the fears of anxious investors that the EU’s largest economy had double dipped into

recession last quarter. Across the Eurozone, the IMF again lowered its growth forecast to0.8 percent in 2014 and 1.3 percent in 2015.

5. Tepid Asian Demand

Beyond slow economic growth and currency depreciation, a number of Asian countries have

begun cutting energy subsidies, resulting in higher fuel costs despite a drop in global oil

prices. In 2012, Asia’s top spenders on energy subsidies, as a percentage of GDP included:

Indonesia 3 percent; Thailand 2.6 percent; Vietnam 2.5 percent, Malaysia 2.3 percent, and India

2.3 percent. India is a primary example. Between 2008-2012, India’s diesel demand grew

between 6 percent and 11 percent annually. In January 2013, the country started cutting the

subsidies of diesel. Since then, diesel consumption has plateaued.

Why the oil price is falling

• Four things are now affecting the picture. Demand is low because of weak economic

activity, increased efficiency, and a growing switch away from oil to other fuels. Second,

turmoil in Iraq and Libya — two big oil producers with nearly 4m barrels a day

combined — has not affected their output. The market is more sanguine about geopolitical

risk. Thirdly, America has become the world’s largest oil producer. Though it does not

export crude oil, it now imports much less, creating a lot of spare supply. Finally, the

Saudis and their Gulf allies have decided not to sacrifice their own market share to

restore the price. They could curb production sharply, but the main benefits would go to

countries they detest such as Iran and Russia. Saudi Arabia can tolerate lower oil prices

quite easily. It has $900 billion in reserves. Its own oil costs very little (around $5-6 per

barrel) to get out of the ground.

Cutting Oil Production Will Not Solve OPEC’s Problems

• As oil prices continue to fal l, OPEC faces a dilemma at its meeting in Vienna on 27

November. Members must decide between decreasing production that wil l support the

oil prices but also consequentl y the U.S. shale oil industry, and main tain ing curr ent

levels of production that wil l lower oi l pr ices at a potenti al cost for poli tical stabil ity.


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• The largest drop in oil prices in the past five years created a stir among the

members of the prestigious energy club. At the moment OPEC controls 40% of the

word’s oil production, with a daily production of around 30 million barrels.

However, its market position is far from safe.

•

The surge in the U.S.’ unconventional oil production, along with stagnating globaldemand, has caused an oil glut of 2 million barrels per day and a sudden slump in

oil prices. Since June 2014, prices have dropped by 30% to less than $80 dollars per

barrel of both Brent and WTI crude.

• The drop obviously caught the oil producers by surprise, and OPEC members will have

to decide whether to retain the current production levels or significantly cut output. Both

choices carry major risks.

• The significant cut of about 500 000 to 1 million barrels would inevitably bring oil prices

close to their pre-June levels, but in the long term would not solve the fundamental problem of OPEC losing control of the global oil markets.

• As a result of the shale revolution, the U.S. is already pumping more than 8 million

barrels of oil per day, compared to five million barrels in 2008. Consequently, the share

of U.S. crude oil imports from the OPEC members has already dropped to a 30 year low,

and with the U.S. oil production still on the rise and the crude oil export ban firmly in

place, the OPEC’s market share in the U.S. will continue to decline.

• An expected increase in prices following potential cuts in OPEC production would give

more incentive for U.S. producers to enhance their production targets and start to bite into

the cartel’s market share outside North America. The U.S. has already re-started exports

of Alaskan crude oil to South Korea and more U.S. companies are circumventing the

export ban by shipping a lightly processed oil condensate to Asia and Europe, which

could soon reach 1 million barrels per day.

• It will be equally difficult for OPEC oil ministers to agree on cuts on 27 November in

Vienna. High oil prices benefited the budgets of oil exporters during the past decade, and

the OPEC countries are no exception.

• However, some countries are more dependent on oil incomes than others. Whereas the

rich Gulf countries with high foreign currency reserves can sustain longer periods of lowoil prices, countries like Libya, Venezuela, Iran or Nigeria cannot afford to lose their oil

revenues, and will fight vigorously to cut OPEC’s overall production but with minimal

cost to their own production quotas, which will put additional pressure on the

organisation’s informal leader, Saudi Arabia.


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• The Gulf kingdom will be careful not to repeat its mistake in the 1980s when a decision

to shrink production resulted in a prolonged period of low oil prices. In addition, the cuts,

along with the price upsurge would only give advantage to U.S. producers. This gives an

indication that Riyadh will not react to the increased cut demands from its OPEC peers.

With low production costs and a secure cash cushion, Saudi Arabia is still in a

comfortable position to cautiously assess its future moves.

• Regardless of the outcome of Thursday’s meeting, the oil markets are experiencing

significant changes and all players will have to adapt to new circumstances. However, the

immediate collateral victims of the prolonged oil price slump will be the countries that

heavily depend on oil prices to patch their budget holes, which might have a disastrous

effect on their fragile political stability.

Why does oil prices rise and fall?

Of all industries in the world, oil industry is indeed an international business which affects most

countries in the world. As the oil is the most consumed energy, it plays a vital role in daily lives

as well as economy and social development. Also, the oil industry leads to new technology

development both directly and indirectly. It has been deployed as a means for economy and

political negotiation. Nevertheless, “crude oil” when refined into various petroleum products

having different attributes i.e. gasoline, diesel, aviation fuel, kerosene, and fuel oil, and others, itsvalue will be maximized. The price of crude oil is thus determined by the type and quality of the

crude oil itself. Once distilled, heavy and light crude oil yield several refined products e.g.

gasoline and diesel to serve demands at different quantities. In addition, sour and sweet crude are

also priced differently.

Forecasting or estimating oil price in the future is sophisticated because oil is the commodity

product which is available globally. Unlike other products, the quality of oil product can be made

different to serve different needs of consumers. As the oil market is mainly regional activities

which are born of cooperation from various countries and parties having different needs and

environments, several factors then involve both directly and indirectly. Nevertheless, the pricecan be analyzed at both regional and global levels.

Main factors that affect the oil price

1. Fundamental factor


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The fundamental factor of oil price determination is demand and supply like other type of

products. Demand and supply of oil products change according to situation and circumstances. In

any market situation, imbalance between demand and supply can affect prices. For instance, in

the case of more demand than supply (undersupply), the price is likely to rise. The variables

which result in imbalance between demand and supply include:

Economic growth is the factor that positively corresponds with the price of oil. When the

economy grows, oil demand in our daily lives as well as demand to cope with economy

expansion will increase. If the world’s production is unable to meet the growth, the price of oil is

definitely on a rise. In an opposite vein, the price of oil will decrease if the economy growth is

minimal in the light of oversupply of oil. It is noted that the world economy growth rate in every

region must be taken into consideration.

Weather Seasonal change is another factor which causes the imbalance between oil demand and

production. Especially, the consumption patterns in Europe and the USA are clearly dictated by

the season. That is, in winter, the demand of heating oil (mainly diesel and fuel oil) is higher thanother types of oil. Normally, the oil traders start to increase inventory of heating oil in the fourth

quarter of the year to prepare for the winter at the beginning of the year. As a result, the price of

oil tends to increase during the said period. In addition, the demand is sensitive to the coldness.

The colder it gets, the higher the demand is. Due to the

Fears of the oil shortage, the consumers increase their oil inventories which also results in an

oversupply and may affect the price as well.

Meanwhile, summer is the driving season for the western countries, starting in the third quarter

of the year or around July. Given that the demand of gasoline is higher than other types, its price

tends to increase in the second quarter of the year. In sum, the weather is another fundamental

factor which contributes to the changing demand and supply and the price of oil.

OPEC’s production capacity If the production is not in line with the demand, the price of oil will

be affected as witnessed by the price skyrocketing during the past world oil crises. Thus the

countries with high reserves and production capacity have strong negotiating power for prices.

Most of the producers are Organization of Petroleum Exporting Countries or OPEC which

currently has 11 members i.e. Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi

Arabia, UAE and Venezuela. OPEC can manage and control production to meet the

consumption. If the production of the member is too high or too low, the price will be

accordingly affected. For instance, the growing and prolonged strike of oil workers in Nigeria

can have consequences in decreasing production and rising prices.

Policy of OPEC The policy set by OPEC also impacts demand and supply of oil market at great

length. As, the world’s largest oil producers and reserves, the OPEC’s announcement to increase


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or lower the production level, unavoidably triggers the oil price. As a major news, each OPEC’s

meeting is always in the spotlight.

Oil reserves of world’s major consumers Typically, each country has to reserve oil for energy

stability and security. Large consumer has to maintain the right inventory level just to

sufficiently meet the demand in order to reduce the expense. The sufficient oil inventory willlessen the worry in the supply shortage. The price is likely to be softened. In the meantime,

when the demand exceeds the forecast, the inventory then decreases as the consumption rises and

results in undersupply. Under such scenario, the price will then adjust upward. As a result, the

large consumer such as the USA or European countries, have paid a particular attention to the oil

inventory.

Alternative energy The discovery and technology development to exploit other alternative

energy sources such as natural gas, coal and nuclear and others to substitute oil at competitive

prices and efficiently meet the consumers need, will decrease the demand and price of oil. As

long as the technology and development is still limited, the price of oil will fluctuate and dependon the imbalance between demand and supply. Nevertheless, the world oil crisis alerts the people

who suffer from the oil price to accelerate their plan to develop other alternative fuels. If

alternative fuel can be developed to replace oil, the equilibrium between demand and supply will

then take place.

2. Sentimental factors

The oil market is naturally more sensitive to news than other market. The sentiment of oil traders

is the key factor to drive oil price to quickly respond to the news. The political and economy

movement in any region can impact the world oil price. Particularly, in unordinary situation e.g.major war, the price is quite volatile. The news about the major oil producers and users in the

world especially in the Middle East, North Sea and the USA, etc predominantly impacts oil

market more than the news about other regions. Therefore, monitoring unrest political situation,

strike, coup d’état, assassination of political leaders of OPEC countries or the decision of

international organization which influences international politics, is thus critical. These news all

affect the price adjustment due to the concern and worry despite the fact the production and

export volume still remain unchanged.

3. Technical factor

To trade oil product in the market, apart from monitoring news and movement according to

fundamental factors of oil market, the traders require information, statistic as well as average

price record or history of the oil products to determine the price of today. This information also

affects the decision of oil sale and purchase as well as poses an indirect impact of price level.

Especially, the impact is greater in the future market which has a larger trading volume larger

than the real existing volume in the market. The trading is mostly speculated for profit making.

At present, there are five major future markets: New York Mercantile Exchange (NYMEX),


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New York, USA; International Petroleum Exchange (IPE), London, UK; Singapore Monetary

Exchange (SGX), Singapore; Tokyo Commodity Exchange (TOCOM), Japan; and Shanghai

Futures Exchange, China.

4. Miscellaneous Factor

Foreign exchange the oil is traded internationally and sold in US dollar. Therefore, the value

change of foreign currency when compared with US dollar, affect the price of oil. When US

dollar devalues, the price of imported crude and finished products will be cheaper when

calculated in local currency. Conversely, the price when calculated in US dollar, will be higher.

The stronger US dollar will also result in lower oil price. Furthermore, the fluctuation of foreign

exchange will make it more difficult for traders to compare the price of oil in each market.

It can be concluded that no one can predict the price of oil in the future with certainty. But we

may estimate the price and direction of oil price by taking into account various aforementioned

factors. The oil price depends on a number of variables or situations occurring during a particular period. The understanding of price mechanism deems vital and most important for planning and

managing energy utilization effectively and promptly.

However, the analysis of future oil price is complicated and the price is yet constantly

indeterminable due to several factors. The direction of price rests upon designated hypothesis as

of the day of analysis. That is why the analysis of the experts of different organizations may vary

according to their views and hypotheses formed in the forecast.

Analysis of the Impact of High Oil Prices on the Global Economy

Oil prices still matter to the health of the world economy. Higher oil prices since 1999 – partly

the result of OPEC supply-management policies – contributed to the global economic downturn

in 2000-2001 and are dampening the current cyclical upturn: world GDP growth may have been

at least half a percentage point higher in the last two or three years had prices remained at mid-2001 levels. Fears of OPEC supply cuts, political tensions in Venezuela and tight stocks have

driven up international crude oil and product prices even further in recent weeks. By March

2004, crude prices were well over $10 per barrel higher than three years before. Current market

conditions are more unstable than normal, in part because of geopolitical uncertainties a0nd

because tight product markets – notably for gasoline in the United States – are reinforcing

upward pressures on crude prices. Higher prices are contributing to stubbornly high levels of


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unemployment and exacerbating budget-deficit problems in many OECD and other oil-importing

countries.

The vulnerability of oil-importing countries to higher oil prices varies markedly depending on

the degree to which they are net importers and the oil intensity of their economies. According to

the results of a quantitative exercise carried out by the IEA in collaboration with the OECDEconomics Department and with the assistance of the International Monetary Fund Research

Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the

OECD as a whole losing 0.4% of GDP in the first and second years of higher prices. Inflation

would rise by half a percentage point and unemployment would also increase. The OECD

imported more than half its oil needs in 2003 at a cost of over $260 billion – 20% more than in

2001. Euro-zone countries, which are highly dependent on oil imports, would suffer most in the

short term, their GDP dropping by 0.5% and inflation rising by 0.5% in 2004. The United States

would suffer the least, with GDP falling by 0.3%, largely because indigenous production meets a

bigger share of its oil needs. Japan’s GDP would fall 0.4%, with its relatively low oil intensity

compensating to some extent for its almost total dependence on imported oil. In all OECD

regions, these losses start to diminish in the following three years as global trade in non-oil

goods and services recovers. This analysis assumes constant exchange rates.

The adverse economic impact of higher oil prices on oil-importing developing countries is

generally even more severe than for OECD countries. This is because their economies are more

dependent on imported oil and more energy-intensive, and because energy is used less

efficiently. On average, oil-importing developing countries use more than twice as much oil to

produce a unit of economic output as do OECD countries. Developing countries are also less

able to weather the financial turmoil wrought by higher oil-import costs. India spent $15 billion,

equivalent to 3% of its GDP, on oil imports in 2003. This is 16% higher than its 2001 oil-import

bill. It is estimated that the loss of GDP averages 0.8% in Asia and 1.6% in very poor highly

indebted countries in the year following a $10 oil-price increase. The loss of GDP in the Sub-

Saharan African countries would be more than 3%.

World GDP would be at least half of one percent lower – equivalent to $255 billion – in the year

following a $10 oil price increase. This is because the economic stimulus provided by higher oil-

export earnings in OPEC and other exporting countries would be more than outweighed by the

depressive effect of higher prices on economic activity in the importing countries. The transfer of

income from oil importers to oil exporters in the year following the price increase would alone

amount to roughly $150 billion. A loss of business and consumer confidence, inappropriate

policy responses and higher gas prices would amplify these economic effects in the medium

term. For as long as oil prices remain high and unstable, the economic prosperity of oil-

importing countries – especially the poorest developing countries – will remain at risk.

The impact of higher oil prices on economic growth in OPEC countries would depend on a

variety of factors, particularly how the windfall revenues are spent. In the long term, however,


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OPEC oil revenues and GDP are likely to be lower, as higher prices would not compensate fully

for lower production. In the IEA’s recent World Energy Investment Outlook, cumulative OPEC

revenues are $400 billion lower over the period 2001-2030 under a Restricted Middle East

Investment Scenario, in which policies to limit the growth in production in that region lead to an

average 20% higher prices, compared to the Reference Scenario.

HOW HIGHER OIL PRICES AFFECT THE GLOBAL ECONOMY

Oil prices remain an important determinant of global economic performance. Overall, an oil-

price increase leads to a transfer of income from importing to exporting countries through a shift

in the terms of trade. The magnitude of the direct effect of a given price increase depends on the

share of the cost of oil in national income, the degree of dependence on imported oil and the

ability of end-users to reduce their consumption and switch away from oil. It also depends on the

extent to which gas prices rise in response to an oil-price increase, the gas-intensity of theeconomy and the impact of higher prices on other forms of energy that compete with or, in the

case of electricity, are generated from oil and gas. Naturally, the bigger the oil-price increase and

the longer higher prices are sustained, the bigger the macroeconomic impact. For net oil-

exporting countries, a price increase directly increases real national income through higher

export earnings, though part of this gain would be later offset by losses from lower demand for

exports generally due to the economic recession suffered by trading partners.

Adjustment effects, which result from real wage, price and structural rigidities in the economy,

add to the direct income effect. Higher oil prices lead to inflation, increased input costs, reduced

non-oil demand and lower investment in net oil- importing countries. Tax revenues fall and the budget deficit increases, due to rigidities in government expenditure, which drives interest rates

up. Because of resistance to real declines in wages, an oil price increase typically leads to

upward pressure on nominal wage levels. Wage pressures together with reduced demand tend to

lead to higher unemployment, at least in the short term. These effects are greater the more

sudden and the more pronounced the price increase and are magnified by the impact of higher

prices on consumer and business confidence.

An oil-price increase also changes the balance of trade between countries and exchange rates.

Net oil-importing countries normally experience a deterioration in their balance of payments,

putting downward pressure on exchange rates. As a result, imports become more expensive andexports less valuable, leading to a drop in real national income. Without a change in central bank

and government monetary policies, the dollar may tend to rise as oil- producing countries’

demand for dollar-denominated international reserve assets grow.

The economic and energy-policy response to a combination of higher inflation, higher

unemployment, lower exchange rates and lower real output also affects the overall impact on the

economy over the longer term. Government policy cannot eliminate the adverse impacts


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described above but it can minimise them. Similarly, inappropriate policies can worsen them.

Overly contractionary monetary and fiscal policies to contain inflationary pressures could

exacerbate the recessionary income and unemployment effects. On the other hand, expansionary

monetary and fiscal policies may simply delay the fall in real income necessitated by the increase

in oil prices, stoke up inflationary pressures and worsen the impact of higher prices in the long

run. While the general mechanism by which oil prices affect economic performance is generally

well understood, the precise dynamics and magnitude of these effects – especially the

adjustments to the shift in the terms of trade – are uncertain. Quantitative estimates of the overall

macroeconomic damage caused by past oil- price shocks and the gains from the 1986 price

collapse to the economies of oil- importing countries vary substantially.

This is partly due to differences in the models used to examine the issue. Nonetheless, the effects

were certainly significant: economic growth fell sharply in most oil-importing countries in the

two years following the price hikes of 1973/1974 and 1979/1980. Indeed, most of the major

economic downturns in the United States, Europe and the Pacific since the 1970s have been

preceded by sudden increases in the price of crude oil, although other factors were more

important in some cases. Similarly, the boost to economic growth in oil-exporting countries

provided by higher oil prices in the past has always been less than the loss of economic growth in

importing countries, such that the net effect has always been negative. The growth of the world

economy has always fallen sharply in the wake of each major run-up in oil prices, including that

of 1999-2000. This is mainly because the propensity to consume of net importing countries that

lose from higher prices is generally higher than that of the exporting countries. Demand in the

latter countries tends to rise only gradually in response to higher prices and export earnings, so

that net global demand tends to fall in the short term.

QUANTIFYING THE IMPACT ON OECD COUNTRIES

OECD countries remain vulnerable to oil- price increases, despite a drop in the region’s net oil

imports and an even more marked decline in oil intensity since the first oil shock. Net imports

fell by 14% while the amount of oil the OECD uses to produce one dollar of real GDP halved

between 1973 and 2002. Nonetheless, the region remains heavily dependent on imports to meet

its oil needs, amounting to 56% in 2002. Only Canada, Denmark, Mexico, Norway and the

United Kingdom are currently net exporting countries. Oil imports are estimated to have cost the

region as a whole over $260 billion in 2003 – equivalent to around 1% of GDP. The annual

import bill has increased by about 20 % since 2001.


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In order to test the vulnerability of the OECD economy to higher oil prices in the medium term,

we carried out a simulation using Interlink,2 the OECD’s in-house macro-economic model. In

the OECD base case, oil prices3 are assumed to remain constant at $25 per barrel over the five-

year projection period from 2004 to 2008. In a sustained higher oil price case, prices are assumed

to be $10 higher at $35 per barrel – the level actually reached in early April 2004 – for the whole

of the projection period. Crucially, nominal dollar exchange rates are held constant at late-2003

levels in both cases.4 In practice, any change in the value of the dollar would significantly affect

the impact of higher nominal oil prices on the global economy. The fall in the value of the dollar

against the currencies of most other OECD countries in the last two years has dampened the

impact of recent oil-price increases in those countries.

Higher oil prices have a significant adverse impact on OECD economic performance in the short

term in this case, though their impact in the longer term is more limited. The impact on the rate

of GDP growth is felt mostly in the first two years as the deterioration in the terms of trade

drives down income, which immediately undermines domestic consumption and investment.

OECD GDP is 0.4% lower in 2004 and 2005 compared to the base case. In all OECD regions,

these losses start to diminish in the following years as global trade in non-oil goods and services

recovers. Throughout the whole five-year projection period, GDP is 0.3% lower on average than

in the base case. 5

The impact of higher oil prices on the rate of inflation is more marked. The consumer price index

is on average 0.5% higher than in the base case over the five- year projection period. The impact

on the rate of inflation is felt mostly in 2005 – the second year of higher prices. Recent trends

show a clear correlation between oil- price movements and short-term changes in the inflation

rate.

QUANTIFYING THE IMPACT ON DEVELOPING COUNTRIES AND

TRANSITION ECONOMIES

The adverse economic impact of higher oil prices on oil-importing developing countries is

generally more pronounced than for OECD countries. The economic impact on the poorest and

most indebted countries is most severe. On the basis of IMF estimates, the reduction in GDP in

the sustained $10 oil-price increase case would amount to more than 1.5% after one year in those

countries (Table 2). The Sub-Saharan African countries within this grouping, with more oil-


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intensive and fragile economies, would suffer an even bigger loss of GDP, of more than 3%. As

with OECD countries, dollar exchange rates are assumed to be the same as in the base case.

Asia as a whole, which imports the bulk of its oil, would experience a 0.8% fall in economic

output and a one percentage point deterioration in its current account balance (expressed as a

share of GDP) one year after the price increase. Some countries would suffer much more: thePhilippines would lose 1.6% of its GDP in the year following the price increase, and India 1%.

China’s GDP would drop 0.8% and its current account surplus, which amounted to around $35

billion in 2002, would decline by $6 billion in the first year.6 Other Asian countries would see a

deterioration in their aggregate current account balance of more than $8 billion. Asia would also

experience the largest increase in inflation in the first year, on the assumption that the increase in

international oil price would be quickly passed through into domestic prices. The inflation rate in

China and Thailand would increase by almost one percentage point in 2004.

Table 2: Oil-Importing Developing Country Macro-economic Indicators in Sustained Higher Oil

Price Case after One Year by Region/Country (Deviation from base case, in percentage pointsunless otherwise stated) Real GDP Inflation Trade Balance (% of GDP)

Country Real GDP Inflation Trade balance

Asia -0.8 1.4 1.0

China -0.8 0.8 0.6

India -1.0 2.6 1.2

Malaysia -0.4 2.0 0.0

Philippines -1.6 1.6 2.0

Thailand -1.8 0.8 3.0Latin America* -0.2 1.2 0.0

Argentina -0.4 0.2 0.2

Brazil -0.4 2.0 0.4

Chile -0.4 2.0 1.4

Highly indebted poor developingcountries7 -1.6 n.a.n.a.

-0.8 1.4 1.0

Latin America in general would suffer less from the increase in oil prices than Asia because net

oil imports into the region are much smaller. Economic growth in Latin America would bereduced by only 0.2 percentage points. The GDP of transition economies and Africa in aggregate

would increase by 0.2 percentage points, as they are net oil-exporting countries.

The economies of oil-importing developing countries in Asia and Africa would suffer most from

higher oil prices because their economies are more dependent on imported oil. In addition,

energy-intensive manufacturing generally accounts for a larger share of their GDP and energy is


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damage caused by higher oil prices. It would also amplify the impact of higher oil prices in

pushing up the oil-import bill at least in the short-term, given the relatively low price-elasticity of

oil demand. Past oil shocks provoked debt-management crisis in many developing countries.

Fiscal imbalances in oil-importing countries caused by lower income would be exacerbated in

those developing countries, like India and Indonesia that continue to provide direct subsidies onoil products to protect poor households and domestic industry. The burden of subsidies tends to

grow as international prices rise, adding to the pressure on government budgets and increasing

political and social tensions.

It is important to bear in mind the limitations of the simulations reported on above. In particular,

the results do not take into account the secondary effects of higher oil prices on consumer and

business confidence or possible changes in fiscal and monetary policies. The loss of business and

consumer confidence resulting from an oil shock could lead to significant shifts in levels and

patterns of investment, savings and spending. A loss of confidence and inappropriate policy

responses, especially in the oil-importing countries, could amplify the economic effects in themedium term. In addition, neither the OECD’s estimates for member countries nor the IMF’s

estimates for the developing countries and transition economies take explicit account of the

direct impact of higher oil prices on natural gas prices and the secondary impact on electricity

prices, other than through the general rate of inflation. Higher oil prices would undoubtedly drive

up the prices of other fuels, magnifying the overall macroeconomic impact. Rising gas use

worldwide will increase this impact. Nor does this analysis take into account the macroeconomic

damage caused by more volatile oil prices. Short-term price volatility, which has worsened in

recent years, complicates economic management and reduces the efficiency of capital

allocation.10 despite these factors; the results of the analysis presented here give an order-of-

magnitude indication of the likely minimum economic repercussions of a sustained period of

higher oil prices.

Chapter 4 OPEC and the World – A Comparative studyIn this chapter we will compare OPEC with the rest of the world. Macroeconomic indicators, oil

and gas reserves, production capacity, import and export from the OPEC is described in the

following section and it was find out that where the OPEC stands and the role of OPEC for

maintaining the demand and supply balance of crude oil.


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Macro economic indicators

On observing and analyzing macroeconomic factors for OPEC and Non-OPEC countries it is

clear that real GDP growth rate of OPEC countries was high in year 2012 compared to non

OPEC countries, however in year it declined drastically by 50% of the previous year though

there was decline in GDP growth rate observed in case of non opec countries also it was very

low compared to opec countries. Value of imports was very much less compared to non opec

countries and crude production was also very high when it was compared with non opec

countries.

Table 2 OPEC members value of export


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Table 3 OPEC members value of Petroleum exports (m$)


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From the table 2 and table 3 it was observed that export from the OPEC countries was increasing

from year 2009 to 2012 however, slightly decline in the export was observed in the year 2013.

Same was the case with export of the oil from these countries. It was observed that export of the

petroleum products was about 70% of the total exports.

Table 4 OPEC member’s value of import

Import by the OPEC member countries was increased from year 2009 to 2013 however it was

quite lower compared to the total exports. Out of all the member countries UAE and Saudi

Arabia were the countries that had maximum import and Kuwait had the minimum imports

compared to all other OPEC member countries.


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Oil and Gas Reserves

Table 5 world proven oil reserves by country


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If we observe the above tables and analyze it is observed that maximum oil and gas reserves are

in OPEC countries which is 81% and 42% respectively followed by Russia. However, the

production of the oil and gas is little less compared to United States of America and Russia. The

production of oil and natural gas from the OPEC is about 40% and 20% respectively.

OPEC’s benefit to the member country

Energy resources due to their specific nature are key product and strategic commodity in today’s

international society. Industry worldwide is dependent on the resources for survival and their

cost will always affect the price of the finished product, thereby controlling energy supply is a

powerful tool in today’s international market. The member states of Organisation of Petroleum

Exporting Countries had an early understanding of this new international economic system.

Furthermore, the member states realise their potential to shift the balance of power from the

West. 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 fr om January 2009; Socialist People’s 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 is one of the oldest organizations founded by developing countries, having

survived half a century since its establishment. According to data from official web page of

OPEC, in 2009, this organization possessed 79.3% of global proven crude oil reserves and was

responsible for 60.3% of the world’s crude oil exports.

This organization has been known as an international organization rather than a regional or

intergovernmental one. In fact, OPEC’s decisions about levels of production have a global effect,

as international oil markets are inter-related and oil can be transferred from one market to

another. Moreover, by building more and more sophisticated refineries, crude oil is becomingmore like a homogenous commodity, so that the supply and demand of a specific type of a crude

in one corner of the global oil market will affect the fundamentals of other crudes in another part

of the global oil market.


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Moreover, OPEC can easily affect on oil price and its supply. Nowadays in case of OPEC

scholars mainly look at the oil production its reserves, price monopoly and impact of OPEC’s

quotas on world oil market (see Loderer 1985, Griffin and Xiong 1997,); they test OPEC’s

behavior and its impact on the oil prices as well as market (see James 1999, Noguera J. and

Pecchecnino R. 2006) and its role in providing sustainable development. However, there are a

few studies that test whether there is any benefit for the oil producing countries to be the member

of organization of petroleum exporting countries and what are they.

As Noguera J. and Pecchecnino R. (2006) has emphasis in their studies there two economic goals

of being member of OPEC. One is macroeconomic – reaching low oil market volatility, and

second one – microeconomic is to promote economic development of the country. Since oil

revenues are vital for the economic development of the OPEC nations, they aim to bring stability

and harmony to the oil market by adjusting their oil output to help ensure a balance between

supply and demand. Also some scholars as Morrison (2004) argues that because of the high level

of oil dependence, the oil sector must perform well in these nations both to maintain current and

ensure future living standards. On the other hand, oil sector and overall economic productivity in

the OPEC economies has declined, and today less rather than more is being produced with the

same resources. Taking in to account that OPEC is one of international organisation with long

history, permanent members and huge impact on world energy supply and market. Also,

considering fact that completely all members of OPEC are developing countries it would be

interesting to know how OPEC is beneficial for the member countries despite the quotas for oil

producing. Taking in to account this circumstance in the paper I also want to see what kind of

and in which spheres the member countries get benefits.

OPEC Influence on Economic Growth of the Member Countries

OPEC is commonly described as Cartel, which is intergovernmental organization. However,

according to the statue of OPEC, it define itself as an international organization with aim toinfluence and maintain the price of oil through the control of production levels and to generate

revenue, which goes towards meeting the development needs of its members.

However, OPEC’s influence on the oil markets has significantly diminished compared to the

1970’s OPEC is still the key player of world energy market. Nowadays the organisation supplies


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about 60% of world oil output and more than 75% of world petroleum reserves are located

within OPEC nations; and OPEC policy instruments have consistently beenconfined to fiscal and

pricing measures (Logman 1982).

Former Acting OPEC Secretary-General, Fadhil Al-Chalabi has emphasized that OPEC's

objective is to co-ordinate and unify petroleum policies among the member countries, in order to

secure fair and stable prices for petroleum producers, member countries, as well as, efficient

economic growth for the member states, and regular supply of petroleum to consuming nations

(World oil outlook 2010). Many scholars argue that OPEC has evolved over the years and has

become a market phenomenon. Since the early 1970s, a significant degree of “re-integration” has

been achieved in the world oil industry, between OPEC minor and major member countries

(Yang 2004), member countries and the biggest oil-producing companies. Moreover, OPEC

influence on the growth and promote economic growth of its member countries through fair

return of capital, that is mentioned in OPEC statue, to those member countries who investing in

their industries that would lead to economic development of the member countries (OPEC statue

article 1-2).

OPEC’s influence on the economy of the member countries is great, since most member

countries derive more than 80% of their foreign-exchange earnings, as well as huge share of

GDP, from oil and gas exports. In turn, receipts from the oil and gas sector account for at least 70

% of government revenue. (Appendix Table 1 and 2)


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Unsurprisingly, the performance of the member countries’ national economies is closely linked

to the fortunes of the domestic oil and gas sector. Investment in oil and gas determines the

potential for the sector to provide either leverage financial resources for economy-wide

development or diverse it through reinvesting. Judged by a number of measures, OPEC member

countries have made varying degrees of economic and social progress over the past 30 years.

Perhaps less debatable and doubtful is the idea that it is now time to review the existing sources

of development finance and the modalities for it in OPEC member countries.

As I have already mentioned OPEC member countries is divided in to two minor and major

countries. Scholars made this diversification according to the hydrocarbons reserve and number

of population. Most minor OPEC countries are those that have large populations and smaller oil

reserves (such as Algeria, Indonesia and Nigeria). Major OPEC countries are those countries that

have larger hydrocarbons reserves and smaller population.

I assume that for describing economic influence of OPEC on the member countries growth I

should narrow down my observation to one country. However, Indonesia nowadays is a former

member it would be appropriate example to demonstrate economic influence of OPEC even on

minor country. While Indonesia was member of OPEC, since 1962, it has a relatively diverse its

economy by reinvesting, as it was already mentioned, from the oil industry toward other sectors.

Despite the fact that, Indonesia was not well develop country, even within the OPEC countries,

with a large external debt. Indonesia was able to divers it economy from oil based economy to

manufacture. As evidence we can observe that in 2005 Indonesia became a net oil importer for

the first time in decades (EIA, 2004) – this had implications for its membership of OPEC.

Therefore nowadays Indonesia is not heavily dependents on oil export. That diversification was

done with help of the reinvesting the income from the revenues obtained by Indonesia within

OPEC (table 2). According the data from World Bank for 2005, the services sector in Indonesia

is the largest sector of economy, nowadays, and accounts for 45.3% of GDP (2005). This isfollowed by industry (40.7%) and agriculture (14.0%). However, agriculture employs more

people than other sectors, accounting for 44.3% of the 95 million-strong workforce. The service

sector of economy is followed by the services sector (36.9%) and industry (18.8%).Major

industries include petroleum and natural gas, textiles, apparel, and mining however, the share of


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petroleum industry in Indonesian GDP has decreased over last years. (Indonesia in a Glance

2006).

The UAE, Saudi Arabia are another examples of OPEC major countries that have larger oil

reserve and smaller population and that countries slightly diversify their economy, moving

increasingly towards services (tourism, banking, re-exports, and information technology) (EIA,

2009). Kuwait and the UAE are the only two Gulf States, which are relatively independent from

oil prices because of the structure of their finances and economy; the other Gulf States will

continue to need higher oil prices to fund their increased levels of expenditure (Barnett J. 2008

citied from Kohl, 2002).

Additionally, as it mentioned in the human development report by UNDP (2003) Saudi Arabia is

the world’s largest crude oil producer, a leader in OPEC’s production quota decisions and

certainly the most active member of OPEC. However, Saudi Arabia has diverse its economy oil

dependence continues to dominate the in Saudi economy (appendix Table 1). Income in Saudi

Arabia remains low from non-oil sources. (Inter-American Development Bank Office of the

Chief Economist Working Paper 312) As a result, the government’s budget is highly vulnerable

to oil price volatility. Improving OPEC member countries’ economies is absolutely essential for

OPEC, since it is one of the aims of organisation. Thus, it is significant for the organisation to

continue and increase investment in their member countries’ economy in the coming years. Oil

export revenues dominate the economies of these countries. Although this revenue will continue

to increase in the future, there is a point where oil will run out, and all the money that is


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generated by oil will disappear with it. That is why these investments need to be implemented

immediately. Investments made into oil and gas projects that stretch beyond maintenance and

production expansion would significantly benefit these natural resource heavy economies. Of

equal importance is investment in social capital; education, transportation, telecommunications,

healthcare, etc and the investments toward economic diversification. If these investments are

made while oil revenues are steadily increasing, OPEC member countries will benefit socially

and economically in the future.

Nonetheless, as it is emphasized in the statue OPEC, as an international organisation has proved

to have a very strong economic character. It has shown this by targeting the development of its

member states as a goal to achieving the highest GDP growth possible.

OPEC’s Benefits to the Member Countries

OPEC members benefits from it in several ways. Mainly they could be divided in to two as

follow: economical that we have already seen in previous part; and political. In this part of my

paper, I am going to look at other than economical benefits of being OPEC member.

Additionally, in this part of my paper I would like to examine whether OPEC member countries

make large benefit by exporting oil within OPEC despite the existing quotas on oil producing for

the member countries.

Among all international trade organisations, OPEC has proved to be a good example of an

alternative international political economy with an undisputed amount of bargaining power and

one of the few powerful organisations not controlled by the West (Farhan Al-Farhan 2003). This

gathering brings great benefits in both economic and political sense for oil exporting countries.

One of the benefits for the member countries can be identified regarding to the primary purpose

of OPEC, which is to secure its member countries’ fair shares of the value of their oil resources,

for the purpose of accelerating economic development and improving the welfare of people ofthe member countries (Iz Osayimwese 1999). Another non-economical benefit for the members

of the organisation, is that OPEC protects its member countries interest, within the oil market

and the global arena. (BB Alizadeh MEES 9 febrary, 7 December 2009) Also the fact the

organization provide and willing to increase its development assistance to the minor member

countries is another advantage; since this will lead to divers economy, reduce external debts


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create new work places, reduce poverty and malnutrition. Despite those benefits, it is also

important for the member countries that the organization provides opportunity to influence on

Western countries as most of them depends on the OPEC oil, as well as paying key role in the

global oil market/ industry. This also includes the murky international politics synonymous with

the oil industry. As we know OPEC emerge in time when the cold war has just end, and

international attention was focused on the tense situation between the Eastern Block and the

Western powers. AL-Otaiba’s (former Minister of Petroleum and Mineral Resources of the

United Arab Emirates under the Presidency of H.H Sheikh Zayed bin Sultan al Nahayn)

argument that he provides can be interpreted as OPEC countries had the opportunity to be

considered as a serious power within the new international system and should use that rationally

in order to achieve their own countries goals. The classical definition of power is “… the ability

to get people to do what you want them to do” (Krasner p.3). The power of OPEC can be viewed

in relation to the rational aspect and absolute role when it used the right strategies and policies to

achieve its member countries’ goals. Another way that the union is beneficial for the member

countries is that the countries which located in the East are secure in terms of wars and other

conflicts (OPEC working paper 2003) but I have doubt on this statement (the two Iraq wars). The

benefit from OPEC to non-OPEC counties is that OPEC focuses its activities on ensuring order

and stability in the international oil market with reasonable prices.

The declaration reiterated that OPEC would go ahead in its efforts to accelerate economic

development in the developing countries through its aid programs; The International OPEC

Development Fund and the International Fund for Agricultural Development. It is urged the

industrial countries to contribute positively to these efforts and to work towards the reduction of

debts of the developing countries. Regarding to the more real benefits gained directly from oil

export, OPEC in its long term strategy, has emphasized that …unstable prices cause difficulties

in the interpretation of signals sent by market. It makes no difference whether such signals are

indicative of the market’s structural change or is resulting from a temporary phenomenon.Therefore, it is difficult to support long-term market stability only by one supplier, if prices

remain unstable. (OPEC long-term strategy:4)

Thus, I think it can be argued that being OPEC member is beneficial as the member countries by

establishing and joining to OPEC make themselves free from dealing with this kind of issues


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furthermore get larger economical benefits by playing together. Besides, OPEC in its long term

strategy, has also stipulated ……when the market is tight, very high prices may influence

economic growth, especially in developing countries, threatening future demand growth for oil.

Meanwhile, very low prices could also limit the trend of economic development and social

welfare of OPEC member countries…Thus, avoidance of a market faced with excess of supply or

shortage of supply is necessary. The presence of more members in OPEC would increase the

organization’s ability to stabilize the market. (OPEC long-term strategy:7)

As it was already mentioned, OPEC countries manly drive their main revenues to the GDP from

oil export (OPEC annual reports 2000-2009). I think it is obvious that the OPEC provide

economic growth to the member countries thought the revenues from oil trade. Thus, it is

significant to underline role of OPEC in oil market and pricing. Moreover, understand how the

member countries are making large benefit from oil export despite the existing quotas on oil

production settled by OPEC.

The aim of OPEC is to provide stabile prices on oil for the member countries by controlling the

prices through quotas. OPEC provides equilibrium and sustainability between such market

phenomena as consumers demand on crude oil and supply of the producers, by using the tool of

quotas on oil producing. OPEC implement the main rule of market is that is, when the there is

larger supply of goods and services the prices go down and when there is larger demand the

prices go up, within its member countries by using the quotas. That helps it to control the prices

on oil. As, the member countries of OPEC are the larger producers of oil, its decisions regarding

the quotas, directly affect on the world prices on oil.

Thus, it can be argued that the quotas are providing to the OPEC countries opportunity to make

larger benefits. Despite the fact that it is commonly argued, that the quotas are the barriers for the

member countries to make larger benefit. It is obvious that the quotas are the main tool that let to

maintain preferable by the suppliers, OPEC countries, prices on oil in the market and keep the prices beneficial for both consumers and suppliers. Furthermore, according to the OPEC statue

following to the quotas in oil production volume is not mandatory.


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OPEC as a Promoter of Sustainable Development

In this part of the paper I am going to see the OPEC’s activity toward promoting sustainable

development for the member countries, as well as for other developing countries. OPECs aid

organisations were noted as good examples to the developing countries in the early 1970s. OPEC

member states, acting in partnership, decided in the 1970s to join forces to achieve greater

effectiveness and relevance in the field of development assistance delivery. The aim from the

idea was to have greater impact and to better manage official aid resources, which were

increasing in both volume and significance.

In 1975, OPEC also called industrialized developing countries to come together to solve the

problems poor countries are facing and to look for ways of establishing a better economic system

by allowing increased trade and exchange of knowledge (OPEC review vol. 3.2 1979). OPECestablished the OPEC Fund for International Development (OFID) in January 1976 (originally

called the ‘OPEC Special Fund’) to promote cooperation between OPEC Member Countries and

other developing states. In particular, OFID aims to help poorer, low-income non-OPEC 15

countries in their pursuit of social and economic advancement. OFID is active in many regions,

including Africa, Asia, Europe and Latin America.

It has supported a wide range of projects, from providing clean water and energy to remote

communities, to building schools, hospitals and roads and developing industries, farming andtrade opportunities. Since its establishment, it has made commitments totaling nearly US $10.1

billion, two-thirds of which have already been disbursed. The Third Summit of OPEC Heads of

State and Government in 2007 reaffirmed OPEC’s commitment to energy for sustainable

development. The concluding Riyadh Declaration stated that energy was essential for poverty

eradication, sustainable development and the achievement of the Millennium Development

Goals (OPEC annual report 2007). It associated Member Countries with all global efforts aimed

at bridging the development gap and making energy accessible to the world’s poor.

Over the last three decades, some experts have highlighted the vital importance that OPEC has

played in the socio-economic development and the huge growth of the member states. OPEC

participates in development financing at two levels. First, individual member countries finance

domestic capital investment from a combination of domestic savings and external borrowing and


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aid. Second, as a group, OPEC countries provide concessional finance for development projects

in non-OPEC developing countries (Note1). OPEC’s development assistance is provided t

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