Roles of OPEC, Setbacks & Ways of Improving its efficiency.

By
Banigo, Peter .A.
peter@peterbanigo.com
www.cluewebhost.com

Department of Gas Engineering, University of Port Harcourt.

Abstract
The Organization of Petroleum Exporting Countries (OPEC), an organization set up to cater
to the interests of Net Exporters of Petroleum worldwide has faced a lot of crisis of
confidence in its over 50 years of existence. OPEC which was formed in 1960 as a reaction to
unilateral cuts in oil prices by the seven big oil companies had a mission to coordinate &
unify the petroleum policies of its member countries and ensure stabilization of oil markets to
secure an efficient, economic & regular supply of petroleum to end users, a steady income to
producers and a fair return on capital for those investing in the petroleum Industry.
Over the years, activities of the Organization has led a vast majority to call it a cartel (an
alliance of business companies formed to control production, competition, and price) since
OPEC manipulates production rates from member countries in order to influence the supply
of oil & hence control prices of crude, it is also blamed for the quadrupling of crude prices in
1974[ CITATION SGü96 \l 2057 ].
Scholars, members & governments of importing countries alike have had some reservations
over the effectiveness of OPEC in carrying out its above named roles.
This paper makes an attempt at trying to identify the setbacks encountered by OPEC in
carrying out its functions.

Keywords: OPEC, Oil Prices, World Economy.

Introduction
The global oil industry has been a very controversial sector of the world economy for myriad
reasons including its strategic nature in the aspect of energy supply, attendant air, land &
water pollution associated with its extraction.
In 1959-1973, the U.S. government, under President Dwight Eisenhower, established the
Mandatory Oil Import Quota program (MOIP), which restricted the amount of imported
crude oil and refined products allowed into the United States and gave preferential treatment
to oil imports from Canada, Mexico, and, somewhat later, Venezuela. This partial exclusion
of Persian Gulf oil from the U.S. market depressed prices for Middle Eastern oil; as a result,
oil prices “posted” (paid to the selling nations) were reduced in February 1959 and August
1960.[ CITATION Vie87 \l 2057 ]
OPEC was setup by five founding members Iran, Iraq, Kuwait, Saudi Arabia & Venezuela at
the Baghdad Conference on September 10-14, 1960. The original founders of OPEC where
later joined by Qatar in 1961, Indonesia & Libya in 1962, United Arab Emirates (UAE) in
1967, Algeria, Nigeria, Ecuador, Gabon & Angola in 1969, 1971, 1973, 1975 & 2007
respectively. OPEC had its initial headquarters in Geneva, Switzerland which was later
moved to Vienna, Austria in September 1, 1965.
The activities of OPEC are guided by its statutes, the first of which was approved by a
conference in January 1961 in Caracas by resolution 11.6.
According to Chapter 2, Article 7, Item C, on membership of the Organization, “Any other
country with a substantial net export of crude petroleum, which has fundamentally similar

1
interests to those of Member Countries, may become a Full Member of the Organization, if
accepted by a majority of three-fourths of Full Members, including the concurrent vote of all
Founder Members.”[ CITATION OPE10 \l 2057 ] This statement explains that all members of
OPEC must be net exporters of oil, i.e. export more than they import & this has been a reason
for the exit of some OPEC member countries over the years. One such country was Indonesia
which suspended its membership as from January 2009 as a result of its becoming a net
importer of crude oil[ CITATION FOR10 \l 2057 ]. Ecuador also withdrew from OPEC on
December 31, 1992 [ CITATION Zyc08 \l 2057 ] as a result of unwillingness/ inability to pay
the $2 million membership fee & also felt that it needed to produce more oil than it was
allowed under the OPEC quota of 320,000barrels per day it was given (it was the second
smallest of all OPEC member nations)[ CITATION NYT10 \l 2057 ]. The country rejoined
OPEC in October 2007. Gabon also suspended membership of OPEC in January 2005.
Iraq remains a member of OPEC, but Iraqi production has not been a part of any OPEC quota
agreements since March 1998 [ CITATION Aln02 \l 2057 ].
The decision-making center of OPEC is the Conference, comprising national delegations at
the level of oil minister, which meets twice each year to decide overall oil output and thus
prices and to assign output quotas for the individual members[ CITATION OPE10 \l 2057 ].
Those quotas are upper limits on the amount of oil each member is allowed to produce. The
Conference also may meet in special sessions when deemed necessary, particularly when
downward pressure on prices becomes acute.

Roles of OPEC
The Roles of OPEC are simple and are all stated in the OPEC statutes[ CITATION OPE10 \l
2057 ] from which they would all be quoted. The roles of OPEC are as follows:

1.) Co-Ordination & Unification of Policies: According to Chapter 1, Article 2a of the

OPCE statutes, “The principal aim of the Organization shall be the co-ordination and
unification of the Petroleum policies of member countries”[ CITATION OPE10 \l
2057 ]. From this, the organization aims to synchronize petroleum laws and energy
policies of all member countries so they all are the same.
2.) Safeguarding member interests: From the second part of Chapter 1, Article 2a, the
OPEC statutes state that the organization shall determine the best means for protecting
member interests both individually & collectively.
3.) Eliminating Oil Price Fluctuations: OPEC has an objective of stabilizing oil prices,
quoting again from the statutes, Chapter 1, Article 2b, “The Organization shall devise
ways and means of ensuring the stabilization of prices in international oil markets
with a view to eliminating harmful and unnecessary fluctuations.
4.) Securing a steady income for producing nations: “Due regard shall be given at all
times to the interests of the producing nations and to the necessity of securing a steady
income to the producing countries” is what is stated Article 2c of Chapter 1 of the
OPEC statutes. This tries to ensure that all oil producing member nations of OPEC
must have a constant and sustainable income from oil producing activities
5.) Ensuring regular supply to Importers: As on one of its objectives, OPEC intends to
secure an efficient, economic and regular supply of petroleum to consuming
countries.
6.) Ensuring Return on Capital: OPEC aims to ensure a fair return on capital for all
multinationals & other investors in the Petroleum industry

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 From what is seen above, it can be seen that OPEC has to employ a delicate balancing
act in order to meet with all the above mentioned objectives. This is because there are
very thin lines when an organization is meant to satisfy all members of the supply
chain, the producer, the consumer & the investors.

Setbacks Encountered by OPEC

In analyzing the setbacks encountered by OPEC in achieving the above mentioned

objectives, we shall take each of the objectives individually & analyze them, highlighting
setbacks encountered in each of the objectives.

According to the Statistical Review of World Energy 2010, Global oil consumption
declined by 1.2 million b/d or 1.7%, the largest decline since 1982[ CITATION BPc \l 2057
].This is as a result of various factors such as the global shift in sources of energy
generation to clean fuels & other alternative energy sources,
OPEC, in order to remain relevant in a world where a lot of competition is emerging must
ensure that its objectives are met in order to improve efficiency & fully satisfy all stake-
holders involved in production, consumption & investing in the oil sector.

1.) The first point to be taken is in the co-ordination & unification of member energy
policies. OPEC expects to achieve a homogenous energy policy by doing this so
members can always speak in one voice on any external issue confronting them.
The setbacks to achieving this goal are as follows:
 Variances in the composition of member countries: An example of this is
comparing the situation in Nigeria to that of Saudi-Arabia. Nigeria has a
heterogeneous societal mix while Saudi Arabia has a mainly homogeneous
mix. As a result of this, in order to satisfy all cultural groups in existence, a
nation like Nigeria would take these multiple ethnic groups into
cognizance while formulating energy policies in other to carry everyone
along & maintain peace.
 Variance in maturity of Petroleum Industries: A few nations in OPEC have
achieved full technology transfer & taken control of their petroleum
industries while others are still struggling in this respect. This can be seen
again in the case of the Nigerian oil industry where a large percentage of
the industry is still dominated by foreigners[ CITATION Den07 \l 2057 ]. A
case like this is what makes policies such as the Nigerian Local
Development Content Bill of April, 2010 which seeks to encourage
maximum local participation in the industry[ CITATION Van10 \l 2057 ]
very necessary in such a case & unnecessary in the situation of other
member nations who might have taken up full control of their industries.
2.) The second point to be taken is the safeguarding of member interests: OPEC is
meant to lookout for the interests of its member countries with respect to global
issues. In this, OPEC is meant to stand as a united front to represent all member
countries in the event of decisions being taken by external bodies which might be
detrimental to the interests of the members of the body.

3.) Elimination in fluctuation of Oil Prices: This is one aspect where OPEC is
generally accepted to have failed in. Taking a look at the chart below,

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Figure 1 Real Average Price of Crude Oil ($2009). (Statistical Review of World Energy 2010[ CITATION BPc \l 2057 ])

This shows the variation in World oil prices from 1861 down till 2009 using the real
value of the 2009 dollar as a stabilizing factor[ CITATION BPc \l 2057 ]. This graph shows
varying spikes and dips in the prices of crude as a result of various factors. The first real
spike, after the formation of OPEC in 1960 which occurred in the year 1973 was as a
result of OPEC manipulation in October 1973 where representatives of the six Persian
Gulf states of OPEC met to raise the reference price, As a result of the fourth Arab-Israeli
War, Arab governments ordered production cutbacks and placed an embargo on oil
shipments to the United States & Netherlands for purportedly supporting the Israeli cause
in the War. This led to panic buying of oil, sending prices above the roof. In January 1974
also, OPEC raised prices of oil from over 250% per barrel & restricted output, hence
sustaining the hike in prices.
In September 1980 also, the start of the Iran-Iraq war led to another spike in prices.
From the chart above, the price of oil over time has been far from stabilized with higher
spikes and dips seen in the crude prices from 1960-2009 than in the period between 1869-
1959 before the formation of OPEC.
This shows that this objective of OPEC is obviously yet to be obtained since these price
fluctuations still occur on a regular basis.
Some factors which could be responsible for the inability of OPEC to eliminate all price
fluctuations of petroleum products are as follows:
 External factors such as wars: From Figure 1 above, closely studying the chart
shows that most times, wars occurring in various parts of the globe usually lead to
price spikes in prices of oil especially when these wars are in, or are expected to
affect oil producing nations. This is a simple reaction to the market forces of

4
 demand & supply as oil future contracts are usually priced more expensively in
expectation of shortages in supply. This behavior can be seen in the Iranian
revolution, during Iraq’s invasion of Kuwait & after the invasion of Iraq by the
United States. Other things such as crisis in the Niger Delta area of Nigeria and
the attack on the twin towers in September, 11 2001 can also lead to price
fluctuations[ CITATION Gai02 \l 2057 ]. In short, from the chart, the biggest spikes
in oil prices occurred close to times of violence.
 Price Cheating by member countries: It is an open-secret that some member
nations of OPEC cheat on quotas by selling below the market price and selling
quantities above their quota. This is a problem also as these countries claim
producing at quota would not provide enough revenue to meet their country needs.
[ CITATION Bas07 \l 2057 ].
 Seasonal Variation in Oil Demand: It has been a pattern over the years for oil
prices to slightly rise during the winter season. This is because a lot more oil
would be required by consumers for space heating. The biggest importing
countries such as the United States and other OECD (Organization for Economic
Co-Operation & Development) nations usually have severe winters at times & so
this is a reason why the heightened demand for oil reflects globally.
 Increased oil finds by non-OPEC nations: More countries outside OPEC are
producing oil and this has led to a larger pool of choice of who to buy from by
importing nations.
 Free Market Forces: In March 1985, Great Britain decided to Price its North Sea
oil at market prices rather than following the OPEC’s price structure[ CITATION
Ara \l 2057 ]. This led to pressures on OPEC to lower its posted prices.
 Incursion of Investment banks & other corporate bodies into the oil trading sector:
The marketing of commodities by Wall Street institutions has made it also a force
to reckon with in determination of oil prices[ CITATION Ver07 \l 2057 ]. The
injection of cash by passive investors such as pension funds has created a rich
financial incentive to accumulate inventories. This has led stakeholders to store
almost record amounts of oil by building new facilities. These stocks which are
being amassed have undermined the ability of OPEC to control prices.
 Increase of Inventories by Countries: When countries keep oil stocks, this can lead
to reduction in oil prices. In March 1999, Saudi Arabia led the organization in a
program to reduce consumer inventories across the globe. Between mid-1998 and
early 2001, global stocks shrunk by almost 700 million barrels. When they
implemented this policy, OPEC officials predicted that prices would rise as stocks
declined. Many doubted this, but by early 2001 prices had tripled from $10 to $30
per barrel[ CITATION Ver07 \l 2057 ].
 Economic Crises: As was in the case of the recent recession experienced globally,
consumers of oil found it necessary to cut back on expenditure & these cutbacks
affected their spending on oil which in turn leads to a reduction in demand of oil
and an inevitable drop in prices.[ CITATION Dan10 \l 2057 ]
 Internal wrangling among member nations: In December 1987, after a debate by
OPEC oil ministers to fathom out ways to arrest the price slide in crude and
OPEC’s faling market share, OPEC voted to impose production quotas in order to
quell this trend but Iraq & UAE announced that they wouldn’t comply. The Iran-
Iraq war was on course then & Iraq believed that by hiking prices, it would be
providing more funds for Iran to purchase more arms & continue fighting them.
Meanwhile, Iran kept pushing hard for production cuts and higher prices to enable

5
 it increase revenue & re-arm for the war. In time, Saudi-Arabia, also supporting
Iraq, stated that it was unwilling to reduce output enough to boost prices. This lead
to a deadlock in OPEC attempts at controlling prices.
In July 1990 also, Kuwait’s new oil minister stated that it was his goal to raise oil
prices to $18 rather than press for an immediate increase in his output quota.
President Hussein of Iraq then threatened to use force against Arab oil-exporting
nations if they refused to curb excess production. A veiled threat at OPEC & the
UAE, this was followed in one month by the invasion of Kuwait by Iraq which led
to an embargo by industrialized nations on purchases from Iraq & Kuwait. A
militant group of oil producers led by Algeria, Libya & Iran blocked an attempt by
Saudi Arabia and Venezuela to call an emergency meeting of OPEC to stabilize
soaring prices.[ CITATION Ana10 \l 2057 ]
4.) Securing a steady Income for Producing Nations: OPEC is meant to ensure that
member countries have a steady income from their oil producing activities. OPEC
attempts to do this by determining production quotas for each country and
restricting or increasing production in order to increase prices[ CITATION Eco00 \l
2057 ]. OPEC also attempts to ensure these steady prices for its member nations
by speaking in one voice against policies taken by World bodies such as the
United Nations which might be detrimental to the interests of member nations of
OPEC[ CITATION Jas01 \l 2057 ]. The Figure 2Error: Reference source not found
shows the impact of quotas enforced by OPEC on the price of oil using a simple
demand & supply curve. The setbacks encountered by OPEC in achieving this
laudable goal are as follows.
 Market Forces of
Demand & Supply:
Figure 2 Impact of OPEC quotas on equiIibrium[ CITATION Again, these forces
Ric08 \l 2057 ] would also come into
play as the demand of
crude by consuming
nations is not steady. As
with seasonal demand
mentioned above, the
consuming nations would
invariably determine the
prices of crude ultimately
regardless of price
adjustments by OPEC.
Also, as said above, the incursion by OPEC into the commodity trading
sector would also affect OPEC’s ability to control prices.
 Conflict with other objectives: This is really a recurrent issue in OPEC’s
aim to achieve its goals as the goals of the body might be at variance with
each other in some issues.
 Growing competition with alternative energy sources: OPEC over the
recent years has been facing a dilemma with the move to alternative
energy sources. Some schools of thought believe that lower oil prices
might be beneficial to OPEC as they make oil more competitive in
comparison with other fuels. In the case of the Hybrid Electric Vehicles
for instance, have a higher cost price even with government subsidies) but
less consumption so when customers intend purchasing vehicles based on
price, they would prefer buying a gasoline powered vehicle (which would
6
 bring sustained, recurrent income to OPEC) than buying a more expensive
hybrid vehicle which would cost much less in the short term. Buying by
price is a feature of the current economic condition faced globally.
[ CITATION Dan10 \l 2057 ]
 Increased Finds in other locations: OPEC's ability to control the price of
oil has diminished somewhat since then, due to the subsequent discovery
and development of large oil reserves in Alaska, the North Sea, Canada,
the Gulf of Mexico, the opening up of Russia, and market modernization.
OPEC nations still account for two-thirds of the world's oil reserves, and,
as of April 2009, 33.3% of the world's oil production, affording them
considerable control over the global market. The next largest group of
producers, members of the OECD and the Post-Soviet states produced
only 23.8% and 14.8%, respectively, of the world's total oil production. As
early as 2003, concerns that OPEC members had little excess pumping
capacity sparked speculation that their influence on crude oil prices would
begin to slip.[ CITATION AlJ09 \l 2057 ].

5.) Ensuring regular supply to Importers: OPEC is meant to ensure that all importers
of crude oil get regular supplies of oil & are not faced with shortages of oil. This
goal has not yet really been met as there are still fears of shortage though the
efforts in these areas have been commendable since variations in quotas by OPEC
attempt to cover shortfalls in supply which might be caused when there are issues
in supply from any of the member countries. Setbacks to achieving this objective
can be seen as follows:
 Conflicting needs by members: A good example of this issue is the case
when Ecuador left OPEC in 1992[ CITATION NYT10 \l 2057 ]. This was as
a result of its quota for production then being lower than what it required
for running the country.
 Conflict with interest of ensuring sustainable income to member countries:
In a situation where importing countries need larger supplies of oil but the
prices are low & continuously dropping, the council of OPEC would be
faced with a serious dilemma since increasing production would likely
lead to a further drop in pricing, hence reducing net revenue to producing
countries; also, raising the prices of the oil would require tightening
supplies which would also be at variance with the objective of ensuring
regular supply of oil to importers.
 Lack of spare capacity: In recent years, due to inabilities of member
countries to meet their quota (such as Nigeria due to factors such as
militancy & equipment vandalism) OPEC has since 2005, seen a huge
drop in spare capacity & has found it really difficult to meet supply needs
in times of heightened demand[ CITATION Ana10 \l 2057 ]. This means that
in times of energy scarcity, OPEC might be unable to meet consumer
demands which might also mean uncontrollable spikes in the price of oil.

6.) Ensuring Return on Capital: OPEC, as one of its objectives tries to ensure that all
investors in the oil sector get reasonable returns on their investments in the sector.

7
 This means all governments & multinationals involved in the industry must all
receive reasonable profits from their investments in the oil sector.
In trying to ensure this, OPEC must also ensure that oil prices are fixed at an
appreciable price. The setbacks which the body encounters in attempting to do this
are myriad and are the same as those which prevent it from controlling wild
fluctuations in price.
One factor that can prevent OPEC from achieving this objective is currency
fluctuations; For example, when the dollar falls relative to the other currencies,
OPEC-member states receive smaller revenues in other currencies for their oil,
causing substantial cuts in their purchasing power. After the introduction of the
euro, pre-invasion Iraq decided it wanted to be paid for its oil in Euros instead of
US dollars causing OPEC to consider changing its oil exchange currency to Euros,
although after Iraq's invasion, the interim government reversed this policy, and the
subsequent Iraq governments stuck to the US dollar. Member states Iran and
Venezuela have undergone similar shifts from the dollar to the Euro.

Ways of improving OPEC efficiency

After stating all the above roles of OPEC and its setbacks which must have been
encountered, we would try to suggest ways in which the organization could improve its
efficiency and get closer to achieving its goals. Our suggestions are as outlined below.
 Greater dialogue with other stakeholders in the sector: In order for decisions of OPEC
to satisfy or at least address concerns of all stakeholders across board, they or their
representatives should not only be present but they should also take an active role in
making decisions to be implemented by the body. Taking this action would ensure
that there is more satisfaction across board when any decision is taken by the body.
This would bring I more perspective into OPEC’s decision making process & avoid
some of the opposition by consuming nations or producers to OPEC decisions.
 Categorizing Member States: In order to achieve the objective of streamlining energy
policies of member states, it is obvious that with the varying socio-economic needs of
OPEC member countries, it would be a herculean task to get all member nations to be
governed by a common energy policy. In order to make this task easier, we suggest a
tier system for the member nations are grouped according to like socio-economic
needs and requirements. For instance, the countries with immature energy industries
would be grouped together while others would be put in different groups. Then a
general loosely defined policy would be defined for all nations which would be
adapted & fine-tuned for every member group of OPEC. This would ensure that while
the general principles are the same, the unique needs of all OPEC member nations
would be taken care of in the policies prescribed for each tier group in the
organization.
 Better Synergy: Apart from working together with consumers & investors, it would
also be advisable for OPEC to also work with already powerful worldwide bodies
such as the United Nations in order to allow more reach and support to be given to its
policies.
 Improve Perception in the public eyes: OPEC should make serious attempts at
improving their perception in the eyes of the public in order to gain better
understanding and achieve less resistance to policies and decisions taken by the body.
OPEC has a serious image problem in the eyes of the developed nations & other
consuming nations as a manipulator & exclusive cartel which selfishly tampers with
market forces to benefit itself at the expense of others. This was especially after Arab
members of OPEC, during the Yom Kippur War, used the “oil weapon” by

8
 implementing oil embargoes & initiating the 1973 oil crisis. There are schools of
thought suggesting even that the US Anti-Trust Law (The Sherman Act) should be
applied to OPEC[ CITATION Emm02 \l 2057 ]. Laundering the International Image of
the body would work wonders for its image around the globe.
 Increasing severity of Sanctions on Member nations (and enforcing them): The
statutes of OPEC should be modified to give it greater power over the member
countries and also to enable it effectively enforce sanctions on countries which flout
its directives. The power of “swing producers” such as Saudi Arabia should also be
clipped.

Conclusion
The success of OPEC hinges on a lot of internal and extraneous factors which might
make or mar the organization. From this study, as a result of reduction in spare capacity &
other issues, the world might be facing a serious energy crisis in the not too distant future
which would be the point where decisions would be made on developing renewable energy
sources or solving the oil debacle once and for all.
We believe that with implementation of one or more of the above suggestions, there would be
an improvement in the perception issues & other issues encountered by OPEC.

9
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