Analysis of OPEC’s missionary statement

The discovery of oil in 1859 (10) in combination with the first and second industrial
revolutions set the world economy to unprecedented growth, allowing both private companies
and nations to prosper. Society's limitations and costs regarding the transportation of essential
materials, assets, and people were hugely reduced but with that, the demand for
energy-generating resources grew. That resulted in a shift of power, from the Western countries
to the countries in possession of oil and coal (10). Now they were the ones, who dictated the
costs for production and the prices of the final goods and services. Having that in mind, in 1960
the creation of the Organization of the Petroleum Exporting Countries, set a new era(10) in the
oil market, uniting the biggest oil producers and centralizing the management of production by
creating a “ multinational cartel ”. The purpose of this essay is to analyze the missionary
statements of OPEC and determine whether they managed to fulfill their five promises,
examining each of them by looking from a past and present perspective and making predictions
as to what could be reasonable to be expected in the future from OPEC and the oil industry as a
whole. The five statements that are to be investigated are:
1) Coordination and unification of policies
2) Stable market
3) Regular efficient supply of oil
4) Steady income for producers
5) Return on capital for investors.

Firstly, to understand whether Opec managed to create coordination within itself, the
structure of the cartel has to be introduced. In the years following the creation of OPEC, the
organization set up its objective and established its secretariat, which was firstly located in
Geneva, but in 1965 was moved to Vienna (13) where to this day OPEC holds meetings twice a
year there (2). Those meetings are generally 6 months apart, but extraordinary meetings can also
occur(2). At those sessions “oil production quotas for OPEC member states ….. are set” (2),
with a goal of maximizing profits, but also limiting competition within the member states. One
important aspect of the organization is that each country has full sovereignty over its natural
resources, according to the Declaratory Statement of Petroleum Policy in Member Countries
from 1968 (3). Achieving consensus, however, rarely happens, due to many political and
economical factors. For example, from 1993 till 2005, total OPEC production exceeded the sum
of its member production quotas by an average of 6,7% (4). In conclusion, OPEC semi-achieves
this statement, even though there are examples when the decisions made were disregarded.
OPEC was created in 1960, due to the events that happened in the previous decade,
which could be summarised in this sentence: “The petroleum industry during 1959 was
characterized by one dominant theme - overcapacity to produce” (Mayhew, 1961). The
overproduction of oil led to 2 major oil shocks, which drastically reduced the prices of oil. To
avoid a possible third shock, Saudi Arabia, Iran, Iraq, Kuwait, and Venezuela founded OPEC.
Throughout the years, other countries joined and this increased their overall crude oil reserve to
80% and supply share to 40% as of today. In the 1970s, OPEC produced 57% of the crude oil. In
1973 the war between Israel and a coalition of the Arab countries, which were led by Egypt and
Syria showed the dark side of OPEC. At that time the US had a problem meeting its oil needs
and had to import oil from OPEC. But since most western countries including the USA
supported Israel, and most Arab countries supported Egypt, OPEC decided to restrict the export
to those countries, creating shortages and raising the price of oil from $3 a barrel to $12 (2). On
the other hand, the Iran-Iraq War (1980-1988) resulted in the total collapse of oil production
from Iran, which OPEC countries compensated for (3), to keep the prices stable. The collapse of
the USSR in 1989 disrupted the oil production, for which OPEC yet again helped to stabilize the
market. The first Gulf was a war between the United States and 35 other nation forces and Iraq in
response to Iraq’s invasion and annexation of Kuwait. All those examples prove OPEC’s
monopolistic characteristics, as they could easily reverse conditions and either bring stability or
chaos. To sum it up, they were able to adapt quickly to changes, although they sometimes
“abused” their power.
For the third statement, it is best to look at the period from the 1960s to the 1980s. From
the 1960s till 1973 the annual growth rate of OPEC production raised by 10% annually(7) which
was unsustainable in the long run One unintended outcome of the 1973 war, was that, due to the
shortage created by OPEC, many western countries and the USA had to make “significant costs
speed limits and energy regulations”(7). The trend continued in the 1980s with the replacement
of oil with other fuel sources such as coal, nuclear power, and natural gas for the production of
electricity(3). This consequence reduced the demand for oil, and thus OPEC had to lower
production to keep reserves last longer as well as prices from dropping. The post-war decision is
indeed in line with their third
missionary statement. Though
one aspect that should not be
overlooked is the shortage
created by OPEC in the
Yom-Kippur War in 1973. This
means that they fulfill their
promise of creating more
efficient and economical use of
oil but when political tensions
rise, they could use their power
to tilt the scales in one direction

Due to the lack of statistical data available on the Internet regarding any information
connected with revenue reports from the countries in OPEC from the past, this paper will analyze
both the 4th and 5th statements based on graphs one and two and observe correlations between
them. Because most countries within OPEC (Eight out of thirteen (9)) have nationalized their
reserves, changes in the amount of oil exported will cause changes in the GDP growth as well. In
graph one, both Saudi Arabia and Iran have nationalized their oil reserves, and are among the
biggest possessors and
exporters of oil within the
organization as can be seen
from the coloring in graph 2.
There are clear similarities in
terms of the way GDP moved
as a result of changes in the
number of exportation barrels,
which indicates that as long as
they manage to keep the
market stable and demand
high, there would be a steady
income for producers and
return on investment for
investors.

Graph 1 GDP (constant 2015 US$) - Saudi Arabia, Iran (11)

https://data.worldbank.org/indicator/NY.GDP.MKTP.KD?end=1990&locations=SA-IR&start=1960
Graph 2 OPEC Annual Statistical Bulletin(12)
https://www.opec.org/opec_web/static_files_project/media/downloads/publications/ASB_2019.pdf

Throughout the 21st century, technological progress had steadily increased the
productivity, and scaleability of factories, including the oil industry, and even though that meant
fewer resources/fuels needed for the creation of products, the demand for oil increased. OPEC
had increased in size and as of today, there are 13 countries that are part of OPEC - Algeria,
Angola, Congo, Ecuador, Equatorial Guinea, Gabon, IR Iran, Iraq, Kuwait, Libya, Nigeria,
Qatar, Saudi Arabia, United Arab Emirates, and Venezuela (1). The increase in demand, with the
even more complex structure of OPEC, led to strained relationships within the member states,
especially when determining the quotas for each country.
Recent geopolitical rivalry between member countries Saudi Arabia and Iran for
influence over the Middle East have raised questions about the unity within OPEC (14). In 2014,
when oil prices crashed, Saudi Arabia managed to pressure OPEC to keep supplying the market
with large quantities of oil (14). The Saudi interest was twofold: to increase its own market share
to gain more power in OPEC and keep oil prices low in order to hurt Iran’s economy. Saudi
Arabia had viewed Iran as a regional adversary with Iran supporting opposite religious groups
linked to Shia Islam in the Yemen and Syrian civil wars. Fears of Iran’s development of nuclear
weapons were another reason to slow down its economy (14). More recently, since the post
Covid recovery, OPEC members have been able to stick to a common policy of moderate output
increases, despite higher demand leading to high prices (15). It is also expected that member
state ministers will agree in March to continue planned increases of four hundred thousand
barrels per day (15) which indicates an improvement in the coordination and unification of
policies after the 2014 conflict.
According to academic research done by the international association for energy
economics, OPEC’s mission to stabilize markets by managing its spare capacity decreased price
volatility by 25% based on data analyzed from 2001-to 2014 (16). This also contributes to a
healthier, sustained world GDP growth. The Corona Pandemic hit the oil industry hard, enforced
lockdowns and a drastic slowdown in economic activity leading to a drop in demand. The oil
produced created such a surplus, that its price turned negative for a short while due to excess
supply. Excess supply meant that companies with oil storage had to instead pay buyers to get rid
of their excess inventory as oil production could not be completely halted, with storage being
limited in the short term (16). It has been argued that Saudi Arabia had disagreed with the
proposed production cuts that Russia wanted, instead of increasing from 9.7 million barrels per
day to 12 million barrels
per day (17). This act by
Saudi Arabia led to a drop
of 50% in the prices of
crude oil and the recovery
from the damage dealt to
the industry can still be
seen (17) which contradicts
their statement of bringing
stability, yet due to their
presence and relatively
good coordination within
the organization, they make
the market less volatile.

Graph 3 -US Energy information administration

https://www.eia.gov/todayinenergy/detail.php?id=48376

Although it was mentioned further above that OPEC members were likely to agree in
March to continue planned increases of extra four hundred thousand barrels per day, the IEA
(international energy agency) stated that OPEC is not hitting its monthly target. This has resulted
in a bigger gap between actual output and the targeted daily output of nine hundred thousand
barrels per day (18). The US has pressured OPEC to further increase production as current high
fuel prices (oil reached almost 100usd/barrel) add even more fire to inflation and threaten to post
Covid economic recovery (18). Such levels of prices are not economical for customers resulting
in additional adverse effects feeding inflation with many products in everyday life being affected
by rising prices. Especially in 2022 with the Russian-Ukraine war, the world waiting to see
OPEC’s response to the inflation.
Oil export revenues have followed a declining trend since their peaks around 2010 (19).
With the 43% revenue plunge in 2020 due to Covid, OPEC countries have acted more cautiously
to recover from this loss. This is perhaps linked to previous statements where OPEC has been
criticized for not adding enough supply in order to maintain consistently higher prices for a while
until they can recover from their lost revenues.
Recent earnings results of oil-producing companies in the stock market have been beating
expectations with Shell, for example reporting a 94% revenue gain compared to the first quarter
of 2021 (20). Revenues were only expected to rise 52%. ConocoPhillips' earnings beat
expectations and rose from 2.19 to 2.27 dollars per share (20) (an increase of 3.5%), as well as
revenue almost doubled compared to last year. This is a beneficial side effect of OPEC's current
strategy of not increasing supply enough in order to keep prices high and satisfy shareholders
who invested in the oil companies. During the Covid pandemic, there was much debate about the
economic decline of oil companies. But the recent recovery after Covid has shown once again
how dependent on oil the world economy is, with oil companies still playing an important role.

The future of the cartel should be seen from a short-term and long-term perspective.
Firstly, the disruption of the economy due to Covid resulted in many countries entering
recessions and crises. Venezuela, being the country with the largest oil supplies is no
exception(21). The post-corona recovery plan of cutting oil production contributed to the
weakening of Venezuela's economy. And with the ongoing war, it is unknown, how it will react
and could it possibly exit the cartel in order to drastically increase production and escape the
recession. This puts a question regarding the cohesion of the organization and its future both in
the short and long run.
OPEC throughout the years has shown that its presence in the oil industry influenced it
positively, by making it less volatile and thus making it more appealing to firms to use oil as
their main source of energy. In the near future, this is still expected to be the case, as most
companies heavily rely on energy extracted from oil, coal, and natural gas to keep their
production costs low. The long-run perspective on the other hand is for the worse. With many
new policies and directives from countries within and outside of the European Union for the
reduction of CO2 emissions (25) and the green movement, many doubt that OPEC would still be
relevant at the world's table in the long run. Especially the embargo on Russian oil stimulated the
transition to renewables even more.
It is estimated that oil reserves have about 47 years left (22). At the current usage rate,
prices have risen 70% from February 2021 to February 2022, at a much faster rate than inflation,
which could be explained partly due to the Corona shock. OPEC’s initial strategy to keep the
prices steadily rising (22) may change in hopes of potentially increasing the expected
life-duration of their reserves by producing less and selling at a higher price. This, however, is a
short-term solution, even though not economical, nor efficient. In the long run, due to the
ongoing trend of making renewable energy sources, cheaper, more durable, and easy to produce,
would eventually replace the demand for oil.
In terms of income for producers and return on investments, in the short-run, it is thought
to become very profitable by many investors (24). As mentioned above, OPEC has the biggest
crude-oil supply ( estimated at 80% of the world's supply) and is accounted for 40% of the crude
oil export, which gives them the possibility to influence the market, though uneconomically, in a
way to match their business targets and expected profits in the short run. In the long run, OPEC
members should, like the rest of the world, look for renewable alternatives to avoid economic
crises, once the profits from oil exports decrease substantially.

OPEC’s missionary statement consists of 5 simple and straightforward, yet crucial rules,
that if fulfilled, would bring stability and prosperity to the world’s economy. That, however, as
mentioned several times above, was not always the case, and from all of the information
presented, the conclusion is, that OPEC semi-succeeded in accomplishing its goals both from a
past and present perspective. The future, however, as it is highly speculative, is up to the reader
to make up his mind and take a side using the information provided.
References:
1) https://www.jodidata.org/about-jodi/partners/opec.aspx Organization Of The Petroleum
Exporting Countries (OPEC)

2) https://www.ig.com/en/financial-events/opec-meeting#:~:text=The%20OPEC%20meetin
g%20is%20a,of%20its%2013%20member%20countries OPEC meeting

3) Lyndon G., Celeste Pomerantz, Jason Donev

https://energyeducation.ca/encyclopedia/OPEC_(brief_history) OPEC (brief history)
September 17, 2016

4) Hamed Ghoddusi Masoud Nili Mahdi Rastad

https://www.econ.cam.ac.uk/people-files/faculty/km418/IIEA/IIEA_2018_Conference/Pa
pers/Ghoddusi_On%20Quota%20Violations%20of%20OPEC%20Members.pdf On
Quota Violations of OPEC Members (2018)

5) Odell, P, R., 1963. An Economic Geography of Oil. Edinburgh: Neill & Co. Ltd

6) Mayhew, Z., 1961. A Review of Foreign Oil Producers. Journal of Petroleum

Technology. pg 322.

7) https://sites.google.com/site/globaloilproduction12/1950-s-oil-production The History of

Global Oil Production

8) https://www.opec.org/opec_web/en/data_graphs/330.htm Opec share of crude oil reserve

(2019)

9) https://en.wikipedia.org/wiki/Nationalization_of_oil_supplies#OPEC_countries
Nationalization of oil supplies

10) https://ektinteractive.com/history-of-oil/ History of Oil

11) Graph 1
https://data.worldbank.org/indicator/NY.GDP.MKTP.KD?end=1990&locations=SA-IR&s
tart=1960 GDP (constant 2015 US$) - Saudi Arabia, Iran, Islamic Rep

12) Graph 2
https://www.opec.org/opec_web/static_files_project/media/downloads/publications/ASB
_2019.pdf OPEC Annual Statistical Bulletin (2019)
13) https://www.opec.org/opec_web/en/about_us/24.htm Brief History

14) Anshu Siripurapu, Andrew Chatzky

https://www.cfr.org/backgrounder/opec-changing-world OPEC in a Changing World
(2022)
15) Ahmad Ghaddar, Olesya Astakhova, Alex Lawler
https://www.reuters.com/business/energy/opec-technical-committee-trims-2022-oil-surpl
us-forecast-2022-02-01/ OPEC+ seen sticking to policy despite oil price rally -sources
(2022)

16) Axel Pierru, James L. Smith, Hossa Almutairi https://www.iaee.org/eeep/article/328

OPEC’s Pursuit of Market Stability

17) Sarah Ladislaw https://www.csis.org/analysis/end-opec-or-new-beginning The End of

OPEC or a New Beginning? (March 30, 2020)

18) Ahmad Ghaddar, Olesya Astakhova, Alex Lawler

https://www.reuters.com/business/energy/opec-technical-committee-trims-2022-oil-surpl
us-forecast-2022-02-01/ OPEC+ seen sticking to policy despite oil price rally -sources
(2022)
19) N. Sönnichsen, https://www.statista.com/statistics/223241/opec-net-oil-export-revenue/
OPEC (ex. Iran) net oil export revenue from 2005 to 2019, with a forecast to 2020 and
2021 (Apr 8, 2022)

20) GILLIAN RICH

https://www.investors.com/news/oil-prices-opec-meeting-oil-stock-earnings/ Shell,
ConocoPhillips Earnings Top Views, Amid 'Monumentally Bullish Shift' For Oil Prices (
March 2, /2022)

21) Amelia Cheatham, Diana Roy, Rocio Cara Labrador

https://www.cfr.org/backgrounder/venezuela-crisis Venezuela: The Rise and Fall of a
Petrostate (December 29, 2021)

22) https://www.worldometers.info/oil/#:~:text=World%20Oil%20Reserves&text=The%20w
orld%20
has%20proven%20reserves,levels%20and%20excluding%20unproven%20reserves
worldometer

23) Ivaylo Iliev

https://docs.google.com/document/d/18UkcMdy5Ec-Bll97nmFdDGwJkj2SrKLMoankkm
g2kLY/edit (December 15, 2021)

24) https://www.marketwatch.com/investing/future/crude%20oil%20-%20electronic Crude

Oil WTI (NYM $/bbl) Front Month (2022)
25) Nick Carey ,Christoph Steitz
https://www.reuters.com/business/retail-consumer/eu-proposes-effective-ban-new-fossil-f
uel-car-sales-2035-2021-07-14/ EU proposes effective ban for new fossil-fuel cars from
2035 (July 14, 2021)