Organization of the Petroleum Exporting Countries

Question: Recent decline in the global oil prices has shown the overarching influence and impact of OPEC member states collective energy policies on the global energy security vis--vis both the oil industry and national economies. Critically discuss different policy measures that Non OPEC member states can take to mitigate the impact of OPECs current trend as an international oil producer cartel? Answer: 1. Introduction 1.1 OPEC The Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental organization which was founded at the Baghdad Conference on 10th to 14th of September 1960. It was formed initially by Iraq, Iran, Kuwait, Venezuela and Saudi Arabia (Aalto, 2015). They were later on joined by nine more members like Qatar in 1961, Indonesia in 1962, Libya in 1962, UAE in 1967, Algeria in 1969, Nigeria in 1971, Ecuador in 1973, Angola in 2007 and Gabon from 1975-1994. However, the membership of Indonesia was suspended from January 2009, and that of Ecuador from December 1992 to October 2007. The headquarters of OPEC was in Geneva, Switzerland during the first five years of its operations. On 1st of September 1965, it was moved to Vienna in Austria (Blanchet, 2015).The primary objective of OPEC is to bring in co-ordination and unification in the petroleum policies among the member countries. In this way the organization can keep the prices for the petroleum producing countries fair and stable. By controlling the petroleum producing nations, it can ensure efficient, uninterrupted supply of petroleum to the countries who import these petroleum products. The organization also looks after the interests of the investors who invest in this industry. It ensures a Return of Capital (ROC) to the stakeholders that is fair and just. The leadership team includes Mr. Diezani Alison-Madueke, who is the President and Mr. Abdallah el-Badri, who is the Secretary General of the organization (Carvajal et al. 2013). Figure 1: The office of the OPEC (Source: nationofchange.org, 2014) 1.2 Non OPEC The Non OPEC producers consist of all the countries in the world which produce petroleum products but are not members of the OPEC. There are around 30 Non OPEC countries in the world which deserve special mention on the basis of production (Serrano et al. 2013). These are as Russia, US, China, Mexico, Canada, Norway, Brazil, Kazakhstan, UK, Azerbaijan, Indonesia, Oman, India, Colombia, Argentina, Malaysia, Egypt, Australia, Sudan, Syria, Equatorial Guinea, Yemen, Vietnam, Congo Brazzaville, Denmark, Gabon, Brunei, Trinidad Tobago and Tunisia. It may be noted that 60 percent of the worlds oil production comes from the Non OPEC countries. They face various problems related to production. It has been observed by the experts that the Non OPEC countries have primitive wells which are less productive. They also have to face rising costs for the upcoming projects. They also face higher demands at their domestic market that leads to decrease in exports. The rising prices have made the tough oil projects more attractive which has led to increase in unconventional production of oil but that may also change. Fall in Non OPEC production occurs when investment becomes difficult in new petroleum production as a result of the credit markets becoming tight, volatility of oil prices and nationalism of resources (Chang et al. 2013).The National Petroleum Council has conducted a study in 2007 which shows that the international oil market is in the threshold of a time where the demand is increasing while the supplies remain limited. According to the Energy Information Agency of the US Energy Department, out of the fifteen of the leading oil producers of the world, seven are outside of the OPEC (Creti et al. 2015). Figure 2: OPEC and Non OPEC oil supply comparison (Source: therationalpessimist.com, 2015) 2. The policies adopted by the Non OPEC countries to reduce monopoly of the OPEC countries The Non OPEC countries have for long been just at the mercy of the OPEC countries. All the oil issues relating to the petroleum production across the globe are regulated by the OPEC members. The Non OPECs have to follow the guidelines and norms set by the monopoly organization. Since the last few years, the production of crude oil by the Non OPEC countries is increasing substantially. The actual output has beaten the estimates (Nguyen et al. 2015).In the fourth quarter of 2014 the output from the outside countries outnumbered the budgeted figures. To compete with the OPEC countries, the Non OPECs have significantly increased their production. They have given special focus to improve their old-fashioned wells and other limitation of resources and labor. Presently, the Non OPEC growth in oil supply is somewhere around 2.04 million barrels per day. In 2015, the Non OPEC growth is expected to be around 0.85 million barrels per day (Frisari et al. 2015). This can put pressure on the carte l. This strategy has helped the Non OPEC to increase the production average to 56.33 million barrels per day in 2014. As per the monthly oil market report of the OPEC, in 2015, the Non OPEC oil supply is estimated at an average of 57.16 million barrels per day which indicates a growth of 0.85 million barrels per day. This strategy of production and marketing will help the Non OPEC countries to keep a check on prices by maintaining a steady supply (Stadelmann et al. 2015). The projections show a rise of 18% in total oil production worldwide from the Non OPECs from the year 2002 to 2025. Russia, Africa and the Caspian region are mention worthy in this regard. But it accounts for a 30% shortage in the projected demand. What these non OPEC countries should do in order to counter the eternal autonomy of the cartel may be discussed under the following heads: 2.1 To counter the authoritative strategies of the OPEC One of the leading OPEC countries, Saudi Arabia, is demanding that the non OPEC countries should cut down on their oil production. The Saudi Arabian Minister of Oil, Mr. Ali al-Naimi, has maintained that the organizations outside the OPEC will have to decrease their production. This shows the pride of the OPEC countries in their own thought process and they are keen to protect their own interest ahead of all the other petroleum producing nations of the world. The Non OPEC countries should show more determination in countering them. There should be more open discussions at the international level about this issue (Greening, 2014). 2.2 To oppose the global market oil price plummet effected by the OPEC Saudi Arabia has made a clear stand that it will not decrease the crude oil production under any circumstance, rather it will keep the prices low (Jotzo et al. 2014). The oil minister of Saudi Arabia is trying to influence the Non OPEC producers to cut down on their production instead. This will ensure the supremacy of the OPEC nations in the global oil market. It is quite evident that the OPEC nations do not want any other countries outside its boundary to gain supremacy as oil producer in the world (Mulder et al. 2013).The US has been one of the leading oil producers outside the OPEC nation. The famous Shale Oil of the US is providing a tough competition to the OPECs. Canada is also the other leading producer of petroleum. All these countries are cause of concern for Saudi Arabia and the other OPEC countries. This is a good sign for the Non OPEC producers. They are slowly beginning to impact the global oil market (Bristow et al. 2015). 2.3 The advantages of the OPEC countries in terms of resources The OPEC organizations have huge resources of petroleum. They are much bigger and precious than the reserves of the non-conventional oil producers (Sander, 2013).These reserves have much developed facilities and infrastructure. These advantages allow the countries like Saudi Arabia to keep the oil prices low without decreasing production. But for the other countries which are outside the OPEC, this luxury is not available. This is because they do not have such big reserves of petroleum. Hence they cannot dictate terms in the global oil market. The remedy is to invest more to develop the wells and resources and look out for new areas of drilling which will increase the resources and in turn there will be more production and supply. Then the unconventional producers will slowly dictate prices in the market and prove to be a tough challenge for the OPECs (Stern, 2014). 2.4 Search for new resources and drilling sites The Non OPEC producers should conduct an extensive research work on the availability of new resources within their respective countries. As the old resources of petroleum get depleted, there should always be new resources which will ensure the continuity in oil production over decades. Hence the governments of the countries should make significant investment in this regard and look out for new drilling sites. Many countries have found resources in unknown locations which were never explored before. They should invest on better drilling equipments and on skilled manpower (Snowden et al. 2013). 2.5 Reduce the cost of oil production In the words of Al-Naimi, the market share of North America in oil production will decrease by 2015. This he accounted to the high production costs of oil in North America. This will reduce the abundance of supply in the oil market as the demand for oil at such a high price will be less. This will hamper the export from North America and boost export from the OPEC countries which have kept the oil prices at a comparatively lower level. Thus, the unconventional oil producers should aim at reducing the oil prices to the extent possible in order to compete with OPEC producers, otherwise they will continue to gain upper hand (Zhang et al. 2014). 2.6 Building a better relationship with the OPECs The Non OPECs should strive to build a better and friendlier relationship with the OPECs. For the sake of success, sometimes it is required to make friendship with the rivals. This will help to create better understanding and a relatively warmth in between the OPECs and Non OPECs. This will also ensure a relatively smooth place for sharing dialogues and ideas. This requires the unconventional producers to be more prudent and smart in forming various relationship strategies. There should be a healthy competition between the two parties. This will create a more acceptance in the mind of the OPEC producers for the Non OPECs and may bring about a positive change in the global oil market. A hand in hand planning and action for the development of petroleum industry around the world will ultimately benefit the nations. This might even create more opportunities for sustainable development and even many innovations (Sohail, 2015). 3. Conclusion It is very evident that currently the oil market is dominated by the OPECs. They are the leaders in global oil production and supply. They formulate all the policies and strategies relating to petroleum production. They have kept the Non OPECs under their supremacy. But this single dominance by the powerful needs to be diminished a little in order to show them that there are other nations also, who can be a challenge for them. For this reason some policies need to be formulated by the unconventional oil producers hand in hand. They have for long remained under the shadow of the powerful. It is now their time to show the world their mettle and capabilities in the oil industry. This will create a healthy competition in the global oil market. 4. Recommendations The Non OPECs shall be very brave to deal with the eternal leaders of the oil market. If the strategies formed are implemented and reviewed from time to time, then a day will come when the OPECs will start to consider them as a potent competitor and treat them with due respect. It is said in history that every empire falls one day and who knows, this eternal high-headedness and pride of the OPEC nations might be challenged by the minnows in recent future. 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