Established in 1960, the Organisation of Petroleum Exporting Countries (OPEC) celebrated its 50th anniversary in September this year. No mean feat for an organisation that was initially founded by a group of disparate developing nations in a bid to avoid the perceived exploitation of their hydrocarbon assets by the world’s then leading industrialised powers. With its mission statement to ‘ensure the stabilisation of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers’, it is clear that OPEC has been fulfilling these objectives with some alacrity over recent years. Perhaps most notable was its considerable show of strength and unity in December 2008 when the cartel cut production by 4.2 million bpd in a bid to lift oil prices from where they were languishing at less than US$ 35 following their dramatic fall from a high of just below US$ 150 earlier the same year. This endeavour not only succeeded in doubling prices but also, largely through the determination of Saudi Arabia who has continued to withhold 4 million bpd of production, has kept prices at or around OPEC’s ‘preferred level’. Indeed, since January this year, oil has traded at between US$ 70 - 85 for 95% of the year.
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On the face of it, OPEC’s position of power and influence is undeniable. The organisation not only supplies approximately a third of the world’s daily crude but controls 80% of total worldwide oil reserves, 1000 billion bbls to the 273 billion bbls controlled by non-OPEC nations. In the years ahead OPEC’s control of the market will surely increase further as production outside the cartel peaks and then declines as oil producing regions such as the North Sea mature. It is predicted that the 12 OPEC nations will supply as much as 50% of the world’s daily crude usage by 2025.
However, there are no certainties in the energy industry and OPEC is not without its challenges if it is to maintain its dominance. Just this week, Saudi Arabia’s oil minister Ali Naimi, who has fiercely guarded the OPEC ‘preferred level’ of pricing in the US$ 70 - 80/bbl range for the past couple of years has announced that he now believes that a US$ 70 - 90 range is ‘comfortable’ for consumers. Much of this rise is down to the dollar’s recent decline but with the benchmark West Texas Intermediate (WTI) crude trading at US$ 87 at the time of writing, oil prices are certainly in the ascendancy and look set to test the new US$ 90 barrier within a matter of days.
For OPEC, a rising oil price is a genuine dilemma. The rationale behind a ‘preferred level’ is sound. Its aim is to provide a pricing structure that is comfortable for both producer and consumer. If oil prices are allowed to rise unfettered, this will inevitably speed up the development of alternatives to oil. Demand in North America and Europe is largely flat and that is set to continue but it is growing across Asia and the Middle East. If demand was to tail off in these developing economies as they moved to adopt alternative energy sources then the impact on OPEC’s future growth could be severe. However, in order to maintain prices within its desired range, OPEC relies on compliance from its members. In the past this record has not been good with some member countries seemingly ignoring quotas.
The next 50 years will undoubtedly be interesting for the oil industry as a whole. With 80% of the world’s oil reserves, OPEC’s global influence would appear assured. However, whether it is entering a ‘golden era’ remains to be seen. Its greatest and long term weakness is its reliance on fossil fuels being the energy of choice for the world’s economy. Any change in this dynamic, even relatively small in the short term, will surely impact the organisation’s longer term ambitions. Now perhaps more than at any other time in its history should the organisation hold to its mission statement and strive for the ‘stabilisation of oil markets’.