Reflecting on 50 years of Opec

12 October 2010

Since its inception in 1960, the oil producers group Opec has made a remarkable contribution to global energy security and seen its member states grow and diversify their economies exponentially

Key Opec fact

Opec member states will earn $731bn in 2010, with Saudi Arabia alone bringing in more than $150bn

Source: The US’ Energy Information Administration

On 14 September, the Organisation of Petroleum Exporting Countries (Opec), the international oil producers’ group, celebrated its 50th anniversary. In the half-century since its inception, few, if any, groups have had as transformative an effect on the economies and societies of the Middle East and North Africa (Mena) as Opec.

Opec share of world crude oil reserves, 2009
 PercentageBillion barrels
Non-Opec 20.4272.9
Source: Opec

When delegates from Iran, Iraq, Kuwait, Saudi Arabia and Venezuela met in September 1960, they hoped to wrest control of the oil produced in their countries from the so-called ‘seven sisters’, the cartel of international oil companies (IOCs) that set production levels and prices. The IOCs were also taking the lion’s share of the money generated by the oil, which was being exported largely to fuel economic growth abroad. Opec was formed to unify producing nations’ demands for greater sovereignty over their own reserves.

Economic boom for Opec countries

In the intervening years, Opec members have nationalised in-country natural resources, increased their overall production by more than 300 per cent, and seen their own economies grow and diversify exponentially. Their national oil companies (NOCs) now number among the biggest oil firms in the world.

This control has also had a financial impact on member states. When the cartel was formed, many of the Mena countries were oil-rich, but received as little as 10-20 per cent of the revenues generated by IOCs from oil production and export. In 2010, the US’ Energy Information Administration (EIA) calculates that Opec member states will earn $731bn, with Saudi Arabia alone bringing in more than $150bn during the year. At the height of the global boom in oil prices and demand in 2008, Opec’s member states earned more than $950bn from oil exports.

Opec membership 
 Year joinedAverage daily crude oil production 2009 (thousand barrels)
IranFounding member3,557
IraqFounding member2,336
KuwaitFounding member2,261
Saudi ArabiaFounding member8,184
VenezuelaFounding member2,878
Notes: Indonesia joined in 1962, but suspended its membership in 2008. Gabon was a member from 1975-1994. Ecuador suspended its membership from 1992-2007.

The revenues have funded the development of Opec member states in the region, backing projects in sectors including education, industry and real estate, which have mushroomed across the region over the past decade. Today, oil accounts for more than 40 per cent of gross domestic product (GDP) in most member states.

The organisation, which produces about 40 per cent of the world’s oil, has a significant influence over the global economy, as group decisions to increase or cut production can cause prices on open markets to rise or fall. Statements by Opec ministers or the secretary general, currently Libya’s Adalla Salem el-Badri, can add or shave off tens of dollars from the price of a barrel in extreme cases.

“Since it was created in Baghdad in 1960, Opec has made huge progress,” El-Badri tells MEED. “We have reached many important milestones in the past 50 years, despite numerous challenges, and our membership has grown [the five founding members have been joined by Algeria, Angola, Ecuador, Libya, Nigeria, Qatar and the UAE]. There is no question that the Opec member countries have achieved long-desired sovereignty over their natural resources and have been able to protect the sovereign interests of their people.”

Today, he says, the organisation is dedicated to protecting its members’ interests, keeping oil prices steady and safeguarding against future demand. “Fifty years later, Opec is even more crucial when it comes to supplying the world with oil and, in turn, supporting economic growth and stability.”

Learning curve for Opec

The road to sovereignty was not an easy one. A key part of the decision in the 1960s and 1970s to completely nationalise, or part-nationalise state oil production, saw day-to-day operations handed over to new, inexperienced NOCs, which lacked the technical or marketing expertise of the IOCs that had previously controlled the industry.

“There was, and is, a view which was perpetuated since the creation of the NOCs, that they were no good, that they wouldn’t do a good job,” says one former Kuwaiti oil executive who worked at state firm Kuwait Petroleum Corporation from the 1970s onwards. “Companies like [state producer] Kuwait Oil Company and Saudi Aramco showed them that this isn’t true. We may have had to learn along the way, as they did, but we are now in a place where we control the oil, and the IOCs come to us.”

Whereas IOCs controlled more than 70 per cent of the world’s oil reserves in 1960, today they hold just 7 per cent, with NOCs overseeing the remaining 93 per cent. Even the NOCs that did not join Opec were likely to have been spurred on by the cartel’s success, says Paul Stevens, a senior research fellow at UK think-tank Chatham House.

“The creation of Opec and its subsequent activities have been extremely important to member countries’ confidence in taking control of their own natural resources,” says Stevens. The nationalisation of the oil industry has been positive for member countries’ economies despite an initial lack of experience and ongoing concerns over management capacity. Saudi Aramco, in particular, is “as good as the best of the IOCs,” he says.

In fact, many of the NOCs that developed as part of Opec are increasingly independent, and even becoming producers abroad in their own right, meaning there is less and less dependence on IOCs for their technical expertise or marketing muscle. After years of budget surpluses due to the oil boom, most Opec members can easily afford to finance their own projects and to pay for international engineering firms to work on them where necessary.

“[Traditional thinking] was that the IOCs could bring risk capital and technology to projects, but that argument is getting thin,” says Stevens. “Then there is the idea that they are good at managing big projects, but that is also [wearing] thin. Where [IOCs] stand out at the moment is gas production, unconventional oil production, like shale oil, and deepwater production, which is under question after the BP Macondo disaster [in the US].”

One of the successes of Opec has been to reduce dependence on IOCs. Where once oil-rich states had to plead with international firms for a greater share of revenues, they now hold a much stronger hand in negotiations. After decades of tensions following the nationalisation of oil assets, relations between Opec and IOCs are now on a relatively even keel.

International and national oil companies working together

“Collaboration and co-operation between NOCs and IOCs is certainly important for our industry, particularly in exploration and enhanced oil recovery,” says El-Badri. “There is no doubt Western oil majors have the expertise to explore in unconventional techniques, such as exploration of frontier fields and deep drilling. IOCs also have the know-how and financial support to participate with NOCs together in oil operations. However, IOCs also need to recognise that oil belongs to oil-producing countries. Therefore, the only sensible way forward is to develop a real partnership, whereby both NOCs and IOCs work alongside each other and help each other meet their respective needs and those of their people.”

As the cartel’s members have reached a rapprochement with IOCs, Opec has also found a degree of acceptance among policymakers worldwide, who, in the past, viewed the organisation as a market manipulator that only wanted to push up the price of oil. When oil prices soared towards $147 a barrel in 2008, the US government, in particular, implored Opec to increase output under the quota system it uses to regulate production.

A few months later, as the global financial crisis took hold, Opec agreed to cut more than 4 million barrels a day from its total production in its biggest ever co-ordinated push to stabilise the oil market. The decision worked – prices had fallen from record highs in July to under $40 a barrel in December, but rose, settling at around $60-70 a barrel in the second half of 2009, largely thanks to Opec’s actions.

This, El-Badri says, was the cartel performing the role it had set for itself: stabilising markets, making sure that the price of oil is fair, while also being high enough to allow member countries to prepare for future demand.

“Evidently, the oil market has become increasingly confident about the policy decisions we take,” says El-Badri. “Over the years, the organisation’s understanding of the oil industry and oil markets have made us much more accomplished when it comes to forecasting. All of this helps to support better market stability, which is, of course, beneficial to our member countries, but also to the world at large. The decision Opec took in Algeria at the end of December 2008 to cut output by 4.2 million b/d is an example of this. At that time, oil prices were on a steep downward decline and had fallen dramatically from $147 a barrel to around $32 a barrel. Without Opec’s initiative, prices would have inevitably collapsed further, creating huge implications for the oil industry worldwide.” 

Opec maintaining investment

Opec is today the only organisation capable of regulating the market. “The international oil industry is a cyclical animal,” says Stevens. “Sometimes there is overcapacity, and if there is nobody there to control supply then prices can collapse.

“Opec’s role is to stabilise prices and maintain investment in the industry so future demand can be met. With inadequate investment, we will see a supply crunch in the long term, within the next 5-10 years.”

El-Badri has spent much of his term as Opec secretary general reiterating the point that if oil demand grows over the coming decade, as it is likely to do despite the crisis of 2008-2009, major producing nations will have to work hard, and invest heavily, to maintain current output and develop new production capacities. Opec member states will bring on-stream 140 new projects by the end of 2014, adding 12 million b/d of new production capacity, he says. No other organisation in the world can make such a big contribution to global energy security.

In the years ahead, the cartel’s size is likely to shrink as production declines in some member states and they cannot afford to stick to Opec’s quota system, says Stevens. But it will also have to work out how to accommodate Iraq, which is currently exempt from quotas while it rebuilds its economy. Given that Baghdad wants to produce 12 million b/d of oil by 2020, fitting the country into the current system will be tough, he says.

El-Badri remains bullish on the prospects for the cartel and the role it will play in the industry over the next 50 years.

“It is imperative that we work with others so as to have a fair and stable oil market for the benefit of producers and consumers,” he says. “I believe that a sustainable energy future is only obtainable if energy producers and consumers work together, openly and honestly. Opec’s history has been quite exceptional and I am confident our future will also be so.”

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