Q+A: OPEC at 50 and the next 50 years

VIENNA (BestGrowthStock) – OPEC on September 14 marks 50 years of existence.

In its early years in the 1960s, the Organization of the Petroleum Exporting Countries had little price impact.

That changed with the Arab-Israeli War of 1973 and an Arab oil embargo, which oil producers said was in response to the U.S. decision to supply the Israeli military.

The group’s fame was cemented under the charismatic leadership of Saudi Oil Minister Sheikh Ahmed Zaki Yamani, who was in office from 1962 until his summary dismissal in 1986.

Since then, OPEC’s power has ebbed and flowed. The following questions the scope of its future influence.

CAN OPEC CONTINUE TO INFLUENCE WORLD MARKETS?

OPEC sits on around three quarters of the world’s proven reserves, according to sometimes disputed figures from its Annual Statistical Bulletin.

Its members largely deny international oil companies access, leaving the majors obliged to invest in very expensive oil, such as that beneath deepwater, in tar sands and in the Arctic.

“The fact that the world is using up its most expensive crude before it uses up its cheapest oil shows that OPEC is effective,” said Lawrence Eagles of JP Morgan.

A former senior official at Saudi state oil firm Saudi Aramco Sadad al-Husseini argued OPEC was a force for moderation.

It has, he said, demonstrated the need for a lower limit to prices to ensure investment in new supplies and to allow the group’s biggest producers to invest in idle capacity, which can be released on to the market when necessary.

“They are working as the only regulator in the industry today,” said Sadad al-Husseini. “They have shown that they are not trying to gouge the world.”

OPEC has matured and can become still more important, he argued. “I think the OPEC group has finally proven its very important role in the oil industry. It used to be totally chaotic,” he said.

“Going forward, OPEC is going to be more critical because reserves in the world are becoming more restricted to OPEC countries and by that we mean the Gulf countries, including Iran.”

HOW EFFECTIVE HAS IT BEEN IN CONTROLLING THE PRICE?

After exerting strong influence in the 1970s, OPEC’s effectiveness waned during the Asian crisis of the 80s and again in the late 90s.

During the latest recession, OPEC showed great resolution in agreeing a record output cut and then ensuring unprecedented levels of output discipline. That helped to drive the price back up from a low of $32.40 in December 2008 to the roughly $70-$80 price range it has suggested is appropriate for producers and consumers.

“The limits of its influence tend to get highlighted during recession. It took them 18 years to revive prices after the 1986 price collapse, but just a few months during the 2009 recession,” said Eagles.

OPEC’s role is curtailed by any growth in non-OPEC production. In the near term, non-OPEC production is expected to grow, reducing demand for OPEC crude, but over the longer term, forecasters anticipate OPEC’s share of the market will increase.

IS ALTERNATIVE ENERGY A THREAT TO OPEC?

Al-Husseini argued alternative energy was a necessary complement to fossil fuels.

“It’s not that alternatives are a problem, alternatives are a necessary solution to supply weakness,” he said.

For Eagles, OPEC’s power will endure for as long as cars run on oil products.

“The one thing that would simply destroy OPEC would be the widespread uptake of electronic vehicles,” he said.

“OPEC has influence because oil demand is inelastic.”

IS IT A CARTEL?

OPEC members prefer to consider themselves a producer group, which happens to control more than one third of the world’s daily oil output.

Many analysts and economists say OPEC is a cartel in that the group restricts supply in order to influence the price.

They also say it faces the classic cartel problem of difficulties in persuading its members to comply with agreed curbs and only steep price slides succeed in enforcing discipline.

Where it differs from many cartels is that it has one producer — Saudi Arabia — that is much larger than the others, enabling it alone to add or subtract supply depending on the state of the oil market and the oil price.

From the early 1970s to the mid 1980s, OPEC set crude prices. More recently, it has often steered clear of specific price discussion.

On its website, OPEC says member nations “voluntarily restrain their crude oil production to stabilize the oil market and avoid severe price fluctuations,” which it says is very different to price setting.

CAN THE GROUP MAINTAIN UNITY AS IRAQ ISSUE LOOMS?

Conflict of interests can hamper consensus within the group and reduce levels of compliance with agreed curbs.

Saudi Arabia tends to be a U.S. ally and a price moderate.

U.S. foes Iran and Venezuela have large populations, large spending plans and rely heavily on oil exports for funding.

They tend to favor higher prices, but to leave the work of compliance to other members of the group as they maximize their own output to try to maximize revenue in the immediate term.

Iraq has long been excluded from output targets because of the damage to its infrastructure of years of conflict.

Iraqi Oil Minister Hussain al-Shahristani said in June the right time to discuss an output quota for Iraq would be in three years once the country’s production has reached 4 million bpd from roughly 2.5 million bpd now.

Any recalculation of targets would be very complex.

Output targets are calculated partly on the basis of oil reserves.

Iraq has slightly smaller oil reserves than neighbor Iran, which has a production limit of 3.34 million bpd, so Iraq’s target might be similar.

However, Iraq has signed contracts with foreign companies to increase its production capacity to 12 million bpd in six-to-seven years’ time. That would place the country a close second to Saudi Arabia, which has an output capacity of 12.5 million bpd.

Iraq’s drive to expand will need to be balanced against the production of other OPEC members and the group may have to deal with the dissatisfaction of some member countries, such as Angola and Nigeria.

Angola, which has also experienced years of civil war, has repeatedly asked to be excused from output targets and has produced well above its implied ceiling.

Apart from the need for revenue for itself, Angola, together with Nigeria, has partnerships with foreign operators that want to maximize output to ensure swift returns and dislike OPEC production curbs.

Nigeria is also hoping for an adjustment to its output limit, which it has said was set when militant attacks on oil facilities in the Niger Delta reduced its production capacity.

All these simmering differences can probably be contained for as long as prices remain in a range broadly acceptable for all members of OPEC, even if they are more acceptable for some than others. (Reporting by Barbara Lewis and Alice Baghdjian; editing by James Jukwey)

Q+A: OPEC at 50 and the next 50 years