The Intergovernmental Organization of Petroleum Exporting Countries (OPEC), created on September 14, 1960 at the Baghdad Conference by Iraq, Iran, Kuwait, Saudi Arabia and Venezuela, 60 years later, is facing new global challenges that require it to be flexible, able to quickly assess situations and make forecasts.
It is noteworthy that of the indicated 5 “founding fathers” of the Alliance, two of the richest in oil countries – Venezuela and Iran with proven reserves of “black gold” of 300 billion barrels and 160-200 billion barrels, respectively, are in crisis due to the effect of international sanctions initiated USA.
Due to the US sanctions aimed at removing Nicolas Maduro from power in Venezuela (elected in 2018), oil exports by this country fell to 200-400 thousand barrels per day – the lowest level in 80 years, and it is mainly carried out according to the scheme “Oil in exchange for diesel fuel”, according to which, under special permits from the US Treasury, oil from Venezuela can be bought by, for example, Italian Eni, Spanish Repsol, Indian Reliance Industries, Thai Tipco for their refineries.
The Russian Federation and Iran tried to circumvent these sanctions, but such attempts are thwarted by the current US leadership in order to prevent the administration of the unwanted Madura from enriching themselves at the expense of the main resource – oil and pushing it to resign.
The Donald Trump administration also initiated sanctions against Iran in 2018, considering it an accomplice of international terrorism and a nuclear weapons developer, although the former head of the White House, Barack Obama, in 2015, together with other world powers, concluded a deal with Iran on a Joint Comprehensive Action Plan, which allowed the country after almost a decade export their oil.
OPEC statistics show that Iran’s oil production has halved since 2018 – to 1.9 million barrelsper day, and the average export rate for 2 years of new sanctions fell 9 times – to 287 thousand bpd (data for January-August 2020 of the year).
China and Syria are the only countries openly buying Iranian oil. Iran is trying to send fuel to Venezuela, Malaysia, Indonesia, but such operations are at risk.
On September 13, the Iranian President said that Iran’s revenue from oil sales in 2011 was $ 120 billion, but by 2019-20 it had decreased to $ 18-20 billion. The Iranian Statistical Center admitted that the factor of the decline in oil production and exports is reflected in the decline in the republic’s GDP.
Iraq is one of the most important global players in the oil market, because its proven reserves of “black gold” are estimated at 153 billion barrels (8-9% of world oil reserves) and Iraq is second only to Venezuela, Saudi Arabia, Iran and Canada in terms of oil reserves.
However, due to protracted hostilities on the territory of Iraq – in 2003-11 in order to overthrow the government of Saddam Hussein, and the conflicts between different rebel groups that have not subsided until now, the Iraqi economy has been undermined, and the country is struggling to fulfill its obligations to OPEC.
Kuwait, neighboring Iraq, with oil reserves of 102 billion barrels, also experienced numerous and bloody strife (until the mid-90s), but over the past period was able to restore its economy, which is more than 50% dependent on oil.
Saudi Arabia with oil reserves of about 270 billion barrels is currently the leader of OPEC.
The Kingdom has been maintaining strategic partnerships with the United States for 75 years (oil reserves are about 50 billion barrels, according to BP estimates), which, coupled with sound foreign policy, close relations with the IMF, World Bank, WTO, European states and countries of the Muslim world, allows Saudi Arabia has an important influence on world processes.
Dependent on 80-95% of oil, Saudi Arabia is interested in predictable and reasonable, moderate world prices for “black gold”, which would allow it to steadily develop its economy and always find buyers for oil.
It was the finding of buyers for oil that was threatened in 2020 due to the COVID-19 coronavirus pandemic and the recession of the economies of almost all countries of the world as a result of strict quarantine measures.
OPEC, which currently unites 13 states, and since 2016 has maintained close consultations with other oil-producing countries of the world, is actually being tested in 2020 for its viability and ability to regulate problems after Saudi Arabia and the Russian Federation (the largest oil producer outside OPEC) unleashed a war for market shares and collapsed world oil prices in March to a 30-year low.
It should be noted that within the framework of OPEC, it was Saudi Arabia that since 1982 has been in charge of oil production quotas by the members of the Alliance, and this mechanism has become the main instrument of OPEC’s influence on the oil market.
Despite the fact that many countries around the world are trying to abandon traditional fuels in favor of renewable and environmentally friendly, the need for oil and gas will remain in industry and transport for many decades to come.
OPEC member countries account for about 75% of all proven world oil reserves, and the proven oil reserves of the Alliance countries are estimated at more than 1.2 trillion barrels.
Thus, OPEC members have a real and serious influence on the development of the world economy.
The COVID-19 pandemic and panic in global financial and commodity markets forced the countries of the world in April 2020 to unite under the auspices of OPEC in order to develop solutions that would restore stability to energy prices, regulate the situation with supply and demand, and ensure fair profits for those who invest in the oil and gas industry.
On April 12, 2020, the OPEC + countries (23 countries participated in the stability deal) were able to conclude an agreement under which in May-July of this year they ensured a total daily reduction in oil production by 9.7 million barrels per day, and from August until the end of the year, the restriction was weakened – the overall production will decline by 7.7 million b / d, and from January 2021 to the end of April 2022 – by another 5.8 million b / d.
These measures are designed to remove excess oil from the world market and return to prices of $ 60-70 / barrel, which are acceptable to everyone.
This OPEC + agreement has reconciled competitors, but many analysts believe that the lull will not last long, and the leading players in the oil market will either not want to adhere to the agreed quotas or will sell their oil at dumping prices.
A similar situation existed in the late 80s and early 90s of the XX century, which then led to a weakening of the role of OPEC.
By the 2000s, the situation began to improve, because OPEC has occasionally granted quota exemptions and has actively responded to the oil demand situation.
But in the 2010s, OPEC found it difficult to coordinate the actions of Saudi Arabia and Iran, and also had to admit the emergence of such a challenge as the shale revolution in the United States.
As a result, by 2020, the United States, Saudi Arabia and the Russian Federation began to produce almost the same volumes of oil (about 11-13 million b / d) and the market faced the threat of overheating.
In April 2020, Russia and Saudi Arabia agreed that they would reduce production from the baseline of 11 million barrels per day – in May-July by 23%, in August-December – by 18% and in January 2021-April 2022 – by 14%, respectively, but already in September, these key countries in the OPEC + deal started talking about their desire to increase their shares in the world oil market.
A number of other countries participating in the OPEC + deal were “caught” in overproduction of oil, and experts suggested that the April agreement could soon collapse.
According to Anas bin Faisal Al-Haji, an economist specializing in oil markets, the time has come to reform OPEC. 60 years later, this organization cannot cope with the realities of the world oil markets.
“Any success in reducing production and increasing oil prices is actually due to the individual actions of the producing countries, mainly Saudi Arabia, the USA, the Russian Federation, and not the OPEC members. The key to success is in the creation of investment cooperation between the oil-producing countries of the world, and this requires the restructuring of OPEC,” the expert said.
Explaining the need to restructure OPEC, the Arab economist points to two main reasons.
“First, the old OPEC agreement focuses on oil production. In the 60s, production was controlled by international oil companies, as was export. Now national companies control production themselves, and a significant part of it is consumed in the countries themselves, part goes to the petrochemical industry, part to oil refineries, part to export. World markets are affected by the volume of exports, not the volume of production, which means that OPEC in its decisions should focus not on oil production indicators, but on export indicators, and not only crude oil, but also quotas for oil products and liquefied gas. The absence of this has already created problems for OPEC in the past and creates problems now. After all, some countries classify light oil as a gaseous liquid, and its exports affect the market balance. The second reason is the voting method, which requires unanimous approval under OPEC law. This means that any OPEC member can fail the meeting or the decision will be delayed for bureaucratic reasons. Here, revisions of the voting system are needed, depending on the importance of the task and the status of the participant (market share),” explained Faisal Al-Haji.
In his opinion, the export of oil and its derivatives is easier to control than the production of hydrocarbons, it affects the budgets of countries and the balance of payments, which means that OPEC could adapt to the market situation faster and more efficiently in terms of export indicators.
“Focusing on the export of crude oil, petroleum products and liquefied gas provides a better understanding of the role of OPEC in meeting global oil demand. In light of the availability of real-time information, the organization can advise on the redirection of some oil carriers to avoid saturation in some markets, and even help in redirecting investments.
OPEC can also be restructured in such a way as to avoid legal “prosecution”, in particular from the United States, because in the West, OPEC is called a monopoly. In this regard, the April OPEC + deal with the participation of Saudi Arabia, the Russian Federation and the United States is a good example for lawyers on how to neutralize any law banning OPEC,” the expert said.
Overall, there is no doubt that OPEC is important as an independent think tank.
According to Energy Intelligence expert Matt Stanley, the market needs accurate forecasts of oil demand, the impact of shocks such as COVID-19, and serious impact measures.
For this, OPEC will have to change.