Commodities union: how OPEC changed the world oil market in 60 years

On September 10-14, 1960, the Organization of the Petroleum Exporting Countries (OPEC) was formed. The states producing energy resources have united to oppose large energy companies and to obtain the right to independently dispose of their own resources. Today, OPEC accounts for about 40% of global hydrocarbon production. At the same time, over the years of its existence, the alliance has become one of the main price regulators on the energy market. How the organization changed the global oil industry - in the material RT.

In the late 1950s, oil displaced coal and became the world's main source of energy.

At that time, the hydrocarbon market was almost completely controlled by large transnational companies (TNCs), the so-called "seven sisters" (Exxon, Chevron, Gulf Oil, Mobil, British Petroleum, Texaco and Royal Dutch Shell).

They were developing large deposits in the Middle East.

The obtained oil was used by TNCs for further processing and resale, and local governments were deducted remuneration in the form of a fixed amount from each barrel produced.

High production volumes and the simultaneous appearance on the market of a new major player in the form of the Soviet Union led to a global surplus of energy raw materials.

As a result of increased competition, the Seven Sisters began to provide discounts to their customers and to lower the purchase prices for oil.

The governments of the Middle Eastern countries remained dissatisfied with this state of affairs and ultimately decided to gain control over the extraction of their own natural resources.

On September 10-14, 1960, at a conference in Baghdad, representatives of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela agreed to unite to further coordinate actions in planning sales and setting prices for energy raw materials.

This is exactly how the Organization of the Petroleum Exporting Countries (OPEC) was founded 60 years ago.

“The oil-rich countries needed to join forces and collectively confront commodity companies.

Attempts to solve the problem one by one were almost doomed to failure, since TNCs could simply punish individual countries by imposing sanctions against them.

Within the framework of OPEC, the states turned out to be strong enough to shift the balance of power away from oil companies, "NES professor Gerhard Tevs told RT in an interview.

In 1962, OPEC was registered with the UN Secretariat as a full-fledged intergovernmental organization, and in 1968 the members of the association adopted a declaration “On the oil policy of the OPEC member countries”.

The document enshrined the inalienable right of each of the states to exercise control over national natural resources.

In one fit

Note that today OPEC includes 13 states.

In addition to the five founding countries of the organization, its members also became: Algeria, Angola, Gabon, Congo, Libya, the United Arab Emirates, Nigeria and Equatorial Guinea.

According to the latest data, almost 80% of the world's oil reserves are located in the OPEC countries.

At the same time, the organization accounts for about 40% of the global production of energy resources.

“In order for such a form of cooperation as OPEC to be successful and bring profit to countries, each member of the organization must trust each other.

This means that if all member states agree to restrict the supply of raw materials to the market, each individual state will fulfill its promises, ”said Gerhard Tevs.

So, in 1973, the member countries of the organization completely stopped oil supplies to the United States and European states, which supported Israel in the war with Syria and Egypt (the so-called Yom Kippur War).

As a result of joint actions by OPEC, world oil prices for the year increased by more than 300% - from $ 2 to $ 13 per barrel.

This is evidenced by data from the World Bank.

“A fairly large number of OPEC members had a political motivation to punish Western countries for their participation in the Yom Kippur War by limiting oil supplies to these countries.

Thus, OPEC has successfully demonstrated for the first time in history that the members of the organization are able to cooperate to achieve a common goal, "Tevs added.

Rise and fall

In the second half of the 1970s, the world remained in high demand for oil, with the result that by the beginning of 1980 the average cost of energy resources in the world approached $ 40 per barrel.

The increased surplus profits from the sale of hydrocarbons have led to a noticeable economic leap in the OPEC countries.

In general, from 1970 to 1980, the total GDP of the states of the organization increased almost tenfold.

However, as experts note, by the mid-1980s, global demand for energy resources began to gradually weaken, while the supply of hydrocarbons in the world rose sharply.

This state of affairs provoked a powerful collapse of oil prices in 1986 below $ 15 per barrel.

Reuters
© Angus Mordant

“The surge in prices in the 1970s led to increased investment and increased oil production outside of OPEC.

For example, the extraction of raw materials on the shelf of the North Sea has become economically profitable.

By the mid-1980s, the volume of production there was about 2.5 million barrels per day, although 10 years before that it was practically zero, ”said Marcel Salikhov, director of the Center for Economic Expertise of the Institute of State and Municipal Administration of the Higher School of Economics, to RT.

According to him, the actions of Saudi Arabia were also the reason for the collapse in prices.

For several years, the kingdom has tried to maintain quotations by reducing its own production.

At the same time, the production of raw materials in other OPEC countries remained high.

As a result of the increased financial losses, Riyadh decided to sharply increase oil production again.

“In 1986, Saudi Arabia abandoned its previous strategy and sharply increased production, which resulted in a collapse in world prices.

It is noteworthy that some experts regard this decision of the kingdom as a desire to destroy the USSR.

Perhaps there were such considerations, but the key motive was still our own economic interests, ”Salikhov added.

Up to a hundred and back

The resulting surplus of raw materials in the global market lasted for almost ten years.

As a result, during the 1990s, oil prices demonstrated relatively stable dynamics and mainly fluctuated in the range of $ 13-20 per barrel.

Meanwhile, since the early 2000s, global demand for hydrocarbons began to grow rapidly again, which led to a sharp rise in oil prices.

So, in 2008, the average cost of raw materials reached the highest level in the entire history of observations and rose above $ 130 per barrel.

“High growth rates of the global economy, as well as the structural transformation of the Chinese economy, have become the main reasons for the soaring oil prices.

At the same time, until 2008, OPEC did not take any action to limit production among its members.

On the contrary, all the countries that had the opportunity tried to take advantage of the favorable situation and increased production, ”Salikhov said.

Against the background of the global financial crisis in 2009, the price of oil dropped to the range of $ 40-70 per barrel, but in 2011 it again exceeded $ 100.

However, as Salikhov explained, at the same time, the production of shale raw materials in the United States began to grow actively.

As a result, by 2014, an oversupply of oil was again formed in the global market, due to which prices dropped to $ 30 per barrel by 2016.

Support Group

In 2016, OPEC countries agreed to join forces with 11 states outside the cartel, including Russia, and begin simultaneous restrictions on oil production.

The created format was named OPEC +.

The fulfillment of the terms of the contract was supposed to restore the balance of supply and demand in order to keep oil prices from significant fluctuations.

The parties to the agreement have repeatedly extended the term of the deal and intensified production cuts.

Each of the states was obliged to reduce production within a predetermined quota.

At the same time, the most significant volumes of decline were in Russia and Saudi Arabia.

Meanwhile, due to certain economic or political reasons, not all countries participating in the agreement were able to reduce production in time and in the required volumes.

As a result, the major players of the alliance had to take on additional volumes of production cuts to fulfill the terms of the OPEC + deal by 100%.

This state of affairs often led to disagreements within the association, but until 2020 the parties always managed to reach a compromise.

The market is shocked

According to the World Bank, as a result of the successful execution of the OPEC + deal from 2016 to 2019, the average price of oil in the world increased by almost one and a half times - from $ 45 to $ 63 per barrel.

However, since the beginning of 2020, the consumption of energy resources in the world began to fall sharply against the backdrop of the spread of the coronavirus, the massive closure of borders and the introduction of quarantine restrictions.

Against this background, oil prices began to fall rapidly.

As expected, the members of the OPEC + alliance were to further reduce production and thereby stabilize the market situation.

Meanwhile, on March 6, following the meeting, the parties did not reach a consensus and decided to completely abandon all earlier commitments.

“The Russian side proposed to extend the agreement on current terms at least until the end of the second quarter in order to better understand the situation with the impact of the coronavirus on the world economy and oil demand.

Despite this, the OPEC partners made a decision to increase oil production and fight for market share, ”the Russian government’s statement published on March 9 said.

The collapse of the OPEC + deal provoked the largest price shock in the history of the oil market.

The increase in production by exporting countries and the simultaneous collapse of global demand for hydrocarbons due to the coronavirus have led to an almost full load of the world's oil storage facilities.

As a result, it became physically impossible to carry out new supplies of raw materials.

The situation turned into the fact that in the middle of spring the price of Brent crude oil fell to a minimum in 21 years and at the moment fell below $ 16 per barrel.

In turn, the cost of raw materials of the American WTI grade for the first time during the entire trading period fell to negative values.

So, on April 20, the contract for the supply of this brand of oil fell immediately by 300% - from $ 18 to minus $ 37.6 per barrel.

After the storm

The unprecedented collapse of the oil market forced exporters of raw materials to sit down at the negotiating table again, and already on May 1, the OPEC + members resumed their partnership.

States again began to reduce oil production, and global demand for hydrocarbons began to gradually recover as quarantine restrictions were lifted in a number of countries.

As a result, by the end of August, the average cost of energy resources in the world exceeded $ 43 per barrel.

“The deal has a long-term nature and underlines that we are all serious about stabilizing the situation on the market,” said the head of the Russian Ministry of Energy Alexander Novak after the agreement was renegotiated.

Meeting of the ministers of the OPEC and OPEC + countries via videoconference
RIA News

Meanwhile, according to Marcel Salikhov, the main challenge for OPEC + and the OPEC organization as a whole still remains the difference of interests.

As the expert explained, countries differ markedly from each other in terms of economic development, resource base and goals in the oil industry.

Against this background, each member of the alliance is often tempted to violate the agreement, says Gerhard Thevs.

Thus, according to the expert, the further future of the OPEC and OPEC + unions depends only on the readiness of each of the participants to put common interests above their own.

“During periods of low oil prices, a country's desire to increase production and use the profits from the sale of raw materials for political purposes may be stronger than the desire to expect long-term benefits from high prices, which are possible only as a result of coordinated action.

On the other hand, if the benefits from the upcoming increase in oil prices are great and the majority of OPEC members are willing to wait before making a profit from the sale of raw materials, cooperation can be successful, ”concluded Gerhard Thevs.