OPEC Plus | The Cartel and Its Allies That Keep Oil on the Boil

OPEC Plus countries, an alliance between the Organization of the Petroleum Exporting Countries and other major oil producers, are in the limelight as global oil prices rose above $120 a barrel last week as supply failed to keep up with rising demand. Sometime soon to come after the EU decided last week to cut oil imports from Russia by 90% by the end of this year and prevent European insurers from selling cover to tankers carrying Russian oil. The price of oil is expected to rise. The move is expected to worsen the current oil supply crisis as non-Russian oil producers may not be able to offset Russian supplies and meet EU demand for oil within a short period of time.

Under pressure from major oil importers, OPEC Plus last week agreed to increase production by 6,48,000 barrels per day In July and August, a nearly 50% jump from the monthly increase set last year under a deal. OPEC Plus countries, which control more than 50% of the world’s crude oil supply, joined hands to cut oil production by 10 million barrels a day in 2020. The decision was taken amid falling oil prices as there was a huge drop in the demand for oil. -19 Lockdown across the world. There are fears that as the global economy gets back on its feet, the failure of OPEC+ countries to rapidly increase output to pre-pandemic levels could keep oil prices high.

OPEC Plus refers to a group of 23 oil-producing countries that includes 13 members of OPEC (Saudi Arabia, United Arab Emirates, Iran, Iraq, Kuwait, Algeria, Angola, Equatorial Guinea, Gabon, Libya, Nigeria, Republic of the Congo) . and Venezuela) and 10 other oil producing countries (Russia, Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, South Sudan and Sudan). Saudi Arabia is the largest oil producer among OPEC members. Russia, which produces more oil than Saudi Arabia, plays an important role along with OPEC in influencing global crude prices.

start of cooperation

It should be noted that OPEC Plus was created in 2016 When OPEC countries decided to cooperate with other oil producing countries outside the grouping to cut global production of oil. Under the agreement, called the Declaration of Cooperation (DOC), countries work together to influence global energy prices. To further institutionalize cooperation, OPEC countries and their allies adopted the ‘Charter of Cooperation’ in a ministerial meeting held on July 2, 2019. “The Charter provides a platform to facilitate dialogue and exchange of views regarding conditions and developments in global oil and energy markets. A safe and secure environment for the benefit of producers, consumers, investors and the global economy,” according to the OPEC website. The goal is to contribute to energy supply and sustainable sustainability.

The new grouping was seen as a response by oil-producing countries to protect their interests amid the rise of the US shale industry. US shale oil producers largely caused a sharp drop in the price of oil by increasing US energy supplies and putting the finances of OPEC governments under great stress. OPEC was formed in 1960 as a cartel to influence the global price of crude oil. The global energy market was largely dominated by Western multinationals known as the ‘Seven Sisters’—the Anglo-Iranian Oil Company (now BP), Royal Dutch Shell (now Shell), Standard Oil Company of California (later Chevron). ), Gulf Oil (now merged with Chevron), Texaco (now merged with Chevron), Standard Oil Company of New Jersey-Esso (now part of ExxonMobil) and Standard Oil Company of New York-Sokony (now part of ExxonMobil). stake).

In September 1960, Iran, Iraq, Kuwait, Saudi Arabia and Venezuela convened in Baghdad to discuss ways to raise prices, which led to the formation of the cartel. ,OPEC developed established its collective vision, its objectives and established its Secretariat, first in Geneva and then in 1965 in Vienna. It adopted the ‘Declarative Statement of Petroleum Policy in Member States’ in 1968, emphasizing the inalienable right of all countries to exercise permanent sovereignty over their natural resources in the interest of their national development, according to the OPEC site. The 1973 “oil shock”, which caused the price of oil to double within a few years and contributed to the impasse in the US, marked by rapidly rising prices and faltering economic growth, was the result of an OPEC embargo, Which also showed the economic power of the cartel.

Cartel members meet every month to determine the amount of oil in the global market. According to current estimates, 79.4% of the world’s proven oil reserves are located in OPEC countries, mostly in West Asia. OPEC members produced about 37.1% of the world’s total crude oil in 2020.

Many economists believe that OPEC and its allies are responsible for keeping oil prices high by artificially limiting supply. Cartels try to influence value of goods or by limiting their supply of services to the market. While this is good for cartel members, it is bad news for consumers who will lack the goods or services to consume. Economists believe that it has adversely affected the world economy. In the absence of the cartel, there would be no collusion among oil producers to limit the supply and hence the total production of oil in the world would be higher. This means that more oil will be available to fuel various economic activities, which will mean that more goods and services are produced in the global economy and people enjoy higher standards of living.

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market power

Countries that rely on oil imports to meet their energy needs are trying to find ways to deal with OPEC’s market power. To prevent the global economy from going into recession, Western countries like US and UK are putting political pressure on OPEC countries to increase their production. The US has also tried to boost its domestic energy production so that it does not have to depend on OPEC to meet its energy needs. In fact, the American shale revolution, driven by private oil producers who were free to exploit resources below ground, managed to reduce America’s reliance on oil from West Asia and give the country a net of oil. made exporter.

However, India has been dependent on oil imports to meet its energy needs. India’s domestic crude oil production FY22 was the lowest in nearly three decades, while domestic oil consumption has increased significantly over the years. Structural reforms in the energy sector can help countries including India boost domestic production and reduce their dependence on OPEC. Meanwhile, the sanctions imposed by the West on Russia have provided India with an opportunity to buy oil from Russia at highly subsidized rates. Russia has been looking for new buyers for its oil ever since the West imposed harsh sanctions on Ukraine for attacking it.

Some economists have argued that, if it were not for OPEC, the global oil market would be similar to the US shale market, with many smaller producers competing against each other. In such a competitive market, no producer would have the market power to influence the prices. Furthermore, the lack of entry barriers would ensure that any attempt to create a cartel would eventually be busted as the unusually high returns received by the cartel would attract competitors who want a share of the pie. It should be noted that while private cartels that artificially suppress production are unanimously condemned by all, OPEC, a giant cartel formed by governments, usually shied away from such criticism. The future of OPEC is likely to depend on the fate of oil as a source of energy in the global economy. Some energy analysts believe that oil will continue to be a major source of energy this century and that OPEC will retain significant economic power. However, others believe that OPEC’s influence will diminish as they see the world move away from its current reliance on fossil fuels.

Whatever the long-term consequences, the cartel will remain powerful in the near to medium term, especially as energy prices continue to rise after the Russian invasion of Ukraine.