OPEC and Oil Prices

The oil prices which had been declining since June 2014 decreased to 30 dollars/barrel in 2016, which caused serious pressure on the economies of the oil exporting countries. Constituting 42% of world oil production, OPEC (Organization of Petroleum Exporting Countries) is one of the most significant actors ensuring stability in the oil market. It played an active role in regulating the global oil markets by implementing of target price or production ceiling as of the 1980s. Therefore, it was increasingly expected that OPEC was going to limit the supply in the face of the prices decreasing for two years. Having convened in November 2015, OPEC countries decided not to limit oil production, which led to a decrease in the prices. Meanwhile, oil exporting countries such as Russia, Saudi Arabia, Qatar and Venezuela which were most affected by this process reached a common accord in January 2016 to freeze oil production. In the meeting held in Doha on 17 April 2016, with the participation of 18 oil-producing countries which constitute 60% of world oil production, there was no agreement on oil production freeze. The deal on the limitation of supply which was expected to be signed for two years, was reached in the 171st OPEC meeting held in Vienna on 30 November 2016, Wednesday when member states decided to reduce their production by 1,2 million barrels per day.

According to this decision, the production ceiling of the member states was set as 32,5 million barrels per day as of 1 January 2017. It was announced that the oil production limit was going to last six months but this term might be extended for six months more, depending on the market conditions.

In addition to the reduction of production in OPEC countries, this deal also undertook that the daily production in non-OPEC countries including Azerbaijan, Bahrain, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Amman, Russia and Sudan was going to be decreased by 558 thousand barrels in total. Among these countries, Russia alone was going to produce 300 thousand barrels of oil less per day. Upon this development, the oil prices showed almost 12 percent increase. According to the decisions taken, world oil production will be reduced by 2% as of the next month. This article addresses the sustainability of this deal and its effects.

OPEC

OPEC was founded in Baghdad on 10-14 September 1960, against the international companies controlling oil production at the time (Seven Sisters), with Iran, Iraq, Kuwait, Saudi Arabia and Venezuela coming together. Qatar (1961), Indonesia (1962), Libya (1962), United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), Gabon (1975) and Angola (2007) became the members of this organization later. Since the membership of Indonesia was suspended in the 171st OPEC meeting, there are currently 13 members. OPEC identified its fundamental objective as 'carrying out works to develop a system which will provide price stability and regulation of production in the member states' but took no initiative until the 1980s to fulfill this objective.

Acting as a cartel company in terms of oil production, the first and maybe the most important effect of OPEC countries which constituted significant part of the production on oil markets was the embargo decision taken in October 1973. Having constituted almost 50% of world oil production at the time, OPEC reduced its oil export to the USA and other industrialized countries because they supported Israel during the Yom Kippur War. In consequence, the prices jumped from 3 to 12 dollars. This situation led to heavy destruction in the economies of oil importing countries.

While one of the initial objectives of OPEC was to control and lead oil production, the amount of oil production of the member states was not regulated until 1982.

Having convened in the 63rd OPEC meeting on 19-21 March 1982, thirteen countries set 34 as the reference price in the face of decreasing oil price and limited the oil production to 18 million barrels per day on 1 April 1982, in order to preserve this price.

On 1 January 1987, an OPEC reference basket was formed by seven different crude oil prices and the prices were set between 22 and 28 dollars. Many deals were signed with respect to oil production ceiling in the following years in order to protect this price.

OPEC and Others

Playing a determinant role in World Oil Production, OPEC has brought to the agenda the initiatives of acting together and taking common decisions with the non-OPEC countries in the face of decreasing oil prices within the last 20 years. We can mention about three common initiatives taken in this process.

Figure 1: World oil production per day (thousand barrels)

The oil prices started to fall due to the financial crisis in Southeastern Asia in 1997 and in Russia in 1998. OPEC called for a oil production limit once the oil prices fell from 25 dollars to 10 dollars in early 1997. In March 1999, OPEC and 4 non-OPEC countries (Norway, Russia, Mexico and Amman) announced that they made a deal on oil production limit of 2,1 million barrels per day. 388 thousand barrels were going to be reduced by non-OPEC countries. Russia undertook to reduce its production by 7% (100 thousand barrels/day). However, it continued to increase its production rather than limiting it in the following period.

 The second crisis was witnessed after the 9/11 attacks. In this period, the oil prices decreased from 36 dollars to less than 20 dollars. Upon this development, OPEC countries limited their production by 1,5 million barrels/day. It also called non-OPEC countries to limit their production in order to prevent the decrease of oil prices. While Norway undertook to reduce its production by 100-200 thousand barrels/day at the time, Russia promised to limit its production by 150 barrels/day in March 2002. However, it increased its production and export by 600 thousand barrels in the following six months.

The third decrease of oil prices happened in the 2008-2009 Mortgage Crisis. While the prices were around 147 dollars in this period, this number fell to 39 dollars. In October 2008, OPEC decided to limit its oil production by 1,5 billion barrels. Having participated in three OPEC meetings at the time, Russia indicated that oil production had to be limited but made no commitment. In consequence, Russia's oil sales to overseas countries increased by 700 thousand barrels/day in 2009.

It can be said that the demand and supply gap was the factor lying behind the decrease registered within the last two years. While the deceleration in the world economy also slowed down the demand growth rate, the increase in oil supply led to global excess supply. The decrease in global excess supply will bring about the disagreements on which country should reduce its production and to what extent. Especially Iran's inclination to increasing its oil production to 4 million barrels per day after the embargo and the potential increase in the oil production of US producers have caused the postponement of a common deal.

Figure 2: Oil Prices (Brent Crude oil, barrel USD)

OPEC decided to reduce its oil production by 1,2 million barrels in its 171st meeting. Furthermore, non-OPEC countries also undertook to reduce their production by 558 thousand barrels. This common deal positively affected the oil prices but it is controversial how long this process can be maintained.

It is expected that the production limit deal will lead to an increase in the incomes of oil exporting countries together with increasing oil prices. However, global excess supply within the past year may postpone this effect to a certain extent.

Figure 3: Oil supply and demand in the world (million barrels)

The second problem is about the extent to which the promises of the countries are fulfilled. Both OPEC and non-OPEC countries were inclined to exceed the quotes in several previous deals. That is why the viability of the current deal should be discussed.

Table 1: Deal on the reduction of OPEC oil production

Figure 4: Largest oil producers (million barrels/day)

The third problem concerns how the other oil exporting countries in the world will act. Compromising countries constitute 60% of world oil production. The production decisions taken by the other countries constituting 40% of the production (the USA, Canada, Norway, Brazil) are important. It is especially possible to see an increase in both the production and the prices of US shale gas producers that have leaped forward in oil production within the last years and the increasing competition for share in the oil market.

Assoc. Prof. Dr., Gaziantep University