What is OPEC?

The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization, currently consisting of 12 oil producing and exporting countries, spread across three continents America, Asia and Africa. The members are Algeria, Angola, Ecuador, the Islamic Republic of Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates & Venezuela. These countries have a population of more than 408 million and for nearly all of them, oil is the main marketable commodity and foreign exchange earner. Thus, for these countries, oil is the vital key to development economic, social and political. Their oil revenues are used not only to expand their economic and industrial base, but also to provide their people with jobs, education, health care and a decent standard of living. The organizations principal objectives are: 1. To co-ordinate and unify the petroleum policies of the Member Countries and to determine the best means for safeguarding their individual and collective interests; 2. To seek ways and means of ensuring the stabilization of prices in international oil markets, with a view to eliminating harmful and unnecessary fluctuations; and 3. To provide an efficient economic and regular supply of petroleum to consuming nations and a fair return on capital to those investing in the petroleum industry.

When was OPEC formed?

OPEC was formed at a meeting held on September 14, 1960 in Baghdad, Iraq, by five Founder Members: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. OPEC was registered with the United Nations Secretariat on November 6, 1962.

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OPEC HISTORY

1960 - founded by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela 1965 - Moves from Switzerland to new headquarters in Vienna, Austria 1973 - Opec embargo causes oil price shock 1990 - Iraq's anger at Kuwaiti over-production sparks Gulf War

The 1960s
These were OPECs formative years, with the Organization, which had started life as a group of five oil-producing, developing countries, seeking to assert its Member Countries legitimate rights in an international oil market dominated by the Seven Sisters multinational companies. Activities were generally of a low-profile nature, as OPEC set out its objectives, established its Secretariat, which moved from Geneva to Vienna in 1965, adopted resolutions and engaged in negotiations with the companies. Membership grew to ten during the decade.

The 1970s
OPEC rose to international prominence during this decade, as its Member Countries took control of their domestic petroleum industries and acquired a major say in the pricing of crude oil on world markets. There were two oil pricing crises, triggered by the Arab oil embargo in 1973 and the outbreak of the Iranian Revolution in 1979, but fed by fundamental imbalances in the market; both resulted in oil prices rising steeply. The first Summit of OPEC Sovereigns and Heads of State was held in Algiers in March 1975. OPEC acquired its 11th Member, Nigeria, in 1971.

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The 1980s
Prices peaked at the beginning of the decade, before beginning a dramatic decline, which culminated in a collapse in 1986 the third oil pricing crisis. Prices rallied in the final years of the decade, without approaching the high levels of the early-1980s, as awareness grew of the need for joint action among oil producers if market stability with reasonable prices was to be achieved in the future. Environmental issues began to appear on the international agenda.

The 1990s
A fourth pricing crisis was averted at the beginning of the decade, on the outbreak of hostilities in the Middle East, when a sudden steep rise in prices on panic-stricken markets was moderated by output increases from OPEC Members. Prices then remained relatively stable until 1998, when there was a collapse, in the wake of the economic downturn in SouthEast Asia. Collective action by OPEC and some leading non-OPEC producers brought about a recovery. As the decade ended, there was a spate of mega-mergers among the major international oil companies in an industry that was experiencing major technological advances. For most of the 1990s, the ongoing international climate change negotiations threatened heavy decreases in future oil demand.

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Who are OPEC Member Countries?

The OPEC Statute stipulates that: "any country with a substantial net export of crude petroleum, which has fundamentally similar interests to those of Member Countries, may become a Full Member of the Organization, if accepted by a majority of three-fourths of Full Members, including the concurring votes of all Founder Members". The Statute further distinguishes between three categories of membership: Founder Member, Full Member and Associate Member. Founder Members of the Organization are those countries which were represented at OPEC's first Conference, held in Baghdad, Iraq, in September 1960, and which signed the original agreement establishing OPEC. Full Members are the Founder Members, plus those countries whose applications for Membership have been accepted by the Conference. Associate Members are the countries which do not qualify for full membership, but which are nevertheless admitted under such special conditions as may be prescribed by the Conference.

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OPEC Member Countries:

Country Algeria Angola Ecuador ** IR Iran * Iraq * Kuwait * Libya Nigeria Qatar Saudi Arabia * United Arab Emirates Venezuela* Joined OPEC 1969 2007 rejoined 2007 1960 1960 1960 1962 1971 1961 1960 1967 1960 Location Africa Africa South America Middle East Middle East Middle East Africa Africa Middle East Middle East Middle East South America

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How does OPEC function?

Representatives of OPEC Member Countries (Heads of Delegation) meet at the OPEC Conference to coordinate and unify their petroleum policies in order to promote stability and harmony in the oil market. They are supported in this by the OPEC Secretariat, directed by the Board of Governors and run by the Secretary General, and by various bodies including the Economic Commission and the Ministerial Monitoring Committee. The Member Countries consider the current situation and forecasts of market fundamentals, such as economic growth rates and petroleum demand and supply scenarios. They then consider what, if any, changes they might make in their petroleum policies. For example, in previous Conferences the Member Countries have decided variously to raise or lower their collective oil production in order to maintain stable prices and steady supplies to consumers in the short, medium and longer term.

Why does OPEC set oil production quotas?

The OPEC Statute requires OPEC to pursue stability and harmony in the petroleum market for the benefit of both oil producers and consumers. To this end, OPEC Member Countries respond to market fundamentals and forecast developments by co-ordinating their petroleum policies. Production regulations are simply one possible response. If demand grows, or some oil producers are producing less oil, OPEC can increase its oil production in order to prevent a sudden rise in prices. OPEC might also reduce its oil production in response to market conditions.

Does OPEC control the oil market?

No, OPEC does not control the oil market. OPEC Member Countries produce about 42 per cent of the world's crude oil and 18 per cent of its natural gas. However, OPEC's crude oil exports represent about 60 per cent of the crude oil traded internationally. Therefore, OPEC
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can have a strong influence on the oil market, especially if it decides to reduce or increase its level of production. OPEC seeks stability in the oil market and endeavours to deliver steady supplies of oil to consumers at fair and reasonable prices. The Organization has achieved this in a number of ways: sometimes by voluntarily producing less oil, sometimes by producing more when there is a shortfall in supplies (such as during the Gulf Crisis in 1990, when several million barrels of oil per day were suddenly removed from the market).

How does OPEC oil production affect oil prices?

The Oil and Energy Ministers of the OPEC Member Countries meet at least twice a year to co-ordinate their oil production policies in light of the market fundamentals, ie, the likely future balance between supply and demand. The Member Countries, represented by their respective Heads of Delegation, may or may not alter production levels during the Meetings of the OPEC Conference. Given that OPEC Countries produce about 42 per cent of the world's crude oil and about 61 per cent of the crude oil traded internationally, any decisions to increase or reduce production may lower or raise the price of crude oil. The impact of OPEC output decisions on crude oil prices should be considered separately from the issue of changes in the final prices of oil products, such as gasoline or heating oil. There are many factors that influence the prices paid by end consumers for oil products. In some countries taxes comprise over 60 per cent of the final gasoline price paid by consumers, so even a major change in the price of crude oil might have only a minor impact on consumer prices.

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DOES OPEC SUPPORT ENVIRONMENT POLICY:OPEC supports sound environmental policies that are fair and equitable, based on proven needs and designed to address those needs. OPEC is concerned about the environment and we want to ensure that it is clean and healthy for future generations. OPEC also supports sustainable economic development, which requires steady supplies of energy at reasonable prices. Many countries have already introduced heavy taxes on oil products. In some countries, the price that motorists pay for gasoline is three or four times higher than the price of the original crude oil. Taxes account for up to 70 per cent of the final price of oil products in some countries. As a result of these taxes, some of the oil-consuming countries (especially those in Europe where taxation levels are highest) receive much more income from oil than OPEC does. OPEC is concerned that many of the so-called 'green' taxes that are currently levied on oil do not specifically help the environment. Instead, they simply go into government budgets to be spent on other things. Taxes might lead to instability in the oil industry, creating problems for many countries and industries. Industrialised countries are developing policies to limit the use of fossil fuels in order to reduce their emissions of carbon dioxide. Many are already levying heavy taxes, particularly on oil products. Yet studies have shown that OECD members could cut their carbon dioxide emissions by 12 per cent by 2010 and still maintain their tax revenues, if they adopted a pro rata tax system that levies tax on all forms of energy according to their carbon content. OPEC is concerned that some countries may impose environmental and taxation policies that are harmful to those who rely on fossil fuels for a substantial part of their income.

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Some countries with high oil taxes actually subsidise domestic coal production, yet coal produces more carbon dioxide than oil. Carbon dioxide is one of the greenhouse gases which are believed to contribute to global warming. OPEC is worried about discriminatory oil taxes because we are committed to providing a stable petroleum market. We need to invest in oil exploration and development in order to have production capacity available as demand rises in the years ahead, but we also need to be sure that there will be enough demand for that oil and that we will get a reasonable price. If we do not invest in expanding oil production capacity before it is needed, the world could face sudden price shocks, leading to serious global economic problems. OPEC is also concerned that many of the environmental policies now being proposed and adopted do not have the full support of the scientific community. There is still considerable debate about the impact of global warming, and how it can best be addressed. OPEC supports further research into these important issues. OPEC is also spending heavily to improve its environmental impact, by locating sources of higher quality oil and gas, by developing cleaner fuels for consumers, and by reducing the impact of its activities through safer, cleaner drilling, transportation and refining processes. OPEC also participates in many international meetings in order to remind governments and others who are debating environmental policies that they must consider the needs of developing countries, especially those that rely on their income from oil.

INDIAN STRATEGY TO DEAL WITH OPEC

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Asking OPEC to act against speculators

India has asked oil-producing countries to move against what it called speculation pushing up prices of crude. Indian finance minister has asked recently the energy ministers of the Opec countries in Jeddah in Saudi Arabia that there is need for the oil industry toaffirm its leadership in price formation and not remain a passive spectator of speculation and paper trading in oil. India has proposed that adopting a price band mechanism would stabilize prices in the global market. Under the mechanism, consuming countries will guarantee that oil prices will not fall below an agreed level while producing countries will ensure that oil prices do not rise above a guaranteed level. This can be one of the solutions to save the world from volatility and unpredictability in oil prices. In case the global economy slowed or slipped into recession due to high oil prices the oil producer countries would also suffer. The current level of prices was in the interest of neither the producer nor the consuming countries. International oil prices in the last 10 months have doubled from $70 a barrel in August 2007. There are evidences that large financial institutions, pension funds, hedge funds, etc have channelised trillion of dollars into commodity investments and commodity derivatives. These financial transactions are unregulated and highly opaque and the demand for oil generated by these funds is purely speculative.

Asking OPEC for uniform pricing policy

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India has asked OPEC to adopt a uniform pricing policy for all buyers and not charge a premium from developing countries in Asia while offering a discount to the developed West. Petroleum Minister Mani Shankar Aiyar told the 132nd OPEC ministerial conference in Vienna. India is the only importer among Asian countries to have been invited for the meet to present views on petroleum and sustainable development. All Asian countries, barring Japan, were developing nations and accounted for twothirds of the crude imports from West Asia. During 2003, Asian consumers paid about half a dollar per barrel more than US buyers and nearly two dollars per barrel more than European consumers. In the April-July quarter this year, Asian countries paid 36 cents per barrel more than the US and close to three dollars per barrel more than European customers. The Asian premium costs between $5-10 billion a year to Asian countries, according to the Japan's Institute of Energy Economics. Import dependent India estimates the premium accounts for $750 million to $1 billion of its over $18 billion oil import bill, as per petroleum ministry official reports. In the absence of energy efficient technology it takes India nearly three times as much oil to produce one unit of economic output as in the OECD (Organisation for Economic Co-operation and Development) countries.

India, Iran should sign gas pipeline deal

India has said in last week of June, 2008 that it will sign very soon an agreement with Iran and Pakistan in connection with the transnational pipeline project involving the three countries.
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the Iran-Pakistan-India (IPI) pipeline project is of $7.5 billion There are some issues with Pakistan that has been taken care of since the Pakistan oil minister has changed and so India will have to deal with the new minister who will be dealing with it. Very soon India hopes to sign the agreement with Iran and Pakistan. The project was first mooted in 1994 but has been stalled by a series of disputes over prices and transit fees.

India's domestic gas supply meets barely half its fast growing demand, and with projected 78 percent annual growth, the country has to ensure reliable supply of affordable energy. As long as natural gas is used to move India's power turbines, Iran, geographically closest to India, will be the lowest cost supplier.

While for India the pipeline is almost a must, Pakistan can afford to kill the project and reap many diplomatic and economic benefits without compromising its energy security. Should it decide to do so it could opt for an alternative energy route such as the proposed US$2 billion Turkmenistan-Afghanistan-Pakistan (TAP) gas pipeline which would carry gas from Daulatabad in Turkmenistan via Herat Afghanistan to Multan. For an additional US$500 million TAP can be extended to Fazilka on the Pakistan-India border and hence provide gas to India as well. At a later stage TAP could be expanded further to connect other fields in Central Asia to Gwadar, turning the new port into one of the world's most important energy hubs. From an energy security standpoint TAP could provide Pakistan with 3,350 million meters cubic feet per day (mm cfpd) of gas, more than the 2,230 mm cfpd the IPI is planned to carry. Economically, shifting from IPI to TAP should be of no consequence. The potential revenue of the IPI, US$700 million in transit fees alone, would be collected too were TAP extended to India. TAP will also save Pakistan the need to depend on Iran which has never been a good neighbour due to its role in spreading Shia militancy in the predominantly Sunni Pakistan. Furthermore, Iran is not a reliable supplier. Last winter it failed to meet its
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contractual agreements to Turkey resulting in the disruption of gas supplies to Turkey during the winter. Running through the restive province of Balochistan, the IPI will face constant threats its reliability due to sabotage by Baloch insurgents.

Asking OPEC to raise oil production

India has joined the global chorus asking members of oil exporting cartel OPEC to increase volumes to calm global crude prices. Indian oil minister has complimented his Saudi counterpart for unilateral decision to increase production by 300,000 bpd (barrels per day). This action would help supply side management and would thus stabilise the current oil market Major oil producing countries should raise their output to calm the market further and revitalize the global economic growth. Saudi Arabia is the world's largest oil exporter and has unilaterally decided to raise production by 300,000 bpd, mainly for exporting to Asian markets which are witnessing record growth in demand and are pushing up global prices. This is an effort at weakining the adverse impact of high oil prices on developing economies. The Indian government has already raised prices of motor fuels and cooking gas this year to save state-owned oil marketing companies from bankruptcy.

The current high oil prices coupled with the turmoil in the financial markets would seriously impact the economic growth of most countries and in the longer term affect both producers and consumers," Deora wrote.

However, experts feel that India does not have much influence in the global oil market and Saudi Arabia had been resisting much stronger US demands for pumping more oil for almost
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year

before

deciding

to

raise

its

output.

India in 2007-08 spent $68 billion for its crude imports, up from $48.38 billion in 2006-07. Even after the June 4, 2008 decision raising prices of diesel by Rs 5 a litre, petrol by Rs 3 and cooking gas cylinders by Rs 50, besides reducing customs and excise duties, the staterun firms continue to incur losses of Rs 13.79 a litre on petrol, Rs 23.22 on diesel, Rs 35.98 on kerosene and Rs 302.99 on each cooking gas cylinder refill.

Building relationship with OPEC: Indian finance minister and petroleum minister will also attend OPEC meet

The decision to send Indian finance minister to the meeting, called by King Abdullah of Saudi Arabia to discuss measures to stabilize the international oil market, have been taken at the highest level in view of the rising inflationary trends and the volatility in oil market threatening to derail economic growth. All eyes are on this high-level meeting between producers and consumer-nations. Saudi Arabia has already announced that it will step up its daily oil output by 2,00,000 barrels to help cool record-high crude futures. Saudi Arabia, the worlds biggest oil exporter, is believed to be the only producer with spare output capacity. However, there are chances that production increases may still not keep up with future demand. Indian finance minister would interact with leading OPEC (Organisation of the Petroleum Exporting Countries) members and seek their intervention in cooling crude prices. The idea is to get a proper feedback from the oil producers in order to chart a strategy for dealing with a situation that could emerge in future. India is a petroleum import-dependent nation and any volatility in the crude oil market would only make things difficult for the Indian government in an election year

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 India should prosecute OPEC in WTO

We live in the WTO era of rule-based trade aimed at increasing competition and removing distortions. Yet there is an absolutely huge exception to this rule called OPEC (Organization of Oil Exporting Countries). This cartel shamelessly aims to manipulate production to deceive consumers.

Why does the world community not impose sanctions on the cartel and ensure its break-up? Clearly the very existence of OPEC is anti-competitive. India is now a huge importer of energy, and its dependence on imported energy will rise further in coming years. But India by itself cannot take on OPEC. Rather, it must raise the issue within WTO, and seek multilateral action to stop the fleecing of oil consumers.

US should also help India in the process considering the improving relations between the two countries. US anti-trust legislation makes it illegal for producers to collude to raise prices. This is why the US government fined multinational vitamin producers and even Microsoft. Logically, it should prosecute government-owned oil companies in OPEC countries, sequester OPEC assets in the US, and arrest any OPEC oil minister who steps into the USA. But it will not do that because it is reluctant to move against cartelizes who happen to be governments rather than corporations. The State Department and Pentagon view many OPEC countries as valuable allies. The second reason for US reluctance to act is its own oil producers, notably those based in Texas, who are major beneficiaries of cartelization. Many of them are engaged in oil exploration in OPEC countries, and fear that anti-trust action against OPEC could jeopardize their foreign operations. So this combination of big oil, the Pentagon and State Department has put paid to any US anti-trust initiative against OPEC. Instead the US has used diplomatic pressure on OPEC, viewing cartelization as a diplomatic rather than anti-trust issue.

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But even governments are answerable in forums like WTO, which seeks to lower global trade barriers. Cartelization is a far more objectionable barrier to trade than quotas or tariffs. India needs to raise the cartelization of oil as a WTO issue, and canvass support from other oil-importing countries. If India moves positively, the US and other western nations will find it difficult to adopt the position that protecting Indian small scale industries is bad but looting consumers of oil is acceptable.

Trading With Non-OPEC Countries

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Non-OPEC countries contain less than one-fourth of the world's proven oil reserves but produce nearly 60 percent of the world's oil. They also possess most of the world's capacity for refining crude oil into petroleum products such as gasoline and heating oil. Because nonOPEC countries have smaller reserves which are being depleted more rapidly than in OPEC, their overall reserves-to-production ratio, which is an indicator of how long proven reserves would last at current production rates, is much lower (about 14 years for non-OPEC and 73 years for OPEC).

The oil industries in non-OPEC countries differ from those of OPEC countries in several fundamental ways: Markets. Whereas most OPEC oil is produced for export, many non-OPEC countries, such as the United States, produce oil primarily to meet their domestic demand for petroleum.

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Nevertheless, non-OPEC countries as a group account for about 45 percent of crude oil trade worldwide. Industry Ownership. OPEC countries generally have state-owned and state-operated oil industries. Although some non-OPEC countries (e.g., China, Mexico) also have state industries, most either already have a private sector oil industry or are promoting increased private investment in their oil industries Finding Costs. Non-OPEC oil reserves generally cost more to develop and produce than OPEC reserves. Finding costs in the Middle East (where OPEC countries control most of the region's oil reserves) averages just over $2/barrel compared with about $4.50/barrel in the United States and western Europe, and $5.75/barrel in Canada Excess Capacity. Non-OPEC producers typically operate close to capacity, thus they have a relatively limited ability to boost production without significant additional investments. Nearly all of the world's excess production capacity is in OPEC countries.

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REFERENCES

www.doe.gov www.eia.doe.gov/cabs/india.htm www.wikipedia.org www.opec.org Reliance Review of Energy Markets Energy Research Group, RIL news.bbc.co.uk

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