OPEC AND OIL PRICES

OPEC brings together most of the world's oil exporting countries to coordinate their petroleum policies and provide them with technical and economoical aid. OPEC was established in september 1960 at Baghdad,Iraq and was formally constituted by Iran,Kuwait,Saudi Arabia and Venezuela in 1961. OPEC was susequently joined by Qatar(1961),Indonesia and Libya(1962),Abu Dhabi(1967;membership was transferred to UAE in 1974),Algeria(1969),Nigeria(1971),Ecuador(1973) and Gabon(1975). The headquarters initially at Geneva was shifted to Vienna in 1965.

Today OPEC accounts for 40% of world's oil producton(In 1973 it was 55% and in 1980 it was 45%; the decline is due to increased role of Russia and Kazakistan). The supreme authority of the organisation is the conference consisting of reprentatives (generally oil ministers) of all the member states,each with one vote. It meets twice a year to formulate policies. All decisions (except those concerned with procedural matters)are adopted unanimously. The resolutions of the conference become effective 30 days after the conclusion of the meeting at which they are adopted,unless one or more members submit their opposition to the resolution.

However,an absence of effective coordination with non-OPEC oil producing countries has lead to much tensions in the world oil market. Four members-Kuwait,Qatar,Saudi Arabia and UAE-have large oil reserves in relation to thier population. The largest producer is Saudi Arabia, second largest being Iran.

OPEC decisions have been of great significance in the world oil market. OPEC gave FIRST OIL SHOCK to the world in October 1973(using oil prices as a political weapon against western nations for supporting Israel in the war of 1973).The organisation again raised prices to 130% in December 1973 and an embargo was placed on oil shipments to the US and Netherlands at the same time.

However,today condition is very different. Oil prices are going down like anything. It has reached below $34 a barrel (as in the third week of December 2008). The main reason of this is price cycle. First demand in western countries was huge(mainly in US which stands at no.1 position when it comes to oil consumption).However,OPEC kept on increasing oil prices. Then suddenly recession came into action and hence demand decreases,especially in western countries(this decrease in demand was due to the fact that people now want to spend less). As a result of decrease in demand, oil prices started coming down.

Recently,OPEC met in Oran, Algeria on December 17, 2008, and decided to cut 4.2 million barrels per day (mmbd) from their actual September production level of 29.045 for the OPEC subject to production quotas, effective January 1. This amounts to an additional cut of approximately 2.4 mmbd from the October production quota level of 27.308, and a cut of 2.9 mmbd from estimated November production, if the cuts are fully implemented.

While this is a somewhat confusing way to present their decision, the Algerian announcement would imply a new OPEC production goal of 24.845 mmbd from January 1. When combined with the October agreement, this latest cut represents a cumulative 4.0 mmbd decline from the September quota agreement, and a 4.2 mmbd cut (or 14.4%) in actual OPEC production from September levels. Non-OPEC producers Azerbaijan and Russia, who attended the meeting as observers with great fanfare, declined the opportunity to join OPEC and did not make a formal pledge to cut production and exports. Mexico and Norway declined to participate, saying that their production was already declining as a result of depletion.

OPEC is trying its best to increase world oil prices. However experts believe that oil prices are unlikely to go above $70 a barrel in 2009. Experts also believe that US President-elect Barack Obama’s stated policy of supporting development of alternate energy sources will also impact oil prices. At current crude oil prices developing alternate energy sources is no viable. But if the new US government subsidises alternate energy, and gives concessions, then companies will think about it.

Its difficult to predict anything with 100% accuracy. However world believes that countries like China and India have the potential to play some role in this context as demand for oil in these countries is constantly increasing. So this time not just OPEC, but India,China,Russia,kazakistan and many others have a major role to play. Lets hope whatever happen would be good for everyone.