Abstract
This chapter reviews the general history of Organization of the Petroleum Exporting Countries (OPEC) and evolution of models explaining its role in the world’s oil market in the context of key events. OPEC’s varying conduct over time implies that no single model fits its behaviour. OPEC’s behaviour and pricing power cannot be generalized—it is dynamic and context-specific and is influenced by market conditions, the internal dynamics within OPEC, its interactions with non-OPEC producers, and the strategic objectives of its key member, Saudi Arabia. It concludes that although OPEC believes that oil will continue to play a role in the world’s energy mix, there is a clear recognition that in the face of climate change policies, economic diversification remains the only viable long-term response.
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Notes
- 1.
In 2015, Goldman Sachs published a report titled ‘The New Oil Order: Making Sense of an Industry’s Transformation’, where it sees the oil market ‘moving into an environment that reinforces commodity prices to be lower not higher’. Available at: http://www.goldmansachs.com/our-thinking/outlook/the-new-oil-order/#overview.
- 2.
The terms ‘IOCs’, ‘companies’, and ‘multinationals’ are used to refer to the dominant group of IOCs in their various forms (these forms changed through industry mergers and acquisitions over the years). The original ‘Seven Sisters’ comprised Anglo-Persian Oil Company (now BP), Gulf Oil, Standard Oil of California (SoCal), Texaco (now Chevron), Royal Dutch Shell, Standard Oil of New Jersey (Esso/Exxon), and Standard Oil Company of New York (now ExxonMobil).
- 3.
The structure of the US oil industry was different from the rest of the world, helped by the subsoil ownership structure, the maturity of the sector, and antitrust legislation. Many smaller companies were involved in all parts of the value chain (Fattouh and van der Linde 2011).
- 4.
The official objective of OPEC was ‘to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry’ (Fattouh and Mahadeva 2013).
- 5.
By the end of 1971, six other members had joined OPEC: Qatar, Indonesia, Libya, the United Arab Emirates, Algeria, and Nigeria.
- 6.
- 7.
See Lajous (2015) for details of these negotiations.
- 8.
Given the uncertainty about the elasticity of the US shale supply curve, Fattouh et al. (2015) show in a simple game that it is better off for Saudi Arabia to assume that the US supply curve is elastic and not to cut output. But as Saudi Arabia learns more about this new source of supply, its policy could adapt accordingly.
- 9.
The property rights theory postulates that faced with the threat of nationalization, the oil majors increased their production levels in order to maximize the present value of their profit stream, which implies a very high implicit discount rate. In contrast, governments have a longer time horizon in developing the reserve base and hence would slow down the growth of oil extraction.
- 10.
While OPEC should be preparing for a future where the share of oil in energy mix will continue to fall, the risk of secular decline in demand due to climate change policies does not seem imminent from OPEC’s point of view. For instance, OPEC’s 2014 World Oil Outlook suggests that globally, oil demand will increase by just over 21 mb/d from 2013 to 2040 driven by non-OECD. The BP Energy Outlook to 2035 forecasts that shale oil production will level off in the share of world oil production post-2020, which will be replaced by growth in OPEC output. In such a world, the challenge facing OPEC would be how to increase production to meet the expected increase in oil demand.
- 11.
Or ‘stranded assets’, from the point of view of the owners of fossil fuel reserves.
- 12.
‘OPEC Statement to the United Nations Climate Change Conference (COP19)’, Delivered by OPEC Secretary General, HE Abdalla Salem El-Badri, at the UN Climate Change Conference (COP19/CMP9), Warsaw, Poland, 22 November 2013, http://www.opec.org/opec_web/en/2670.htm.
- 13.
See Ghanem et al. (1999) and Loulou et al. (2008). For instance, Loulou et al. conclude that ‘OPEC would derive no advantage in flooding the oil market in the Climate scenario, since its own net revenues would decrease in such an event. In other words, the severe climate target is more important in determining oil demand than OPEC’s policies, and thus decreasing oil prices does not induce a sufficient demand rebound to overcome the lower price’.
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Fattouh, B., Sen, A. (2016). The Past, Present, and Future Role of OPEC. In: Van de Graaf, T., Sovacool, B., Ghosh, A., Kern, F., Klare, M. (eds) The Palgrave Handbook of the International Political Economy of Energy. Palgrave Handbooks in IPE. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-55631-8_3
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