Comments: OPEC Turns 50

Abstract

Editor's column Fifty years ago, the heads of state of five countries—Saudi Arabia, Iran, Iraq, Kuwait, and Venezuela—signed an agreement in Baghdad that would significantly change the way oil is produced, priced, and traded. In a celebration marking OPEC’s half-century, the organization claimed that, despite its obituary having been written numerous times over the years, it had succeeded in achieving its original pledge to “stabilize oil prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations.” Said current OPEC Secretary General Abdalla Salem El-Badri: “The 50 years have seen various ups and downs, but the organization has remained true to its original goals of safeguarding the interests of its member countries, securing a steady income to producing countries, ensuring efficient and regular supply of petroleum to consumers, and a fair return to investors at fair and acceptable prices.” OPEC may not dominate headlines like it did during the 1970s’ oil embargoes that quickly got the consumption-rich West’s attention, but it remains relevant and will continue to play a leading role in the oil market in the future. Last month, the organization approved a new Long-Term Strategy, its first in 5 years, in the face of a changing oil outlook. The group also agreed to hold its production steady, leaving output quotas unchanged since December 2008. Then, OPEC announced the last in a series of production cuts designed to revive oil prices that had dropped from USD 140/bbl to USD 34/bbl. The plan worked, with oil prices seemingly stable for now in the USD 70–80/bbl range despite global economic weakness. OPEC’s forecast now sees only a slight increase in global oil demand over the next 2 years, with growth coming from China and other developing countries. The group will face challenges ahead and the country where the organization was created may prove to be its biggest headache. Iraq produces 2.3 million B/D now but has plans to rapidly ratchet up production to rival Saudi Arabia’s 8 million B/D and then eventually reach 12 million B/D. That is provided the country can rebuild its infrastructure, which severely limits such output gains, but the country just last month dramatically increased its estimate of proven oil reserves to 143.1 billion bbl, up from a previous 115 billion bbl. Any increase in Iraqi production would wrest market share from other OPEC producers, which could lead to infighting. Challenges will also arise as the world looks more to natural gas and alternative fuels for energy. But hydrocarbons will still play a major role in energy supply for years to come, and OPEC member countries hold three-quarters of the globe’s reserves. Ian Skeet, a former Shell executive and author of a book on OPEC’s first 25 years, said about the future oil market then what is likely true today: “What can be said is that the international oil trade will continue, that the main supplier of that trade will be the countries which today form OPEC, and that Saudi Arabia will remain the single most important influence on oil price.”