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OPEP5
OPEP5
At various times, OPEC members have displayed apparent anti-competitive cartel behavior
through the organisation's agreements about oil production and price levels.[23] Economists
often cite OPEC as a textbook example of a cartel that cooperates to reduce market
competition, as in this definition from OECD's Glossary of Industrial Organisation
Economics and Competition Law:[24]
International commodity agreements covering products such as coffee, sugar, tin and more
recently oil (OPEC: Organisation of Petroleum Exporting Countries) are examples
of international cartels which have publicly entailed agreements between different national
governments.
While OPEC is at times cited as a textbook example of a cartel, various authoritative and
academic sources provide a broader perspective on the organization's role. For instance,
the US Energy Information Administration's[25] glossary explains OPEC as:[1]
An intergovernmental organization whose stated objective is to 'coordinate and unify the
petroleum policies of member countries'.
The Oxford Dictionary of Energy Science (2017)[26] defines OPEC as:[2]
An organization set up in 1960 to coordinate petroleum policies among its member
countries, initially with the aim of securing a regular supply to consuming countries at a
price that gave a fair return on capital investment.
OPEC members strongly prefer to describe their organisation as a modest force for market
stabilisation, rather than a powerful anti-competitive cartel. In its defense, the organisation
was founded as a counterweight against the previous "Seven Sisters" cartel of multinational
oil companies, and non-OPEC energy suppliers have maintained enough market share for
a substantial degree of worldwide competition.[27] Moreover, because of an economic
"prisoner's dilemma" that encourages each member nation individually to discount its price
and exceed its production quota,[28] widespread cheating within OPEC often erodes its
ability to influence global oil prices through collective action.[29][30] Political scientist Jeff
Colgan has challenged that OPEC is a cartel, pointing to endemic cheating in the
organization: "A cartel needs to set tough goals and meet them; OPEC sets easy goals and
fails to meet even those."[8]
OPEC has not been involved in any disputes related to the competition rules of the World
Trade Organization, even though the objectives, actions, and principles of the two
organisations diverge considerably.[31] A key US District Court decision held that OPEC
consultations are protected as "governmental" acts of state by the Foreign Sovereign
Immunities Act, and are therefore beyond the legal reach of US competition law governing
"commercial" acts.[32] Despite popular sentiment against OPEC, legislative proposals to limit
the organisation's sovereign immunity, such as the NOPEC Act, have so far been
unsuccessful.[33]
Conflicts[edit]
OPEC often has difficulty agreeing on policy decisions because its member countries differ
widely in their oil export capacities, production costs, reserves, geological features,
population, economic development, budgetary situations, and political
circumstances.[34][35] Indeed, over the course of market cycles, oil reserves can themselves
become a source of serious conflict, instability and imbalances, in what economists call the
"natural resource curse".[36][37] A further complication is that religion-linked conflicts in the
Middle East are recurring features of the geopolitical landscape for this oil-rich
region.[38][39] Internationally important conflicts in OPEC's history have included the Six-Day
War (1967), Yom Kippur War (1973), a hostage siege directed by Palestinian
militants (1975), the Iranian Revolution (1979), Iran–Iraq War (1980–1988), Iraqi
occupation of Kuwait (1990–1991), September 11 attacks (2001), American occupation of
Iraq (2003–2011), Conflict in the Niger Delta (2004–present), Arab Spring (2010–
2012), Libyan Crisis (2011–present), and international Embargo against Iran (2012–2016).
Although events such as these can temporarily disrupt oil supplies and elevate prices, the
frequent disputes and instabilities tend to limit OPEC's long-term cohesion and
effectiveness.[40]
In response to a wave of oil nationalizations and the high prices of the 1970s, industrial
nations took steps to reduce their dependence on OPEC oil, especially after prices reached
new peaks approaching US$40/bbl in 1979–1980[83][84] when the Iranian
Revolution and Iran–Iraq War disrupted regional stability and oil supplies. Electric utilities
worldwide switched from oil to coal, natural gas, or nuclear power;[85] national governments
initiated multibillion-dollar research programs to develop alternatives to oil;[86][87] and
commercial exploration developed major non-OPEC oilfields in Siberia, Alaska, the North
Sea, and the Gulf of Mexico.[88] By 1986, daily worldwide demand for oil dropped by
5 million barrels, non-OPEC production rose by an even-larger amount,[89] and OPEC's
market share sank from approximately 50 percent in 1979 to less than 30 percent in
1985.[53] Illustrating the volatile multi-year timeframes of typical market cycles for natural
resources, the result was a six-year decline in the price of oil, which culminated by plunging
more than half in 1986 alone.[90] As one oil analyst summarized succinctly: "When the price
of something as essential as oil spikes, humanity does two things: finds more of it and finds
ways to use less of it."[53]
To combat falling revenue from oil sales, in 1982 Saudi Arabia pressed OPEC for audited
national production quotas in an attempt to limit output and boost prices. When other OPEC
nations failed to comply, Saudi Arabia first slashed its own production from 10 million
barrels daily in 1979–1981 to just one-third of that level in 1985. When even this proved
ineffective, Saudi Arabia reversed course and flooded the market with cheap oil, causing
prices to fall below US$10/bbl and higher-cost producers to become unprofitable.[89][91]: 127–
128, 136–137
These strategic measures by Saudi Arabia to regulate oil prices had profound economic
repercussions. As the swing producer in that period, the Kingdom faced significant
economic strain. Its revenues dramatically decreased from $119 billion in 1981 to $26
billion by 1985, leading to substantial budget deficits and a doubling of its debt, reaching
100% of the Gross Domestic Product.[92]: 136–137
Faced with increasing economic hardship (which ultimately contributed to the collapse of
the Soviet bloc in 1989),[93][94] the "free-riding" oil exporters that had previously failed to
comply with OPEC agreements finally began to limit production to shore up prices, based
on painstakingly negotiated national quotas that sought to balance oil-related and economic
criteria since 1986.[89][95] (Within their sovereign-controlled territories, the national
governments of OPEC members are able to impose production limits on both government-
owned and private oil companies.)[96] Generally when OPEC production targets are
reduced, oil prices increase.[97]
1990–2003: ample supply and modest disruptions[edit]
See also: 1990 oil price shock
One of the hundreds of Kuwaiti oil
fires set by retreating Iraqi troops in 1991
[98]
Fluctuations of
Brent crude oil price, 1988–2015 [99]
Leading up to his August 1990 Invasion of Kuwait, Iraqi President Saddam Hussein was
pushing OPEC to end overproduction and to send oil prices higher, in order to help OPEC
members financially and to accelerate rebuilding from the 1980–1988 Iran–Iraq War.[100] But
these two Iraqi wars against fellow OPEC founders marked a low point in the cohesion of
the organization, and oil prices subsided quickly after the short-term supply disruptions.
The September 2001 Al Qaeda attacks on the US and the March 2003 US invasion of
Iraq had even milder short-term impacts on oil prices, as Saudi Arabia and other exporters
again cooperated to keep the world adequately supplied.[99]
In the 1990s, OPEC lost its two newest members, who had joined in the mid-1970s.
Ecuador withdrew in December 1992, because it was unwilling to pay the annual
US$2 million membership fee and felt that it needed to produce more oil than it was
allowed under the OPEC quota,[101] although it rejoined in October 2007. Similar concerns
prompted Gabon to suspend membership in January 1995;[102] it rejoined in July
2016.[52] Iraq has remained a member of OPEC since the organization's founding, but Iraqi
production was not a part of OPEC quota agreements from 1998 to 2016, due to the
country's daunting political difficulties.[103][104]
Lower demand triggered by the 1997–1998 Asian financial crisis saw the price of oil fall
back to 1986 levels. After oil slumped to around US$10/bbl, joint diplomacy achieved a
gradual slowing of oil production by OPEC, Mexico and Norway.[105] After prices slumped
again in Nov. 2001, OPEC, Norway, Mexico, Russia, Oman and Angola agreed to cut
production on 1 January 2002 for 6 months. OPEC contributed 1.5 million barrels a day
(mbpd) to the approximately 2 mbpd of cuts announced.[91]
In June 2003, the International Energy Agency (IEA) and OPEC held their first joint
workshop on energy issues. They have continued to meet regularly since then, "to
collectively better understand trends, analysis and viewpoints and advance market
transparency and predictability."[106]
2003–2011: volatility[edit]
See also: 2000s energy crisis
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