Wednesday, December 16, 2009
OPEC AND THE POLITICS OF GLOBAL ENERGY.
The term Energy in simple parlance refers to power obtained from sources such Electricity, Coal, Petroleum or Water etc, that make machines and automobiles to work. The world is presently in a highly industrialized and technological age which needs a lot of energy to produce goods and services needed by man. Though there are different types of energy such as Wind, Water, Coal, Bio fuel, Solar and Oil etc, Crude oil no doubt is the most sought after source of energy in the globe.
Crude oil is produced in different parts of the world such as United States of America, Saudi Arabia, Russia, Venezuela, Angola, Nigeria, Gabon, Canada, Ecuador, etc, and crude oil prices behaves much as any other commodity with wide price swings in terms of shortage or over supply. The crude oil price cycle may extend over several years responding to changes in demand as well as OPEC and non-OPEC supply (Williams, 2008). The focus of this paper is to critically unravel how the activities of OPEC, affects the availability of Oil as an indispensable source of global energy. We shall therefore explore the conditionalities that led to the formation of OPEC, its aims and objectives and how its activities affect the production and supply of Oil (petroleum) in the world. More importantly the study shall investigate the politics of quota system and oil prices and their effect on global energy sourced from oil. The study is organized in to seven sections. This includes the Introduction, Politics, Oil as a Source of Global Energy, OPEC and Global Energy, OPEC and Global Oil Price/Supply, OPEC and the Instrumentality of Sanctions, OPEC and its Challenges and lastly the Conclusion.
As a common phenomenon in the social sciences, the concept politics had different connotations or interpretations. The reason, been that, politics as an issue, concept and phenomenon basically invokes a lot of variegated opinions and sentiments. This is because, virtually everybody has an “expert opinion” on issues of politics, and politics as a universal phenomenon affects every one of us in different dimensions. In the globe presently, we live in an age of growing politicization where government actions and inactions, the water we drink, institutions we attend, marriage and divorce, our accommodation and mode of transportation, cost and provision of basic social amenities, activities of international organizations, e.t.c all fall within the purview of politics.
The above scenario corroborates the declaration of the famous great philosopher, Aristotle and originator of the term “politics” that “man by nature is a political animal”. He went further to opine that the essence of social existence is politics and that where two or more men are interacting with one another, they are invariably involved in a political relationship, and this is a natural and inevitable predisposition among men…As men seek to define their positions in society, as they attempt to wring personal security from available resources and as they try to influence others to accept their points of view, they find themselves engaging in politics (cited in Rodee, et al 1972:2). Politics is therefore a ubiquisitous phenomenon and an unavoidable fact of human existence.
Politics basically refers to the conscious or unconscious struggle for domination, advantage and interest actualization by man in society. Hence politics is been defined as “who gets what, when and how (Lasswell 1930:23), some scholars prefers “and how much” to Lasswell’s conceptualization. Politics is organized dispute about power and its use, involving choice among competing values, ideas persons, interests and demands (Curtis, 2007). Politics is the manner in which power is obtained, exercised and controlled, the purpose for which it is used, the manner in which decisions are made, the factors which influence the making of those decisions, and the content in which those decisions take place (Sohari, 1987:10). The above implies that politics connotes social relations involving the intrigue to gain authority or power, and in other cases the maximization of interests. To Bierce (1992:2) politics is strife of interests masquerading as a contest of principles. It is the conduct of public affairs for private advantage. We can deduce from the above definitions that politics is a dynamic and interactive activity. It is the act of influencing, controlling and manipulating others. International organizations therefore engage in politics to protect and promote their interest.
OIL, AS SOURCE OF GLOBAL ENERGY
Petroleum or crude oil is a greasy liquid, with a unique and characteristic odor, occurring naturally at the surface of the earth and at dept (Wallace and Good, 1950:3). The first commercial oil well was drilled in North-Western Pennyslavania in 1959, known as Drake Well (Middleton, 2007:6). All over the world, the lives of people are affected and the destiny of nations is probably determined by the results of Oil industry operations. Oil keeps the factories of the industralised countries working and provides the revenues, which enables Oil Exporters to execute ambitious national and economic development plans. The march of progress would be retarded and life itself could become unbearable if the world was deprived of oil. That is why oil has become concern of governments, a vital ingredient of their politics and a crucial factor in political and diplomatic strategy. Oil has been given the image of a big business ruled by naked politics and dominated by ruthless men who are sensitive to nothing except their profit (Feyide, 1986:7). By any standards, Oil is the World’s leading industry in size, it is probably, the only international industry that concerns every country. And as a result of the geographical separation of regions of major production and regions of high consumption, it is first in importance in its contribution to the world’s tonnage of international trade and shipping. Because of these and other attributes, such as its involvement in both national and international affairs, a day hardly passes without oil being in the news (Adeniran, 1992).
Oil supplies assume great importance in world politics because oil is not being discovered at the same rate it is being used. For every two barrels pumped out of the ground, the giant Oil Companies discover only one new barrel. About 70 percent of the oil consumed today was found 25 years ago or longer. Meanwhile, demand for oil keeps escalating and the era of cheap and abundant oil is ending (Deffeyes, 2005:66). Oil consumption hit a new all-time high of 90 million barrels each day in 2006. The International Energy Agency predicts that by 2030 the world will be using 50 percent more oil as demand grows to 120 million barrels a day and it warns that the world will need to spend 3 trillion dollars over the next 25 years to meet this run-away global oil demand (Kegley, 2007:368).
There are different varieties of crude oil. Each variety of oil has a name: United States West Texas Intermediate, North Sea Brent Blend, Algerian Saharan Blend, Indonesian Minas, Nigerian Bonny Light, Saudi Arabian Arab Light, Fatch from Dubai, Venezuelan Tia Suana Light, Mexican Isthmus and so on. And the quality of a particular oil determines its cost (Middleton, 2007:15) The general rule of thumb is the “lighter” and “sweeter” the oil, the more valuable it is.
OPEC AND GLOBAL ENERGY
The Organization of Petroleum Exporting Countries (OPEC) is a permanent inter-governmental organization created at the Baghdad conference on September 10-14, 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The international Oil cartel, OPEC was formed in reaction to the activities and policies of the defunct Seven Sisters cartel, made up of powerful western international oil companies. The first version of OPEC was created in Baghdad after Exxon, one of the Seven Sisters Oil companies cut oil prices without consulting the oil producing countries.
Therefore, the furious oil ministers from Saudi Arabia Venezuela, Kuwait, Iran and Iraq met in 1960 and joined to form OPEC, hoping it would emulate the Texas Railroad Commission in controlling production and prices of oil (Ikein, 1998:72). The formation of OPEC was also triggered by a 1960 law instituted by American President Dwight Eisenhower that forced quotes on Venezuelan and Persian Gulf oil imports in favour of the Canadian and Mexican Oil industries. When this led to falling prices for oil in these regions, Venezuela’s President Romulo Betancourt reacted seeking an alliance with oil producing Arab nations as a preemptive strategy to protest the continuous autonomy and profitability of Venezuela’s oil (www.opec.org.).
In terms of membership, the founding members (Iraq, Iran, Venezuela, Kuwart and Saudi Arabia) were later joined by nine other members. This includes: Qatar (1961), Indonesia (1962) – suspended its membership from January 2009, Libya (1962), United Arab Emirates (1987), Algeria (1969), Nigeria (1971), Ecuador (1973) – suspended its membership from December 1992-October 2007, Angola (2007), and Gabon (1975-1994), OPEC had its headquarters in Geneva, Switzerland in the first 5 years of its existence, but was moved to Vienna, Austra on September 1st, 1965.
To this end, the OPEC objectives are:
- To keep oil competitive relative to other energy sources through production and pricing policy.
- To protest the per barrel purchasing power of oil export revenues.
- To maintain the intrinsic value of oil both as a non-renewable resources and as a raw material for other noble uses of petroleum.
- To take cognizance of the impact of oil prices on the world economy and especially the efforts of the developing countries to establish a new international economic order.
- To regulate the production to secure an equilibrium between supply and demand in the market (Saad, 1988: 12).
However, according to its statutes, one of the principal goals of OPEC is the determination of the best means for safeguarding the Carter’s interest, individually and collectively. It also co-ordinate and unify petroleum policies among Member Countries and pursues ways and means of ensuring the stabilization of prices in international oil market, with a view to eliminating harmful and unnecessary fluctuations; giving due regard at all times to the interest of the producing nations and to the necessity of securing a steady income to the producing countries, an efficient and regular supply of petroleum to consuming nations, and a fair return on their capital to those investing in the petroleum industry (The Statute, OPEC, 1960).
It is imperative to note that, in terms of share of world crude oil reserves, OPEC constitute 939 billion barrels (78%), while non-OPEC states has 265 billion barrels (22%). Out of this figure the bulk of OPEC reserves is concentrated in the Middle East with Saudi Arabia, Iran and Iraq contributing 55% of the OPEC total (http://www.Opec.org). OPEC rise to international prominence in the 1970’s as its member countries took control of their domestic petroleum industries and acquired a major say in the pricing of crude oil on the worlds markets.
The decision-making center of OPEC is the Conference comprising National delegations at the levels of oil ministers, which meet twice each year to decide the overall out, that is production quotas for individual members.The Conference also meet in special sessions when deemed necessary to review the quotas.
OPEC AND GLOBAL OIL PRICE/SUPPLY
The fundamental mechanism adopted by OPEC to influence the supply of oil to the global market is the quota system. This implies that in order to enhance the protection of the collective interest of member states and profit maximization, each member state is allotted a production quota per day to stabilize the supply of oil to the global market. The logic is that, in tandem with the economic laws of Demand and Supply, unregulated production will lead to surplus oil for sale which will reduce the global price. While regulated production level will lead to stability and increase in the global oil price. Common sensically, the inability of any OPEC member state to meet up its quota of production will invariably result of the reduction in the supply of global oil and hence, increase in price (Ebienfa and Nwaodike, 2009:10-11),
It is pertinent to that increase in the price of oil per barrel translate to current account surplus for the member states. OPEC benefited tremendously from the quota system especially in the first decade of its inception and the trend has some how continued to date. The profit margin has persistently lingered, because, when ever OPEC member states are not satisfied with the existing price of oil (per barrel) modalities are introduced to reduce the Production Quotas of Member States to maintain profit maximization. OPEC used oil reserves in determining the production quota for its member countries. Some scholars have argued that, this reserve based allocation system seemingly penalizes countries with large population and leads to the problem of cheating. In general, the use of the quota system under a broad range of circumstances is well recognized in the economic literature and it is widely known to be inefficient, particularly the welfare loss from not having free trade. A number of empirical studies have shown that the use of quotas cause inefficiency in global trade (Ikein, 1998:70).
The use of quotas by OPEC to restrict crude oil production so as to gain control of the world oil market through its pricing is an interesting area to understanding the politics of quotas in world trade. OPEC conceives the retention of the quota system as a means to influence the production and pricing of oil resources to benefit its members. It is also a means to improve its credibility as a powerful cartel. As Ikein (1998) puts it “the basic rational of OPEC as a cartel is not different from other developing countries view, which emphasizes the risky depending nature of the sale of raw materials for foreign exchange and that a disruptive change in world demand for their raw materials could seriously jeopardize each nations balance of payment. It is further argued that the nature of the extractive industry constitute a systematic depletion of the valuable national assets of the host country constitute a systematic depletion of the valuable national assets of the most country, while leaving little of enduring value. Moreover, in the short run, these raw materials or primary goods are subject to uncontrollable fluctuations, and in the long run they are exhaustible. Oil which is the focus of our attention is not an exception in the above regard. Therefore the politics of OPEC’s quota system is justified.
Be that as it may, disruptions in the production quotas of member states greatly impacts on the price of crude oil. In April, 1990, the average price for a barrel of internationally traded crude oil was less than 15 dollars. Five months later, stimulated by Iraq’s invasion of the tiny oil Sheikdom of Kuwait, it rose to more than 40 dollars. For the third time in less than two decades, the world suffered “an oil shock” when the price paid for the most widely used commercial energy source skyrocketed (Kegley, 2007:367). The problem of cheating, or non-quota adherence, was partly responsible for the Iraqi-Kuwait conflict. Iraq’s incursion into Kuwait is believed to have been a move to punish Kuwait for perceived insubordination. Part of the rational for the invasion is that Kuwait over produce oil, surpassing its quota enough to depress oil prices (Butt, 1990:1). The Iraqi-Kuwait war disrupted the production quotas of the two countries and sent new shock waves into the world oil market, precipitating an immediate increase in oil prices.
The global oil price swings in recent years is also attributed to production disruptions in the OPEC member countries such as Iraq, Nigeria, Saudi Arabia etc. The fact remains that just because increase in price benefits the member countries, OPEC usually down plays the issue of increasing production quotas to stabilize the market. Whereas, in low price regimes, modalities are quickly evolved to cut down production quotas.
For instance, OPEC’s income from oil and exports jumped 35 percent to more than one trillion dollars last year as world oil prices hit record highs of almost 150 dollars per barrel, OPEC saw the total value of its petroleum sales abroad reach almost 1,007 billion dollars in 2008, up from 746 billion dollars in 2007, which was itself a record. The increase in prices last year kept all of OPEC’S members in current account surpluses with a group current account balance of 467 billion dollars for the year, up 28 percent (Business Day 2009, July 2009). The price swings are always not favourable. Experience has shown that from a record high of 150 dollars per barrel in June 2008, it fell to as low as 40 dollars per barrel in 2009 before gradually appreciating to the present 80 dollars per barrel, in November, 2009.
OPEC AND THE INSTRUMENTALITY OF SANCTIONS
The use of sanctions is another vehement force used by OPEC to exert its influence in global affairs. Historically, it was the persistence of the Arab-Israel conflict that triggered a response that transformed OPEC into a formidable political force. The initial step was the formation of the Organization of Arab Petroleum Exporting Countries in 1967, after the Six Day War by Arab members as a separate overlapping group, for the purpose of centering policy and exerting pressure on the west over its support of Israel. However, the climax of it, was during the Yom Kippur war of 1973, fought between Israel and two Arab States, Egypt and Syria. Furious at the emergency re-supply effort that enabled Israel to withstand Egyptian and Syrian forces, Arab members of OPEC embargoed oil shipments to countries deemed pro-Israel, the United stated of America and the Netherlands (Roskin and Berry, 1997:136). Their purpose was to alter these countries policies towards the Arab-Israel conflict (Kegley, 2007:479). It involved reductions in total oil production and a ban on shipment to the United States and Netherlands (Holland). This refusal caused a fourfold increase in the price of oil, which lasted five months, starting on October 17, 1973 and ending on March 18, 1974. For instance, by January 1974, crude oil prices had risen from 3.1 dollars a barrels at the outset of the crisis to 11.65 dollars, a near fourfold increase, and prices for gasoline and heating oil more than doubled. The steep climb in oil prices confronted the United States with a shift in economic power that, according to Henry Kissinger, altered irrevocably the world as it had grown up in the Post War period (Spiegel and Wehling, 1999:311).
OPEC is also flexing its economic muscles by cutting production in an effort to use oil prices as an instrument of coercive diplomacy to influence the course of the unfolding war on terrorism, particularly between Palestine and Israel. In fact, the sanctions mechanism is a crucial tool that can make OPEC a force to reckon with in world politics if effectively utilized. It is indeed truism that the cut off of OPEC exports to the United States, Japan, China or Europe would be catastrophic, and this dependence seemingly puts OPEC in control (Kegley, 2007:369).
OPEC AND ITS CHALLENGES
Though OPEC have played a great role in the politics of global energy in this dispensation where oil presently remains an indispensable source of energy, the cartel is bedeviled with some bottle necks. First and foremost, it has not always being successful for OPEC to influence the price of oil in the world market. Put differently, OPEC has not been very successful with its objectives since the early 1970’s. The argument is that, except in the wake of the 1979 Iranian upheaval, and in market anticipation of a possible destruction of substantial reserves in the 1990-1991 and 2003 Gulf wars, real prices of crude oil fell from 1974 through 2003. Again, the increase of prices in recent times has little to do with the effectiveness of OPEC as a cartel. But to a large extent attributed to increased demand of oil in Asia due to the fast expanding sphere of industrialization, coupled with production problems in Venezuela, Nigeria, and other producing regions; a weakling dollar, and an increased terrorist threat to oil production and transport facilities.
A good illustration is the fact that, after 1980, oil prices began a six-year decline that culminated with a 46 percent price drop in 1986. This was due to reduced demand and over-production that produced a glut on the world market. The oil price instability of the 1980s eroded OPEC power and the Cartel lost revenues. The organization took steps to combat price instability through production cut backs and a quotas system, but the non-OPEC producing countries undermined the organizations position in the world market, and the OPEC market share fell drastically. In the late 1980’s OPEC as a whole produced only 40 percent of the world’s total oil supplies, whereas it had accounted for 64 percent of those supplies in 1979 (Al-Charlabi, 1988:233). The price upheaval is adversely affecting OPEC’s ability to maintain its power. This is due to the fact that the international oil industry is highly vulnerable to shocks, since it is influenced by both economic and political forces.
One of the most common misconceptions about OPEC is that the organization is responsible for setting crude oil prices. Although OPEC did in fact set crude oil prices from the early 1970’s to the mid-1980s, this is no longer the case. It is true that OPEC’s member countries do voluntary restrain their crude production in order to stabilize the oil market and avoid harmful and unnecessary price fluctuations, but this is not the same thing as setting prices. In today’s complex global markets, the price of crude oil is set by movements on the three major International Petroleum Exchanges. They are the New York Mercantile Exchange, the International Petroleum Exchange in London and the Singapore International Monetary Exchange (www.opec.org).
Production disputed is another factor that weakness the collective influence and interest maximization of OPEC states. The idea is, OPEC member countries are faced with the problems typical of developing countries. Due to the above premise, the economic needs of the Member States more often than not, affects the internal politics behind OPEC production quotas. Iran, Nigeria, Algeria and Venezuela have relatively large populations and need high oil revenues to support economic development programmes. In contrast, Saudi Arabia, United Arab, Emirates, and Kuwait with relatively small populations have been producing at levels well in excess of domestic revenue needs in order to satisfy the international market demand (Taher, 1982:154). Thus, the agitations to reduce the production quotas of Member States by countries with smaller reserves relative to populations, termed price “hawks” (e.g Iran and Iraq before the demise of Saddam Hussein’s Presidency) are continuously opposed by the price “doves’ Saudi Arabia and UAE which are nations with larger reserves relative to population. In fact, such demands conflict with Saudi Arabia’s stated long-term strategy of being a partner with the world’s economic powers to ensure a steady flow of oil that would support economic expansion. The argument advanced by Saudi Arabia is that, expensive oil or oil of uncertain supply will drive developed nations to conserve and develop alternative fuels, and that would constitute a threat to their source of national revenue. The Saudi Arabian delegation jeopardizes OPEC’s influence when it walked out of OPEC’s negotiating session on September 10, 2008, where the cartel voted to reduce production. Although the Saudi Arabian delegated officially endorsed the new quotas, they stated that they would not observe them. That is, they will meet the market’s demand, see what the market requires and will not leave a customer without oil. That policy has not changed (New York Times, 2008: September 11).
More so, as mentioned earlier, considering the fact that worldwide oil sales are majorly denominated in United States Dollars, changes in the value of the Dollar against other world currencies affects the Cartel’s decisions on how much oil to produce. This is because, when the dollar falls relative to the other currencies, the Cartel States receive smaller revenues in other currencies for their oil, which invariably causes substantial cuts in their purchasing power.
Again the invention of new sources of energy in the globe such as nuclear energy and biofuel poses a threat to the continuous reign of oil as the most sought after source of energy in the world. It is indeed factual that, cleaner and more affordable sources of energy will erode the deterministic influence of OPEC in the world energy market. Due to the above challenges, OPEC presently is not a political force to reckon with in the world politics.
Experience has shown and there is no denying the fact that, OPEC has not realty utilized the resources in its disposal to direct the course of world politics. Scholars have argued that even the embargo mechanism enforced against the United States of America and Holland did not record maximum success with adverse effects on the embargoed countries. The reason has been that, oil is a fungible commodity, which can be easily resold. That is countries that bought legitimately from the OPEC countries can resell their products to the affected countries at the same OPEC selling price. The dependent nature of most OPEC States on western and emergent Asian economics infiltrates the rank and file of the cartel to collectively initiate policies that will adversely affect the interest of countries like United States of America, Britain, China, Japan etc.
Oil is indeed a vital indispensable source of energy in the world. And OPEC as a cartel has been successful to a large extent in protecting the economic interest of its members via the price control mechanism immersed in the quota system. However, the conflict of interest among members and the dependent posture of OPEC members on Western economics has continuously bedeviled its influence as a force to reckon with in the larger sphere of world politics.
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