28 Nov 2017 14:03 IST

All you wanted to know about OPEC

It was founded in 1960 in Baghdad

With oil on the boil, all eyes will be on the OPEC meeting this week. The meeting is crucial as OPEC will decide whether to continue with output cuts in force since January this year beyond March next year. The cuts helped halt oil’s rout and aided its 40 per cent rally since June to about $64 a barrel now.

What is it?

OPEC is short for Organisation of Petroleum Exporting Countries. Founded in 1960 in Baghdad, this cartel of oil exporting nations had four major West Asian producers - Saudi Arabia, Iran, Iraq and Kuwait — and Venezuela as its founding members. The group was founded with the idea of reclaiming control of the global oil market from seven major international oil companies, known as the Seven Sisters.

Over the years, some other oil exporting countries joined in, some left and others rejoined. Today, OPEC has 14 members — besides the founding members, the group comprises UAE, Qatar, Nigeria, Libya, Gabon, Ecuador, Angola, Algeria and the latest entrant Equatorial Guinea.

The big boy of the group is Saudi Arabia accounting for more than 30 per cent of OPEC’s production in October 2017, followed by Iraq and Iran (12 to 13 per cent) and then by UAE and Kuwait (8 to 9 per cent). Thanks to its far higher production and exports, Saudi Arabia invariably calls the shots in the cartel.

OPEC aims to coordinate and unify the petroleum policies of its member countries to stabilise oil markets. Member countries together increase or decrease oil production to try to achieve desired supply levels and prices, based on a unanimous vote. This is not always easy though with internal contradictions and conflicting pulls within OPEC — Saudi Arabia and Iran have been arch-rivals for a long time, while Iraq and Iran fought a multi-year war in the 1980s.

Also, the Saudis and the Qataris are not on talking terms now, and Venezuela is in financial dire straits. Still, the OPEC members managed to safeguard and further their collective economic interest — petrodollars — pretty well. Oil traded beyond $100 a barrel for the most part between 2011 and 2014, even as production cost was in low double-digits for many members including Saudi Arabia.

Why is it important?

For much of its nearly 60 years so far, OPEC was the prime mover and shaker in the global oil market. As a ‘swing producer’, it could turn on and turn off the spigots to control global oil production and prices. For instance, OPEC’s embargo in 1973 to protest the support of Western countries for Israel in the Arab – Israeli conflict saw oil prices quadruple from $3 to $12 a barrel.

OPEC is still a major force to reckon with, accounting for more than 40 per cent of the world’s oil supply.

But today, it is no longer the only show in town. Technological advancements — horizontal drilling and fracturing (fracking) — honed this century, enabled shale oil exploration and production on an industrial scale in the US, a non-OPEC nation and numero uno global oil guzzler. This upended the dynamics of the oil industry and precipitated the rout of oil since mid-2014. Other mega producers such as Russia that are also not part of OPEC, too now command significant influence in the oil market.

When the oil rout was underway, OPEC initially tried to out-price US shale oil producers and wrest market share by maintaining output; this exacerbated the price rout. But when US shale producers held on and lower prices stated pinching OPEC itself, it eventually teamed with major non-OPEC producers such as Russia late last year to cut production by 1.8 million barrels of oil a day, about 2 per cent of global production.

This strategy seems to have helped; the price rout halted giving way to a rally this year. This week’s OPEC meeting is expected to approve extension the production cuts by another 9 months until December 2018 with Russia also on board. Among the many reasons for likely continuation of the output cut is the importance of high prices for the success of Saudi Aramco’s IPO expected next year.

Why should I care?

India imports more than 80 per cent of its oil requirement, and oil prices halving since 2014 has been a fiscal godsend for the government and oil companies. The recent sharp rally in oil prices threatens to throw a spanner in the works. Already, higher diesel and petrol prices evoked howls of protest from consumers, forcing the government to cut taxes somewhat. Higher oil prices will invariably mean costlier petrol and diesel and higher inflation in India.

If OPEC gets aggressive on it output cut programme, it could mean trouble for us. Thankfully, there is hope that oil prices will not go up too much from current levels — US shale oil should come back to the market a big way to take advantage of higher prices, resulting in a cap on prices.

The bottomline

What’s sauce for OPEC is not sauce for us Indians.

(The article first appeared in The Hindu BusinessLine.)