What is OPEC?
The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization, currently consisting of 12 oil producing and exporting countries, spread across three continents America, Asia and Africa. The members are Algeria, Angola, Ecuador, the Islamic Republic of Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates & Venezuela.
These countries have a population of more than 415 million and for nearly all of them, oil is the main marketable commodity and foreign exchange earner. Thus, for these countries, oil is the vital key to development – economic, social and political. Their oil revenues are used not only to expand their economic and industrial base, but also to provide their people with jobs, education, health care and a decent standard of living.
The organization’s principal objectives are:
1. To co-ordinate and unify the petroleum policies of the Member Countries and to determine the best means for safeguarding their individual and collective interests;
2. To seek ways and means of ensuring the stabilization of prices in international oil markets, with a view to eliminating harmful and unnecessary fluctuations; and
3. To provide an efficient economic and regular supply of petroleum to consuming nations and a fair return on capital to those investing in the petroleum industry.
When was OPEC formed?
OPEC was formed at a meeting held on September 14, 1960 in Baghdad, Iraq, by five Founder Members: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. OPEC was registered with the United Nations Secretariat on November 6, 1962 (UN Resolution No 6363).
Who are OPEC Member Countries?
The OPEC Statute stipulates that: "any country with a substantial net export of crude petroleum, which has fundamentally similar interests to those of Member Countries, may become a Full Member of the Organization, if accepted by a majority of three-fourths of Full Members, including the concurring votes of all Founder Members".
The Statute further distinguishes between three categories of membership: Founder Member, Full Member and Associate Member.
Founder Members of the Organization are those countries which were represented at OPEC's first Conference, held in Baghdad, Iraq, in September 1960, and which signed the original agreement establishing OPEC.
Full Members are the Founder Members, plus those countries whose applications for Membership have been accepted by the Conference.
Associate Members are the countries which do not qualify for full membership, but which are nevertheless admitted under such special conditions as may be prescribed by the Conference.
OPEC Member Countries:
|Ecuador **||rejoined 2007||South America|
|IR Iran *||1960||Middle East|
|Iraq *||1960||Middle East|
|Kuwait *||1960||Middle East|
|Saudi Arabia *||1960||Middle East|
|United Arab Emirates||1967||Middle East|
* founder Members
** Ecuador joined OPEC in 1973, suspended its membership from Dec. 1992-Oct. 2007
How does OPEC function?
Representatives of OPEC Member Countries (Heads of Delegation) meet at the OPEC Conference to coordinate and unify their petroleum policies in order to promote stability and harmony in the oil market. They are supported in this by the OPEC Secretariat, directed by the Board of Governors and run by the Secretary General, and by various bodies including the Economic Commission and the Ministerial Monitoring Committee.
The Member Countries consider the current situation and forecasts of market fundamentals, such as economic growth rates and petroleum demand and supply scenarios. They then consider what, if any, changes they might make in their petroleum policies. For example, in previous Conferences the Member Countries have decided variously to raise or lower their collective oil production in order to maintain stable prices and steady supplies to consumers in the short, medium and longer term.
What is the OPEC Conference?
The Conference is the supreme authority of the Organization, and consists of delegations normally headed by the Ministers of Oil, Mines and Energy of Member Countries.
The Conference generally meets twice a year, in March and September, and in extraordinary sessions whenever required. It operates on the principle of unanimity and one Member, one vote. It is responsible for the formulation of the general policy of the Organization and the determination of the appropriate ways and means of its implementation.
The Conference also decides upon applications for membership of the Organization, and on reports and recommendations submitted by the Board of Governors on the affairs of the Organization. It approves the appointment of Governors from each Member Country and elects the Chairman of the Board.
Moreover, the Conference directs the Board to submit reports or make recommendations on any matter of interest to the Organization, and considers and decides upon the Organization’s budget, as submitted to it by the Board.
Who are the heads of Delegation?
The Heads of Delegation to OPEC are the official representatives of each Member Country to the OPEC Conference. They are normally the Ministers of Oil, Mines and Energy of Member Countries.
What is the Board of Governors?
The Board of Governors, or BoG, can be compared to the board of directors of a commercial organization. The BoG is composed of Governors nominated by Member Countries and confirmed by the Conference for two years. The Board directs the management of the Organization; implements Resolutions of the Conference; draws up the Organization’s annual budget and submits it to the Conference for approval. It also decides upon any reports submitted by the Secretary General and submits reports and recommendations to the Conference on the affairs of the Organization.
The role of the Board of Governors is described in Article 20 of the OPEC Statute.
The Board of Governors shall:
1. Direct the management of the affairs of the Organization and the implementation of the decisions of the Conference;
2. Consider and decide upon any reports submitted by the Secretary General;
3. Submit reports and make recommendations to the Conference on the affairs of the Organization;
4. Draw up the Budget of the Organization for each calendar year and submit it to the Conference for approval;
5. Nominate the Auditor of the Organization for a duration of one year;
6. Consider the Statement of Accounts and the Auditor's Report and submit them to the Conference for approval;
7. Approve the appointment of Directors of Divisions and Heads of Departments, upon nomination by Member Countries, due consideration being given to the recommendations of the Secretary General;
8. Convene an Extraordinary Meeting of the Conference; and
9. Prepare the Agenda for the Conference.
What is the Economic Commission?
The Economic Commission is a specialized body operating within the framework of the Secretariat, with a view to assisting the Organization in promoting stability in the international oil market. The Commission is composed of a Commission Board, National Representatives, and a Commission staff. The Commission Board consists of the Secretary General, the National Representatives appointed by the Member Countries, and a Commission Co-ordinator (who is ex-officio the Director of the Research Division).
What is the Ministerial Monitoring Sub-Committee?
The Ministerial Monitoring Sub-Committee (MMSC) was established in February 1993 by the 10th Meeting of the Ministerial Monitoring Committee in order to monitor oil production and exports by Member Countries. The MMSC comprises three Heads of Delegation and the Secretary General.
What is the OPEC Secretariat?
The OPEC Secretariat functions as the Headquarters of OPEC. It is responsible for carrying out the executive functions of the Organization, in accordance with the provisions of the Statute and under the direction of the Board of Governors.
The Secretariat consists of the Secretary General, who is the Chief Executive and includes the Research and Support Services Divisions, the Legal office and the Office of the Secretary General.
The Research Division, headed by a Director, comprises the departments of Data Services, Petroleum Studies and Energy Studies. The Support Services Division, also headed by a Director, includes the departments of PR & Information, Finance & Human Resources and Administration & IT Services.
The Secretariat was originally established in Geneva, Switzerland, in 1961. It moved to Vienna, Austria, in 1965. The 8th (Extraordinary) OPEC Conference approved the Host Agreement with the Austrian Government in April 1965, prior to the opening of the Secretariat in Vienna on September 1, 1965.
Why does OPEC set oil production quotas?
The OPEC Statute requires OPEC to pursue stability and harmony in the petroleum market for the benefit of both oil producers and consumers. To this end, OPEC Member Countries respond to market fundamentals and forecast developments by co-ordinating their petroleum policies. Production regulations are simply one possible response. If demand grows, or some oil producers are producing less oil, OPEC can increase its oil production in order to prevent a sudden rise in prices. OPEC might also reduce its oil production in response to market conditions.
Does OPEC control the oil market?
No, OPEC does not control the oil market. OPEC Member Countries produce about 43 per cent of the world's crude oil and 19 per cent of its natural gas. However, OPEC's crude oil exports represent about 60 per cent of the crude oil traded internationally. Therefore, OPEC can have a strong influence on the oil market, especially if it decides to reduce or increase its level of production.
OPEC seeks stability in the oil market and endeavours to deliver steady supplies of oil to consumers at fair and reasonable prices. The Organization has achieved this in a number of ways: sometimes by voluntarily producing less oil, sometimes by producing more when there is a shortfall in supplies (such as during the Gulf Crisis in 1990, when several million barrels of oil per day were suddenly removed from the market).
Does OPEC Set Crude Oil Prices?
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 1970s to the mid-1980s, this is no longer the case. It is true that OPEC's Member Countries do voluntary restrain their crude oil 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, all of which have their own Web sites featuring information about oil prices. They are the New York Mercantile Exchange (NYMEX, http://www.nymex.com), the International Petroleum Exchange in London (IPE, http://www.ipe.uk.com) and the Singapore International Monetary Exchange (SIMEX, http://www.simex.com.sg).
The Web sites of the Paris-based International Energy Agency (IEA, http://www.iea.org) and the US Energy Information Administration (EIA, http://www.eia.doe.gov), also have extensive historical information on oil prices.
How does OPEC oil production affect oil prices?
The Oil and Energy Ministers of the OPEC Member Countries meet at least twice a year to co-ordinate their oil production policies in light of the market fundamentals, ie, the likely future balance between supply and demand.
The Member Countries, represented by their respective Heads of Delegation, may or may not alter production levels during the Meetings of the OPEC Conference.
Given that OPEC Countries produce about 43 per cent of the world's crude oil and about 60 per cent of the crude oil traded internationally, any decisions to increase or reduce production may lower or raise the price of crude oil.
The impact of OPEC output decisions on crude oil prices should be considered separately from the issue of changes in the final prices of oil products, such as gasoline or heating oil. There are many factors that influence the prices paid by end consumers for oil products. In some countries taxes comprise over 60 per cent of the final gasoline price paid by consumers, so even a major change in the price of crude oil might have only a minor impact on consumer prices.
What are OPEC's proven oil reserves?
At the end of 2011, OPEC had proven oil reserves of 1,199,707 million barrels of crude oil, representing 81 per cent of the world total of 1,481,526 million barrels.
What is OPEC's attitude towards fuel-efficient cars?
OPEC is happy to see improvements in transportation technology to make it cleaner, safer and more efficient.
The organization would prefer that more people enjoy the benefits of personal mobility in an environmentally sustainable manner.
Oil is a precious, limited resource and we want people to value it accordingly.
Does OPEC support environmental policies?
OPEC supports sound environmental policies that are fair and equitable, based on proven needs and designed to address those needs.
OPEC is concerned about the environment and we want to ensure that it is clean and healthy for future generations.
OPEC also supports sustainable economic development, which requires steady supplies of energy at reasonable prices. Many countries have already introduced heavy taxes on oil products. In some countries, the price that motorists pay for gasoline is three or four times higher than the price of the original crude oil. Taxes account for up to 70 per cent of the final price of oil products in some countries.
As a result of these taxes, some of the oil-consuming countries (especially those in Europe where taxation levels are highest) receive much more income from oil than OPEC does.
OPEC is concerned that many of the so-called 'green' taxes that are currently levied on oil do not specifically help the environment. Instead, they simply go into government budgets to be spent on other things. Taxes might lead to instability in the oil industry, creating problems for many countries and industries.
Industrialised countries are developing policies to limit the use of fossil fuels in order to reduce their emissions of carbon dioxide. Many are already levying heavy taxes, particularly on oil products. Yet studies have shown that OECD members could cut their carbon dioxide emissions by 12 per cent by 2010 and still maintain their tax revenues, if they adopted a pro rata tax system that levies tax on all forms of energy according to their carbon content.
OPEC is concerned that some countries may impose environmental and taxation policies that are harmful to those who rely on fossil fuels for a substantial part of their income.
Some countries with high oil taxes actually subsidise domestic coal production, yet coal produces more carbon dioxide than oil. Carbon dioxide is one of the greenhouse gases which are believed to contribute to global warming.
OPEC is worried about discriminatory oil taxes because we are committed to providing a stable petroleum market.
We need to invest in oil exploration and development in order to have production capacity available as demand rises in the years ahead, but we also need to be sure that there will be enough demand for that oil and that we will get a reasonable price.
If we do not invest in expanding oil production capacity before it is needed, the world could face sudden price shocks, leading to serious global economic problems.
OPEC is also concerned that many of the environmental policies now being proposed and adopted do not have the full support of the scientific community. There is still considerable debate about the impact of global warming, and how it can best be addressed. OPEC supports further research into these important issues.
OPEC is also spending heavily to improve its environmental impact, by locating sources of higher quality oil and gas, by developing cleaner fuels for consumers, and by reducing the impact of its activities through safer, cleaner drilling, transportation and refining processes.
OPEC also participates in many international meetings in order to remind governments and others who are debating environmental policies that they must consider the needs of developing countries, especially those that rely on their income from oil.
Can OPEC guarantee the security of oil supplies?
Yes, at the right conditions, OPEC can provide an increasing amount of oil to meet the expected growth of global oil demand. OPEC currently produces about 43 per cent of the world's crude oil.
OPEC has a policy of maintaining stability in the oil market, and its Member Countries have often done this by increasing or decreasing the amount of oil they produce. Only OPEC nations have a significant spare oil production capacity, and this enables them to increase production at relatively short notice. However, because OPEC is not the only source of oil in the market, it cannot guarantee the movement of oil prices, or the availability of supplies to all consumers at all times.
OPEC has around 81 per cent of the world's oil reserves, and this will enable us to expand oil production to meet the growth in demand. But in order to expand our output, we need to be sure that the oil industry will continue to be profitable. Oil producers invest billions of dollars in exploration and infrastructure (drilling and pumping, pipelines, docks, storage, refining, staff housing, etc) and a new oil field can take 3-10 years to locate and develop.
If oil producers do not invest enough money and do it far enough in advance, then the world could face a shortage of oil supplies in future.
Therefore, OPEC is concerned about issues that undermine the prosperity of the oil industry and thus threaten the security of world oil supplies. One such issue is oil taxation in the consuming countries.
Oil taxes reduce the incomes of oil producers, and limit the funds they have available for maintenance, exploration and production activities.
Oil taxes also limit the growth in oil demand and raise costs for other industries. As a result, oil producers and other investors are unsure of the future development of oil prices and profits, and they might hesitate from making the necessary investments.
Although OPEC does try to maintain stability and invest in a timely manner, our efforts to guarantee the security of oil supplies can be undermined - or supported - by the actions of oil consumers.
Is there any need for security of oil demand?
Yes, oil consumers need steady supplies of oil, and oil producers rely on steady demand. If demand changed suddenly it would have a major impact on the profitability of oil producers and the economies of many countries around the world.
Oil production is a long-term affair: the oil industry works 24 hours a day, 365 days a year, excluding maintenance or bad weather and other disruptions. Oil facilities require many millions of dollars of investment, and the investors try to earn a reasonable return on their capital.
A downturn in oil demand could force oil production to slow down or stop. This could physically damage the oil fields, reducing the amount of oil that can be recovered in future. The oil installations could also be damaged. Some facilities, such as those operating in the oceans, are very difficult and expensive to shut down.
When production slows down, oil producers might be forced to lay off staff. Downstream operators, such as gasoline retailers, refiners and transport companies, could also be forced to shed staff.
If oil producers receive lower incomes they must spend less money and import fewer goods from oil consumers. If investors are unsure about the risks and the likely returns from petroleum investments they may not make those investments. If we do not invest enough money, or do it far enough in advance, then the world could face a shortage of oil supplies and a downward spiral in the global economy. However, if oil producers continue to receive reasonable prices and stable demand, they will maintain their production and invest far enough in advance to meet the growth of demand.
Thus the security of oil supplies relies upon the security of oil demand. Oil producers - and oil consumers - need to work together to ensure that the security of oil supply and demand is preserved.