Organisation of the Petroleum Exporting Countries (OPEC): Objectives, Oil Pricing Policies & Global Impact

Origins and Headquarters of OPEC #

The Organization of the Petroleum Exporting Countries (OPEC) is a permanent, Intergovernmental Organization, created at the Baghdad Conference held in Iraq in 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.

• It initially had its headquarters in Geneva, Switzerland which was then moved to Vienna, Austria in 1965.
• It accounts for an estimated 44 percent of global oil production and 81.5 percent of the world’s “proven” oil reserves.

Objective of OPEC #

• Coordinate and unify petroleum policies among Member Countries
• In order to secure fair and stable prices for petroleum producers
• The efficient, economic and regular supply of petroleum to consuming nations
• A fair return on capital to those investing in the industry

Members of OPEC #

• Currently, the Organization has a total of 13 Member Countries – Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, United Arab Emirates, and Venezuela.
• Qatar terminated its membership on 1 January 2019. Ecuador suspended its membership in December 1992, rejoined Organisation of the Petroleum Exporting Countries in October 2007, but decided to withdraw its membership of OPEC effective 1 January 2020.

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Functions of OPEC #

• Review the status of the international oil market and the forecasts for the future in order to agree upon appropriate actions which will promote price stability in the oil market.
• Decisions about matching oil production to expected demand are taken at the meeting of the Organisation of the Petroleum Exporting Countries conference.
• Provides research and administrative support to the secretariat body that disseminates news and information to the world at large.

OPEC and Russia #

• Russia happens to be the 3rd largest supplier of Oil in the world (12% of all oil produced).
• This means they too have considerable influence in controlling the global oil supply.
• And back in 2017, OPEC and Russia started colluding informally to cut production and prop up prices. This came against the backdrop of oil having made some terrible lows.
• So two big parties came together to keep prices stable and it obviously helped.

OPEC+ #

• The non-OPEC countries which export crude oil along with the 14 OPECs are termed as Organisation of the Petroleum Exporting Countries plus countries.
• OPEC plus countries include Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan and Sudan.
• Saudi and Russia, both have been at the heart of a three-year alliance of oil producers known as Organisation of the Petroleum Exporting Countries Plus, which now includes 11 OPEC members and 10 non-OPEC nations that aims to shore up oil prices with production cuts.

International Energy Agency (IEA): Formation and Focus Areas #

• The International Energy Agency (IEA) is an autonomous organization which works to ensure reliable, affordable and clean energy.
• It was established in the wake of the 1973 (set up in 1974) oil crisis after the OPEC cartel had shocked the world with a steep increase in oil prices.
• It is headquartered in Paris, France
• The IEA has four main areas of focus, e. 4Es:

1. Energy security,
2. Economic development,
3. Environmental awareness
4. Engagement

• India Became an associate member of the International Energy Agency in
• Mexicoofficially became the International Energy Agency’s 30th member country in February 2018, and its first member in Latin America.

Qatar quit OPEC: #

• Qatar recently announced that it was walking away from the Organisation of the Petroleum Exporting Countries.
• Qatar is a small oil producer which accounts for less than 2 percent of total oil output, so its departure may not have a significant impact on the oil market.

Reason behind Qatar’s Decision: #

• Qatar is among the world’s smallest countries by area.
• However, it is the richest in terms of per capita gross national income ($128,000 according to World Bank figures).
• Qatar’s riches are due to its natural gas reserves, and it is the world’s largest exporter of liquefied natural gas (LNG).
• So it wanted to focus on its gas industry rather than on oil, in which it was in any case a small player.
• It denies any political reasons for leaving OPEC.
• However, Qatar’s broken diplomatic relationship with Saudi Arabia is to be noted.
• Notably, Saudi Arabia plays a dominant role in OPEC, having pumped 11 million barrels per day in October, 2018.
• So Qatar feels it was pointless to put efforts, resources and time in an organisation that it was a very small player in.

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Why is Qatar’s Regional Relations Strained? #

• Qatar has long shown an independent mind in foreign policy.
• This includes having a close economic and diplomatic relationship with Shia Iran, Sunni Saudi’s great regional rival.
• This stance does not always align with the priorities of its regional Arab neighbours.
• In June, 2017, Saudi Arabia, UAE, and Bahrain cut ties with Qatar.
• They directed Qatari citizens to leave within 14 days, and forbade their citizens from going to or staying in Qatar.
• Egypt too severed diplomatic contact with Qatar.
• All of these countries shut their airspace to Qatari aircraft, and told foreign airlines to seek permission if flying to and from Qatar.
• Saudi also sealed Qatar’s only land border, and closed its ports to Qatari-flagged ships.
• It claimed Qatar had refused to end ties with “terrorists”, after Doha declined to fulfill 13 demands that were presented to it.
• It included:
  • Cutting diplomatic relations with Tehran and military ties with Turkey
  • Shutting down the TV station Al Jazeera
  • Aligning with other Arab countries “militarily, politically, socially and economically”
• But Qatar said the demands amounted to surrendering their sovereignty, which it would never do.
• It has backed the Muslim Brotherhood and Hamas, but it is also part of the US-led war on the Islamic State.
• It has assisted the rebels fighting Bashar al-Assad’s regime in Syria.
• Over the last year and a half, hopes of reconciliation of Qatar with its neighbourhood have dimmed.
• Doha has only deepened its cooperation with Iran and Turkey, and with political Islamist organisations.

How will Qatar’s Decision Impact Global Oil Prices? #

• Qatar is a tiny player that pumped only 2% of OPEC’s total output of 32.9 million barrels per day.
• It has limited influence on OPEC’s pricing decisions and so the exit would not make a much impact in terms of global oil prices.
• However, over the last many decades, it has played a role mediating internal rivalries in OPEC.
• It helped strike production-cut deals with producers like Russia.
• So in these areas, Qatar’s absence may hurt OPEC slightly.
• India – Qatar’s position as the world’s top LNG exporter and an influential player in the global LNG market is important for India.
• Qatar is one of India’s oldest LNG suppliers, with Petronet LNG among the companies that have contracted to buy LNG from Qatar.
• But LNG pricing is not in OPEC’s domain, so Qatar’s decision is unlikely to impact these trends.

OPEC+ Decides Combine Slashing Of Crude Oil Production: #

• The global economy, grappling with the COVID-19 pandemic, is now faced with an energy war, resulting in crashing crude oil prices in the international market.
• After many talks OPEC and Russia finally agreed upon a huge production cutamounting to 10% of Global Oil supply.
• This is an unprecedented agreement because it’s not just between OPEC and OPEC+, but it also found support among the U.S. that is the biggest Oil supplier in the world, and other G-20 countries too.
• India has made a case for affordable oil prices in the backdrop of the Organization of the Petroleum Exporting Countries-plus (OPEC+) combine slashing production amid the COVID-19 pandemic.
• OPEC accounts for around 40% of global production.
• The OPEC accounts for 80% of India’s crude oil imports.
• Any production cut by the OPEC plus arrangement impacts India’s energy security efforts in the short run.

NORD STREAM 2 #

• It is a gas pipeline project with a purpose to bring Russian gas under the Baltic Sea direct to Germany.
• The decision to build Nord Stream 2 was taken after the success of building and operating the first Nord Stream gas pipeline.
• It will also facilitate reliable supply of Russian gas to Europe.

Impact on India: #

• India, which is one of the major OPEC consumers, has always stood for a global consensus on responsible pricing.
• Indian refiners have cut production as the lockdown has led to a sharp decline in demand for transportation fuels.
• Demand for domestic cooking gas has, however, increased as more people stay indoors during the lockdown aimed at containing the spread of the coronavirus.
• However, Saudi Arabia has agreed to supply crude oil at lower rates to refiners in India and China, two primary customers.
• For India, it comes as a respite given the fact that it is the world’s third-largest importer of crude oil and the fourth largest importer of LNG.
• India saves ₹10,700 crores for every $1 drop in prices, this may help manage the Current Account Deficit (CAD).

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India wants OPEC to fix Asian Oil Pricing Anomaly: #

• India in a virtual OPEC-India Dialogue meeting expressed that India wants OPEC to review its pricing policies for the Asian market and end the premium it puts on its crude for Asia.
• India urged OPEC about the urgency and need to address the historical aberration in crude pricing for Asia by ending Asian Premium recognizing the shifting of demand for crude oil to Asia, which is further accelerated by Covid-19 pandemic
• Previously India also tried to coordinate with China and other Asian countries to raise voice against the “Asian premium” being charged by OPEC.
• Both sides drew attention to the close cooperation and engagement in many projects and investments between OPEC Member Countries and India, and other topical issues were addressed, including the Asian Premium and term contracts

Why are countries, including India, against Asian Premium? #

• India, which sources 85% of its crude oil supplies from OPEC member countries, wants producers to offer discounts rather than charge a premium, as today it has become a buyer’s market.
• The direction of crude flow from West Asia has now shifted to Asia. Besides, with OPEC deciding not to reduce production, there is a tilt in the demand-supply balance.
• Earlier, crude flow was from West Asia to North America and the pricing also depended on the market. Now, with the shale revolution, the flow has shifted to Asia.

OPEC’s Impact: Understanding the Asian Premium #

• It is the extra charge being collected by OPEC countries from Asian countries when selling oil.
• It has roots in the establishment of market oriented crude pricing in 1986.
• There are 3 important benchmarks in the global market, representing the cost of oil produced in respective geographies.

1. Brent: Light sweet oil representative of European market
2. West Texas Intermediate(WTI): US market
3. Dubai/Oman: Middle East and Asian Market.

• However, the US and Europe had an advantage because their markets and prices were based on future trading and reflected every trend in the crude market. On the other hand, Asia represented by Dubai/Oman does not have any derivative trading, doesn’t have that edge.
• Hence, prices charged from Asian countries remained $1-$2 dollar higher than that from Europe and the US. This price differential is termed as ‘Asian Premium’.