Opec hits middle age
At 50, Opec has mellowed. But remains a formidable geopolitical force, writes Tom Nicholls
THE Organization of the Petroleum Exporting Countries (Opec) celebrated its 50th anniversary last month, more interested in co-operation than in the confrontation that characterised its youth.
Founded in Baghdad, on 14 September 1960, by five countries – Iran, Iraq, Kuwait, Saudi Arabia and Venezuela – its main purpose was to protect its members' interests through the "co-ordination and unification" of their oil policies. Five eventful decades later and Opec's interests are still at the heart of its output policy. But it now talks more about consumer interests and market stability, reflecting its appreciation – acquired through years of painful experience – that booms are always followed by busts and that the benefits of expensive oil are short-lived.
Opec came to prominence as a geopolitical force in the 1970s as its members took control of their oil industries; their new-found market power became obvious during the six-month 1973 Arab oil embargo, when prices quadrupled. It prompted a response from the consumer world the following year, when the OECD set up the International Energy Agency (IEA) as a bulwark to growing producer power.
By then, Opec's membership had more than doubled. Between 1961 and 1971, six countries joined: Qatar, Indonesia, Libya, the UAE, Algeria and Nigeria. Ecuador signed up in 1973 and Gabon in 1975, although both later left (Ecuador rejoined three years ago). In 2007, Angola became Opec's first new member since the 1970s; in 2008, having long since become a net importer of oil, Indonesia quit the group. Headquartered in Vienna, Opec now has 12 members.
A mighty geopolitical force
Over the years, Opec has suffered occasional bouts of market impotence, generating speculation about its demise. But at 50, Opec – an institution made up of developing-world nations with genuine economic significance – is no less mighty a geopolitical force than it was in its 1970s heyday.
When the oil market overheated in July 2008, it was to Opec that the Western world turned; Gordon Brown, then UK prime minister, flew to Saudi Arabia to beg exporting countries to pump more oil. When prices collapsed a few months later, Opec responded swiftly and decisively, slashing output by 4.2m barrels a day (b/d) from January 2009 – an unprecedented volume. Prices have been above $70 a barrel for all but two weeks of this year, hovering for much of the time around $75/b, the price Saudi Arabia says balances producer and consumer interests: compelling circumstantial evidence of market power.
And although its star men may not quite be household names in the West, financial markets treat their words with the reverence reserved, say, for Alan Greenspan. They include Saudi oil minister Ali Al-Naimi and Opec secretary general Abdalla el-Badri, experienced oilmen and articulate advocates of Opec's goals and policy. Sheik Yamani, the Saudi oil minister from 1962 until 1986, was the oil market's version of a rock star; years after his departure, financial journalists continued to hang on his every word.
Not everyone loves the group. Many Western politicians and consumers see Opec as an unsophisticated price-fixing cartel, devoted to its own interests. But it has become a more complex, multi-layered organisation than that caricature suggests: it began to broaden its mandate as early as 1976 by establishing the Opec Fund for International Development, a multilateral financial facility to channel aid to developing countries. It produces credible, respected economic analysis. It's more media-savvy. And while it still has its radical wing – led by Iran and Venezuela, both anti-US price hawks – it appears committed to dialogue with consumer nations and non-Opec producers, as well as to improving data quality, market transparency and oil-price stability.
By founding the International Energy Forum (IEF), it has done something to convert rhetoric about better market dialogue into something tangible. Its oil-market strategy is based on pragmatic, long-term goals, too; although the gradual loss of market share that arises from its production cuts is an inconvenience (higher prices allow non-Opec producers to step in and fill the gap), it's a temporary blip. Opec holds 80% of the world's oil reserves. Barring an unforeseen alternative-energy technology jump, it knows that market share will eventually return.
Relations with consumer governments may be steadily improving, but there are frequent niggles. In the first half of 2008, for example, Opec and IEA officials conducted a prolonged, fractious proxy argument through the press about the cause of high oil prices. Opec blamed speculators and a shortage of suitable refining capacity. The IEA said supply and demand fundamentals were the cause. That's an argument Opec seems to have won; the IEA now gives greater credence to the speculator theory. And there is plenty of anecdotal evidence – the inversely proportional relationship that oil prices have with the dollar, for example – that crude has indeed become a financial asset class in its own right.
If the 1970s were marked by the defiance of Opec's Arab members to the Western powers, the end of the 1970s, the 1980s and the 1990s were dominated by inner turmoil and in-fighting – the Iranian Revolution (1979), the Iran-Iraq war (1980-88) and Iraq's 1990 invasion of Kuwait. Demand and prices rose until – eventually, inevitably – they crashed, cutting Opec's share of a shrinking market. Its members, all heavily dependent economically on oil revenues, suffered.
The 2000s produced another war, this time a sustained attack on an Opec country from outside, as the US and its allies invaded Iraq and ousted Saddam Hussein. The decade saw a widespread acceptance of climate-change theory in rich countries – a direct challenge to Opec's core business – and rapid growth in alternative energy. It also saw the emergence of large new markets – China and India – which contributed to spectacular oil-price inflation, with crude futures topping out at almost $150/b in mid-2008, before collapsing to almost $30/b as the economy entered recession.
Ghost of Jakarta
On that occasion, Opec responded decisively and effectively to the slump in prices. But it hasn't always got things right. In November 1997, Opec raised output by 10% – a big margin. It proved to be a mistake: Opec didn't foresee the severity of the Asian financial crisis, which, even then, was beginning to hammer oil demand. By the end of the following year, oil prices had halved to $10/b. Memories of the Opec Jakarta meeting that preceded the collapse still linger in the mind.
Although Opec members have much in common (principally a desire for highish prices and – the trump card – plentiful oil and gas reserves), they remain susceptible to internal division and dispute. Saudi Arabia, for instance, sees Iran as a threat to regional stability and its own political power. Population sizes, economic needs and priorities, production volumes and political views vary widely from member to member. Compliance with production targets has almost always been a weak point.
And there are great contrasts. Compare Saudi Aramco's recent upstream achievements with those of Venezuela's PdV, for example. Or Qatar Petroleum's in liquefied natural gas (LNG), compared with those of its far bigger and slightly gassier neighbour, Iran. Or compare the economic outlook for Qatar, a nation with the world's largest LNG industry but a population of just over 1 million, with that of politically fragmented, insurgency-ridden Nigeria, with 150 million citizens.
That Opec remains cohesive at all, given such differences, seems a remarkable achievement. Indeed, among its biggest near-term problems is one that lies in its birthplace. Iraq – outside Opec's quota system as it rebuilds its economy, following decades of sanctions and war – plans to boost output to over 10m b/d. When to bring Iraq back into the quota system without wrecking the country's chances of recovery, but before its growth begins seriously to undermine oil prices and the market share of other members, could be Opec's next tough call.