OPEC produces around 40% of total world oil output and wields a substantial control over its international price. It is noteworthy that in most of the member countries from Middle East, discovery and/or commencement of commercial production of oil took place in 1950s and early 1960s. During those years, the production and distribution of oil was mainly in the hands of seven foreign multinational corporations commonly known as the Seven Sisters.
The world oil prices were low and the producing countries got very little by way of royalty sums. The people of the oil producing countries were, by and large, extremely poor. In addition, the lands of member countries featured vast deserts, scarcity of water and very little of other natural resources. Officially, OPEC is open to every country (a) which is a substantial net exporter of oil and (b) which subscribes to the objectives of OPEC. However, in effect, it is an organisation of only developing countries.
That is to say, the member countries are industrially less advanced and depend heavily upon oil revenues. Of course, it is true that OPEC members have been able to raise their per capita incomes to very high levels. But this situation is unsustainable in the long-run. Oil revenues cannot be considered as a permanent feature of their GDPs, since petroleum is a non-replenishible resource. They must make hay while the sun shines, diversify their economies and generate alternative sources of national income.
The lack of long-run sustainability of current situation flows from several risk factors including the following: i. Exhaustion of known oil reserves after some period, unless fresh reserves are discovered. The estimated time periods for which existing known reserves would last vary from country to country. ii. Discovery of reserves in other countries, thereby reducing OPEC’s share in world supply.
iii. Lack of discipline amongst OPEC members and non-adherence to allocated production quotas. iv. Discovery and application of non-fossil fuels and alternative sources of energy. For these reasons, OPEC members should not expect their oil revenues to last forever. They are well advised to protect themselves against a future fall in their national incomes and diversify their economies so as to create additional sources of national income.
By and large; OPEC members have shown awareness of this need and are busy diversifying their economies to the extent they can. They are using a part of their oil revenues for building up economic infrastructure, industrial base, trade channels, and the like. Through these measures they hope to build foundations for strong and multi-sectoral economies which will function efficiently even after oil revenues have petered out. Objectives: Officially, the objectives of OPEC include adjusting the supply of oil with its changing demand so as to prevent an undue fluctuation in its price, a reasonable return on investment by oil companies and a steady supply of oil to consumers. However, in reality, the basic objective of OPEC, like that of any such international grouping or ‘cartel’, is to regulate production and supply of oil vis-a-vis its demand in such a manner that the member countries derive maximum possible combined revenue. To this end, the Organisation collectively determines the production volume and allocates shares (or quotas) out of it to individual members. That way, it ensures that there is no distress sale or a substantial fall in oil prices.
Clearly, the success of an organisation like OPEC and actual economic gain from it depends, among other things, upon the nature of the product, the share of the grouping in the total world supply, equitable operation of the group quotas, and its internal discipline. Performance: OPEC is well set to achieve its main objective of securing high returns from its oil wealth. As of now, oil happens to the leading source of energy, particularly for the transport industry and, as noted above, OPEC controls about 40% of world oil output. Therefore, the main source of strength (or weakness) of OPEC lies in the equitable distribution of production quotas among members and their discipline as regards abiding by this allocation. However, as can happen with any organisation involving several countries, OPEC also suffers from some weaknesses, mainly in the form of less than complete discipline at the part of its members.
In its formative years, activities of OPEC were generally of a low-profile nature. It acquired the massive clout that it wields today only with the passage of time. It took about a decade or so for member countries to assume control of their domestic petroleum industries and acquire a major say in the pricing of crude oil in world markets. During 1970s, OPEC succeeded twice in achieving two steep price increases (commonly known as pricing crises). The first one was triggered by the Arab oil embargo in 1973, and the second by the outbreak of the Iranian Revolution in 1978.
In both cases, the world oil market witnessed a major excess of demand over supply and enabled the OPEC to reap the benefit in the form of steep price hikes. As fuel costs skyrocketed, individual as well as national incomes came under heavy strain as OPEC held the world to ransom. Since then, however, the fortunes of OPEC have been passing through alternative phases, but only between “good” and “better” ones. Part of the variation in its fortunes is attributable to the lack of discipline among its members who tend to produce in excess of the allotted production quotas. The second pricing crisis was followed by a dramatic decline and a collapse of pries in 1986. OPEC likes to term it as the “third oil pricing crisis”.
Prices rallied in late 1980s, without approaching the high levels of the early 1980s. This was partly due to the realisation by OPEC that prices can be increased and sustained only up to a level and not beyond that. In addition, OPEC found that oil consuming countries had started talking about the environmental problems created by a continuous and excessive use of hydrocarbons and had intensified their search for alternative energy sources which should be “clean” and economical and preferably also renewable. It was partly due to these factors that the outbreak of war against Iraq in the beginning of 1990s did not result in another steep oil price hike.
The steep rise in prices in panic-stricken markets was moderated by output increases by OPEC Members. After that, prices remained relatively stable until 1998, when they again collapsed in the wake of the economic crisis in South-East Asia. Collective action by OPEC and some leading non-OPEC producers brought about a recovery. The Second Iraq war brought about a wave of uncertainty and a massive increase in oil prices. Currently, efforts are on for discovery and use of commercially viable alternative sources of energy which should also be environmentally clean.
Research is also being directed towards energy saving techniques. These developments are partly motivated by erratic fluctuations in oil prices and partly by the fear that supply of fossil oils would become insufficient for future energy needs. In India, however, prices of petroleum products have shown an overall steady increase over the years despite many major oil strikes such as Bombay High, Godavari basin and recently in Assam and Rajasthan.