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Political Component of OPEC and Its Future

Abstract

The paper provides the detailed exploration of the Organization of Oil Exporting Countries (OPEC) – the key figure in the global petroleum market. The primary purpose of the research is to define the political aspect of the functioning of the organization and derive scientific prognosis of its further activities and evolution. To address the issue, the author conducts coherent historical overview of the organization focusing on the political component. The paper aims to reveal the latent non-economic motives the founding countries of the entity had while creating OPEC and at the initial stages of its existence. The research also discusses the political side of the decisions of the organization and provides their in-depth chronological overview. In addition, the key objective of the work is to predict the political future of the union. To fulfill this task, the author thoroughly examines current global geopolitical conditions and provides their deep analysis. Furthermore, one of the aspects of the paper exposes the challenges OPEC is facing now and defines how they might influence the nearest future of the organization.

Petroleum is a natural resource that constitutes paramount importance for the modern global economy and world politics. Given the special conditions needed for the oil deposits emergence, the “liquid gold” reserves are distributed unequally among the states. According to the present estimates, the member-states of the Organization of Oil Exporting Countries (OPEC) exercise control over more than 80% of the evaluated world crude oil reserves (OPEC, 2016, p. 6). Thus, the organization dictates the petroleum free market price and possesses the undeniable leverage of influence not only on the economic component of the global politics but also on the political activity in the world as a whole.

 
 

For about sixty years, OPEC and its decision-making process have been one of the crucial areas of analysis for various scholars ranging from the economists to lawyers. Addressing the issue, most of the researchers put an emphasis on the role, which the organization plays in the global economy and trade. Most of the works form the conventional assumption that the international behavior of OPEC merely relies on such market forces as the supply and demand dynamics. Thus, the ample number of researchers studies the mechanism of how the member states of the organization reach consensus on the petroleum market price. James Griffin and David Teece (2016) investigate the process of the oil price setting and describe the existing limitations OPEC has in this field. They found that the organization acted as a form of a cartel and swiftly described the political modeling of the group decisions. Besides, a wide range of authors thoroughly examine the historical background of OPEC focusing on the process of its creation and acquiring the new members.

For instance, Dr. Clifford Jones (2014) investigated and appraised the origin of OPEC as well as pinpointed the process of its enlargement. Concentrating on the descriptive method, Jones in detail described the stages of the OPEC evolution and attempted to outline its possible new member states. However, a negligible number of scientific works are dedicated to the political side of OPEC activity. Reza Sanati (2014) expanded the chronological overview of the topic shifting the focus of her research to the political history of decision-making and behavior of the organization. Following the footsteps of the previous author, Sanati provides her view on OPEC further development distinguishing the trends that will affect the future of the oil exporters union. However, no separate coherent and relevant research on the political future of the organization has been conducted.

With an aim to fill the existing scientific gap, the author makes a hypothesis that OPEC is not only an economic entity but also a powerful political figure. To confirm the suggestion, the study analyzes the role of OPEC as a political actor in historical retrospective and describes the ways of its possible development. To achieve this goal, the author resorts to a set of empirical-analytical and interpretative methods including comparison, deduction, structural analysis, abstraction, and prognosis.

Data Analysis

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Political Necessity for an Organization Aimed at the Regulation of Oil Prices

The beginning of the XX century, which the rapid industrialization marked, has brought the rising demand for fuel, notably petroleum. The era of the coal-fueled production has come to its end. The crude oil advantages including the higher thermal efficiency, versatility of use, and simplified storage system among others led to the mass transition of the major economies to the oil fuel (Sanati, 2014, p.21). Acknowledging the growing importance of this natural resource, oil producers were deeply concerned about the price-setting mechanism in the industry. Fearing the possible unfair level of prices and understanding the significance of export control system, the petroleum exporters basing on professedly economic reasons agreed on the necessity of the creation of the international and supranational institution aimed at protecting their commercial interests (Sanati, 2014, p.19).

However, the market conditions as well as the confluence of international geopolitical, security, and political factors stimulated the group configuration. It is evident that the large, influential, and developed countries created the oil demand while the raw material able to fulfill those needs was geographically distributed among military weak developing states of the Middle East, Latin America, and Central Asia (Sanati, 2014, p.19). Therefore, an undoubted fear for the national safety looming over the governments of the petroleum-exporting states contributed to their decision to form an institutional body and unite their trading policies, thus, providing themselves with international political support (Jones, 2014). The fear mentioned above was not groundless, and the global historical international context confirmed it.

A sweeping wave of oil industry nationalization in the developing countries starting in Mexico and ending in the Middle East began in 1930s (Sanati, 2014, p.38) and caused considerable damage to the economic interests of the industrial giants, US and Britain, in the first place. The newly created systems of the shared oil production designed to substitute the previous ownership methods merely managed to satisfy the Western interests (Maugeri, 2006). Under these conditions and in the framework of the beginning of the global Cold War, the risk of becoming a bargaining chip in the big zero-sum game of the two superpowers has definitely contributed to the OPEC creation.

Given the fact that the world was dividing into two rivaling camps, the petroleum-exporting states had to unite their efforts so that they could maintain the median stance and not to join any of the parties (Jones, 2014). Therefore, the political and security goals were equally important factors that influenced the emergence of the new organization making it not only an economic actor but also an authoritative political figure.

Historical Background of OPEC: Non-Economic Perspective

The beginning of the union activities dates back to 1960 when Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela – the five largest oil-producing developing countries – finally managed to unite their efforts and reach consensus over the principal aims of the new entity. On September 14, 1960, during the international conference in Baghdad, the Organization of Oil Exporting Countries officially proclaimed its existence. The newly formed international body targeted:

At the co-ordination and unification of petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry. (OPEC, n.d.)

The organization gradually attracted new members. Other developing oil-exporting states subsequently joined the founding countries; among them, there were: Qatar (1961), Libya (1962), Indonesia (1962), United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), Gabon (1975), and Angola (2007) (Jones, 2014).

The history of OPEC operation includes four separate evolutionary stages. The first period is so-called Infancy of the organization (1960-1968) – the time of institutionalization and major mechanisms development. The phase of Ascendancy that lasted for a whole decade followed it; it started in 1969 and was marked by the global rise of OPEC as well as its manifestation of geopolitical power. The third stage of the organization history is usually addressed to as the Fragmentation (1980 -1993) due to the dramatic weakening of the entity and its integrity crisis that took place at these years. The final modern period started in 1994; it is considered to be the stage of the hibernation of OPEC influence. This phase is often called “the stage of global Rebalancing” (Sanati, 2014, pp.4-5).

According to Sanati (2014, p.82), the Infancy period of OPEC existence was under the influence of by the factors that contributed to its creation. In its initial years, the organization acted “as a trade union whose main objective was to prevent the income of its member countries from declining” (Fattouh, 2011, p.15). Its global political activity in that decade was limited to the minimum if existed at all.

However, during the initial period of the organization functioning, OPEC members managed to use the power of the entity to stabilize the internal situation inside their countries. In other words, they handled OPEC as an instrument to boost the domestic economic and political development. The period of the far-reaching alterations in the political structures of the member-states of OPEC marked the 1960s. During this decade, five out of nine countries belonging to the organization have experienced the change of their governments and regimes. These changes were made via coup d’etats, some of which were relatively peaceful (Libya, Saudi Arabia) while others led to severe bloodsheds (Indonesia, Iraq). Venezuela was the only exception from this process due to “a stable democratic transition from the Betancourt administration (1959-1964) to the Leoni administration (1964-1969)” (Sanati, 2014, p.100). Socio-political changes within OPEC members resulted in the fall of the essential economic indicators in these countries. To improve the situation, the respective states have utilized the crude oil prices as an instrument for the re-establishment of healthy economies within their territories (Sanati, 2014, p.100). Thus, the countries realized the scope of the power they possessed and created the framework of any further political activities.

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Fair to note, the organization designed the instruments of possible collective political international influence exactly at the Infancy stage. According to the Statute of OPEC, three main governmental bodies of the entity are the Conference, the Board of Governors, and the Secretariat. The special organs, which may be established if the circumstances require it, accompany the main organs activities (OPEC Statute, 2012). The broad scope of these bodies responsibilities allows the organization to derive common political decisions and resort to one of the most powerful instruments it has – oil embargo.

In the next stage of its development, OPEC precisely used the above-mentioned political pressure tool: it prohibited the oil supplies to a whole range of countries. The Oil Embargo of 1973 has become the first major political instrument of OPEC used to influence the international situation. The beginning of the war between Egypt and Israel marked the foregoing year. At the time, Israel continued to occupy the lands of the West Bank of the Gaza Strip as well as the East Jerusalem – the territories Palestinian state considered to be under its jurisdiction. Besides, the Israelis took control over the Syrian Golan Heights and occupied Egyptian Sinai Peninsula (Siniver, 2013). The member countries of OPEC being firmly interested in the conflict resolving in favor of the Arab side decided to get involved in the war both politically and economically.

It was the first time the oil supply was ever used as a political weapon. The members of OPEC called for the introduction of the oil embargo against Israel and its allies, notably the United States of America. The Board of Governors of OPEC adopted the decision almost anonymously and hurriedly introduced it. “Not only did OPEC stop selling oil to these states but they also promised to reduce the monthly oil supply by 5 percent until Israel would withdraw from the Palestinian territories” (Jones, 2014, p. 43).

As a result of this decision, the opponents of Egypt were seriously economically undermined. Eventually, the embargo was removed while the Israeli still held control over the Palestinian territories but the very fact of the oil pressure used to reach political objectives seriously worried the whole world. The event led to the rapid growth of the crude oil market price while OPEC had demonstrated its significant political weight.

During the next period, the Fragmentation, the organization has not been demonstrating any global political activity since all its efforts were directed at the preservation of the integrity. The Iranian Revolution of 1979 and the Iran-Iraq war of 1980-1988 – the bloody war between the two powerful members of the organization – triggered the internal crisis of OPEC and made it virtually impossible to reach any consensus within the governmental bodies of the union (Sanati, 2014, p.220). The only political movement, which the organization made during that period, was targeted at the reduction of the tension between the conflicting parties. Fair to note, these attempts were extremely fragile and limited to the mere acknowledgement of the situation (Sanati, 2014, p.220).

The Conference endorsed the sincere and honest appeal made by His Excellency the President of the Republic of Indonesia in his inauguration speech to the two Member Countries – Iran and Iraq - who are presently in dispute, to quickly seek the best possible solution to their conflict leading to a peaceful settlement of their differences. (OPEC, 1990, p. 198). In 1988, the war between two OPEC founding members finally ended by a standstill, and it marked the finish of the period of organization Fragmentation.

No less complicated period, which the external global geopolitical changes and internal lack of strategic unity strongly influenced, followed it. The collapse of the Soviet Union, market introduction of the new oil exporting states (Kazakhstan, Azerbaijan, and Turkmenistan), increase in American influence on global politics, and drastic changes, which the 9/11 tragedy brought, – all these factors had an impact on both the political and economic dimension of OPEC (Sanati, 2014, p.254). What is more, the new global political conditions, notably the US intervention in Iraq in 2003, substantially undermined the power of not only separate OPEC member countries but also the union as a whole.

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Another new factor that has a negative effect on the organization is the development of the ecological and environment-friendly energy sources. To address the issue, OPEC resorted to its traditional instrument of political pressure – setting the level of the global oil prices. However, this time, the organization made a historic shift in its policy. In November 2014, OPEC refused to cut the level of petroleum supply and supported the prices hoping that “lower prices would curb the growth of more costly-to-develop competing supply sources” (Lawler, 2016, para. 10). This political decision has vividly demonstrated that even remaining relatively weak, OPEC was still able to use political pressure strategies to achieve its goals.

Besides the events that have the adverse impact on the organization, lifting sanctions on Iran, which both the US and EU had imposed, has returned the country to the global petroleum market. Taking this opportunity, Iran increased its oil export volume strengthening the OPEC position in the world trade system (Lawler, 2016). This event demonstrated that the organization was regaining the power, and its future development was still possible.

Geopolitical Challenges to the Political Future of OPEC

The XXI century has become a highly intense era with different types of conflict situations and global dramatic changes arising in various parts of the world. Thus, OPEC is now facing a set of challenges that threaten its future development and even further existence. According to the Secretary General of the organization Abdalla S. El-Badri (2014), a chain of events has had its negative impact on the oil market and institution policy in general. It includes continuing instability in Iraq, Boko Haram terrorist group rising activities in the Northern parts of Nigeria, mutinies in Egypt, Libya, and Tunisia, Syrian war, and the unexpected Russian aggression towards Ukraine (El-Badri, 2014). In other words, every major national rally or international conflict constitutes a challenge to the organization.

For example, Putin’s actions towards its Southern neighbor have triggered the United States to impose the economic sanctions on Russia. The most radical measure that has in turn influenced the global oil market took place when the US government agreed with the opening of the emergency oil stockpile of the country and started to sell the strategic petroleum reserves (Critchlow, 2014). Aiming to undermine Putin’s Russia economy that was virtually based on the oil and natural gas export, the US became one of the biggest oil suppliers in the world (Colibasanu, 2016). Therefore, the event that seemed to be a regional conflict at the first glance, turned out to have a global impact on the oil markets.

However, geopolitical changes are not the only negative factors that influence OPEC. Though not being a pressing issue yet, the rapid development of the renewable energy sources – solar, wind, water, geothermal, and biomass ones – that can adequately substitute oil fuel threatens OPEC existence in the long-term perspective. The renewable energy industry has shown the colossal progress. In 2015, despite relevantly low oil prices, unprecedented sum of $329 billion was invested into the alternative energy development (Saidi, 2016). The further prognoses are striking. According to the forecasts, “by 2040, the world’s power-generating capacity mix will have transformed from today’s system composed of two-thirds fossil fuels to one, with 56 percent from zero emission energy sources” (Saidi, 2016, para. 12). Therefore, as the renewable energy has become emulative with the fossil fuel, the process of the crude oil prices setting and the future of the organization became more complicated. Certain political challenges create additional obstacles for further evolving of OPEC. Nonetheless, its main problem – low oil prices – remains tightly connected to the economic variable.

Political Future of OPEC

Understanding the scope of the factors that gradually weaken OPEC by means of provoking the slump of oil market price, the future of the organization remains unclear. What is more crucial is to comprehend whether OPEC will survive the period of the low oil prices and define how its development will respond to the growth of renewable energy.

Two polarizing approaches to how the scientists and analytics see further evolution of the entity have arisen. The first one is related to the utilized optimistic approach, the supporters of which are convinced that the organization will continue its functioning. According to Jones (2014), the proponent of this approach, one of the possible scenarios of the future union development is tightly connected with the entry of the new members into it. Jones had conducted the research and provided a suggested list of countries that were formally eligible to join OPEC and fulfill all the requirements delineated in the Statute of the organization. Based on the oil production level, the author claims that such states as Brazil, Kazakhstan, Malaysia, Uzbekistan, Azerbaijan, Argentina, Cameroon, Vietnam, Oman, Colombia, Taiwan, and Syria might become the new members of OPEC if they express the political will for it (Jones, 2014).

Other supporters of the positivistic vision, for example, Reza Sanati claim that the organization can benefit from the complicated international situation especially if Russian aggression towards Ukraine results in disruptions in oil and gas supplies from Moscow to Europe. If it happened, the European countries would be forced to search for another reliable hydrocarbon supplier. In this case, the advantageous geopolitical location of Iran and volume of its oil and natural gas reserves along with the relative ease of the fuel transportation will make this country the most plausible alternative (Sanati, 2014, p.305). The expansion of the markets will allow OPEC to restore its power and retake the control over the crude oil market price.

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The second approach to the future of OPEC is, by contrast, a pessimistic one. Some of the skeptics are extremely radical in their views and express the idea that the days of OPEC existence are numbered. Claiming that the oil market is overflowed and the return of Iran, Libya, and Iraq to the petroleum exports only adds to the excess supply, the scholars suggest that the future of OPEC lies within its disintegration and subsequent decay (Saidi, 2016). Another suggestion resembles the combination of two previous attitudes towards the issue. According to this median idea, given the rising popularity of the renewable energy sources, in order to continue its successful functioning, OPEC has to “transform itself into the Organization of Renewable Energy Countries” (Saidi, 2016, para. 28).Therefore, both economic and political future of the organization seems ambiguous, and only its member countries can either save the union or let it retreat to the past.

Conclusion

As outlined throughout the body of the research, OPEC is not merely an economic organization but also an institution that possesses substantial political power. The results of the conducted study provide strong support of the suggested alternatives and confirm the working hypothesis. The research resulted in the number of findings. First, the author confirmed the initial suggestion that the very fact of OPEC emergence was tightly linked to a set of political motives that supplemented the major economic goal. These complementary reasons lie mainly in the growing need for political and national security of the developing oil-exporting countries.

What is more, the thorough examination of the history of organization development and the detailed overview of the decision-making process in the state revealed that throughout the years of its activity, OPEC have been often resorting to pressure and acting like a political actor rather than trade-controlling institutional body. The vivid examples of the processes of the member-states economies restoration in the 1960s, the Oil Embargo of 1973, and deliberate lowering of the oil market prices of 2014 aimed at the inhibition of the renewable energy development confirm that OPEC is a powerful global political actor.

Besides, the careful study of the issue leads to the comprehensive understanding of the challenges OPEC is currently facing. They include low petroleum prices, international conflicts, and new rivals in the energy market, namely the US. Finally, the study resulted in discovering two contrasting approaches towards the future of the oil suppliers union. The first one suggests that the future development of the organization would be achieved through attracting the new members: Brazil, Kazakhstan, Malaysia, Uzbekistan, Azerbaijan, Argentina, Cameroon, Vietnam, Oman, Colombia, Taiwan, and Syria in particular. Another suggestion of how the entity should continue its further development is optimistic. It claims that OPEC has to take advantage of the current geopolitical situation. The supporters of the opposite point of view, by contrast, believe that OPEC is now living its last days. Therefore, considering current geopolitical obstacles, it becomes evident that in order to continue its successful activity, OPEC has to design the new strategy of its further existence.

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