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OPEC: The need for a pragmatic market strategy

by Business News Report

The recent press statement credited to the president of the Organisation of Petroleum Exporting Countries, OPEC, Alhaji Rilwanu Lukman, that an oil glut is imminent is a course for concern.
In recent years, the glut in oil market has caused OPEC members a huge loss of revenue. When the market started to pick up again sometimes this year, it gladdened the hearts of oil producers.
In recent month there has been growing concern as some members produce far above their allocated quotas.
This over production often culminate in oil glut. It would appear from recent happenings that the purpose for which the organisation was formed has been outlived.
The organisation was formed in 1961 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela in response to a unilateral reduction in the posted price of crude oil in August 1960, by the major multinational petroleum companies.

The reduction cut the oil revenues of these countries. During t he 1960s and early 1070s OPEC now thirteen with the entry of Abu Dhabi, Algeria, Indonesia, Libya, Qatar, Nigeria, Gabon and Equador, followed a defensive strategy that prevented any further decline in the posted prices of crude oil.
The 1970s however saw OPEC taking a giant stride in determining both the production level and the prices for crude oil produced in its members territory.
The ideas which the organisation sort are as contained in paragraph 4 of resolution 12 and further emphasised in article 2 of the statute of OPEC.
These include: the coordination and unification of petroleum polices of member countries and the determination of bet mens of safe-guarding their interest individually and collectively.
The devising of ways and means of ensuring stabilisation of prices in international oil markets with a view of eliminating harmful and necessary fluctuations.
Due regard shall be given at all times to the interest of the producing nations and to the necessity of securing a steady income to the producing country and an efficient, economic and regular supply of petroleum to consuming nations and a fair return on their capital to those investing in the petroleum industry.
OPEC hay days were in the 1970s and late 1970s. The 1980s have not been particularly favourable to OPEC. Most of consuming nations had embarked on conservation and stock piling of crude oil in late 1970 following increased oil prices.
The result of this was that OPEC was cut under current and prices of oil plummeted to the pre-1973 oil prices of $12 per barrel.
At the wake of the oil glut, there was the need for the organisation to use its trump card, production quota. Since the resort to this use, most members over production of allocated quota to members.
In reality, OPEC authorities cannot expect absolute compliance of members to their production quota. A close study of OPEC members shows that they are at different stages of economic development and growth.
Some members can afford to keep down their production because their economies cannot absorb the earnings stemming from the sale of ever increasing quantities of crude oil at whatever market prices. This is an important point which should not be belittled since some of the most important producers, commending the largest reserves fall into this category.
How strong this argument can be for main producers depends on the size of their population, the requirement for the development plans and the political attitude of their governments.
Another factor OPEC should take cognisance of when allocating quotas to members is the size of members known (proven) reserves.
Obviously, the shorter the expected life of their reserves he sooner te bonanza comes to an end for them. It is understandable that they would wish to postpone the time of exhaustion.
The needs and objective of a country with a small population such as Abu Dhabi with a population of less than 0.25 million by 1982, Libya 2 million 1982, are quite different from those of larger or more developed countries like Iraq, Iran, Algeria and Nigeria.
The fact however is that among the countries with more plentiful city could produce to higher levels. The others, chiefly those with large output such as Saudi Arabia, Kuwait and Abu Dhabi probably may not be have much incentive for higher output and could possibly do with lesser quotas in order to keep production level down.
Others like Libya may be in the same position with the additional disincentive of relatively smaller reserves.
Whatever the development in supply it is unlikely that Western Europe and America can expect continued unlimited supply of oil which in the previous decade permitted an annual increase of oil consumption exceeding 10 per cent.
For instance, by the 1970s the industrial west became highly dependent on a few developing countries to supply a growing appetite for oil.
Between 1962 and 1972, US imports of oil rose from 99 million metric tons to 230 million, Western Europe’s import from 265 million to 680 million and Japan’s import from 48 million 235 million. By 1972 the United States imported about one third, Western Europe nearly all of their respective requirements.
This growth in export continued up to 1980 when the North Sea oil entered into the oil market in commercial quantity and reduced Western Europe dependence on developing countries oil.
If the past growth of demand for oil is taken as a yardstick, consumers would suffer a shortage even if oil supplies continued to grow at a more moderate rate let alone remaining static or declining.
This is a point OPEC should note and exploit in order to regain its past glory by allocating quotas to members that would enable it reduce output while taking advantage if the price like such production cut would bring into being.
OPEC should also note that it is not every commodity that can stand for cartelisation. The oil cartel (OPEC) has stood the test of time because the demand for has been price inelastic in both the short run and longer run

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