OPEC: ensuring an energy-secure future

UN Chronicle, June-August, 2003

Silva-Calderon, Alvaro

For over four decades, the Organization of the Petroleum Exporting Countries (OPEC) has been committed to a set of principles geared towards establishing an energy-secure future for the world we live in. Two fundamental objectives have formed the cornerstone of its approach: maintaining oil market stability and striving to attain a fair price for the oil it produces. These goals have been intrinsic to the Organization's aims and objectives since its formation in Baghdad, Iraq in September 1960. And although OPEC has always professed that the management of the oil market should not be up to its members alone, it has made important policy decisions that have brought the industry back from the brink of a number of serious crises and has always taken this inherent "managerial" responsibility very seriously.

In fact, throughout its history, OPEC has found itself to be in the pivotal role in an often difficult balancing act- trying to guarantee adequate revenues for the producers, companies and investors alike while attempting to satisfy the needs of the consumers, especially in providing uninterrupted supplies of oil at a fair and equitable price.

It is no secret that over the years many producing and consuming countries have advocated an international oil market free of controls and outside influence.

As the last two decades or so have shown, that approach simply does not work-certainly not with something as diverse and complex as the global oil sector. Of all the commodities traded on world markets every day, oil is undoubtedly the most unpredictable and volatile. The price of international crude can crash or soar overnight. It can be affected by a multitude of factors and not solely by supply-and-demand-related fundamentals. Hype and speculation have also proved to be extremely problematic. Take the Middle East crisis for example-just the mere suggestion that the United States intended launching military action against Iraq caused the price of crude to surge in a few weeks by something like $10 a barrel, even though global supplies were more than adequate. There was no basis in the supply-and-demand picture for such a hike, yet the uncertainty of what might happen drove prices higher. So to leave such a sensitive trading environment to its own devices would, in our opinion, be a sure recipe for disaster .

However, it must be stressed that oil market management is not something new. If we look back to the early years of the twentieth century, we can see that the first moves towards attempting to balance supply and demand, which ultimately affected prices, were made by the United States Texas Railroad Commission in the early 1930s. Around the same time, the United States Congress endorsed the establishment of the Interstate Oil and Gas Compact Commission.

Both entities had the prime function of controlling production, with a view to maintaining a certain price level. Later, the renowned "Seven Sisters"--a group of major oil companies--took a stronger hold on the manipulation of output and pricing, sparking the birth of OPEC, which was mandated to defend the sovereignty and oil rights of its then five founding members.

OPEC has had to contend with a series of boom-bust periods in the oil market. In fact, a couple of them proved to be real roller-coaster events, threatening the very livelihoods of its members.

The Organization has implemented numerous mechanisms in its bid to rid the market of instability, but due to the very nature of the oil industry, volatility is still very much with us today. Of late, we have been experiencing a new cycle of instability, with the effects of the Middle East crisis and the hostilities in Iraq, one of our sovereign founders. Even though it had no real control over these politically oriented events, it did not mean that OPEC could sit back and wait for the dust to settle. It was imperative to closely monitor the situation and be ready to respond quickly and effectively to any development threatening the interests of the producers, consumers and the industry at large. We are indeed fortunate that some members have spare production capacity to respond to any supply emergency, but from past experience we know that we must not be hasty and need to carefully study the market fundamentals before arriving at any new decisions.

If there is one thing that the oil market has taught us over the years, it is that it cannot be successfully managed single-handedly. The eleven OPEC members currently control only around 40 per cent of global oil production, so it is unrealistic to expect them to cure all ills alone. That is why cooperation among and between producers and consumers is so essential for attaining a healthy and prosperous future. All producers are affected when prices soar or slump, so it is only fair that they should join hands and face any potential crisis together. Oil prices--whether low or high--do not discriminate from one producer to another. As we learned in 1998 when the price of crude sank to under S 10 a barrel, low prices are a common problem requiring common policies and actions. OPEC cannot unilaterally maintain market stability nor should it be expected to shoulder the responsibility alone. If producers and consumers do not act in a concerted fashion, the market will impose its own will, and often with disastrous consequences for us all.