What exactly does OPEC do?

Summary

  • Crude oil has been on a wild journey since the onset of the COVID-19 pandemic.
  • The prices hit the negative territory for the first time in history during April 2020. Crude oil prices are now at the pre-pandemic levels.
  • OPEC, a 13-member cartel, has played a significant role in stabilising the oil market. The organisation decides the production and supply quotas for most of the global oil-producing nations.

The journey of the oil market amid this pandemic has been a wild ride, with crude oil experiencing both the boom-and-bust phases.

Last year, the COVID-19 pandemic-led global lockdowns forced cars, aeroplanes, and rail coaches to restrict movement. As a result, the demand for crude oil sapped to its lowest levels with nearly no buyers of WTI crude oil at the Cushing hub.

With a huge oil glut at the hub and no physical delivery, May futures contract price of WTI crude oil crashed to negative levels in April last year. Those were some of the darkest days for the oil industry in history.

Source: © Gumpapa | Megapixl.com

However, the sector entered the recovery phase with the rollout of coronavirus vaccines and ease in global lockdowns. Now, the energy demand is nearly at the pre-pandemic levels.

The Organization of the Petroleum Exporting Countries (OPEC) has played a critical role in stabilising the global oil market. The 13-member cartel OPEC decides the production and supply quotas for most of the global oil-producing nations.  

Also Read: What are the factors that influence global crude oil prices?

What is OPEC?

Headquartered in Austria, OPEC is an intergovernmental organisation formed in September 1960. Initially, the organisation was created by five founding member countries and later joined by 11 more members. Currently, there are 13 member countries in the organisation.

Data as on January 2021, Image Data Source: OPEC

The OPEC member countries hold nearly 79.4% of the world's proven oil reserves, with about 64.5% in the Middle East, as per 2018 estimates by the organisation. The net addition in production during 2009-2018 by OPEC countries was 186.2 billion barrels, whereas non-OPEC countries produced merely 24.6 billion barrels.

Good Read: Crude oil rises 44% YTD, stoking up inflationary pressure

Why was the OPEC cartel formed?

The OPEC cartel was formed during the international transition phase with the objective of coordinating and standardising the petroleum policies in member countries to stabilise oil prices in the global market.

When extensive decolonisation was taking place during the transition phase, the international oil market was monopolised by big oil players present in the market till 1970. The move to standardise the oil policies assured the safe supply of oil to consumers and appropriate returns to the suppliers in the worldwide market.

Must Read: OPEC And Russia Meet to Push for Iraq and Nigeria Compliance

What are the main goals of OPEC?

The primary goal is to maintain the oil prices at a profitable level for its members and keep the market free from any restrictions. The cartel also ensures that its members receive a smooth income flow by supplying oil uninterruptedly.

Apart from this, OPEC has goals like keeping the oil prices stable, reducing oil price volatility, and adjusting the global oil supply.

The cartel ensures that its members get a reasonable price for the oil they sell in the international market. OPEC traditionally considers oil prices to lie between US$70 and US$80 per barrel.

If the prices rise above this level, the cartel increases its gross production and vice-versa. When the oil prices increase, it provides an opportunity to oil companies to unearth expensive crude oil deposits like shale oil fields in Canada and hydrofracking based Bakken oil fields in the US. In such cases, non-OPEC supply increases.

Interesting Read: How crude oil dynamics influence the upstream and downstream sectors

The second important goal is to maintain the oil price volatility. Ideally, the oil production business needs to run 24 hours a day by seven days a week for maximum efficiency. The volatility in oil prices may lead to the shutdown of costly operations as offshore drilling is a costly process and very difficult to shut down. It is then the OPEC responsibility to keep the global oil prices stable.

Adjustment of the global oil supply is the third goal of the cartel. For example, the oil lost in any crisis like the Gulf crisis in 1990 was managed by the OPEC. The cartel also increased the supply during the 2011 Libya oil crisis.

How did the OPEC control the 2020 oil crisis?

The OPEC, along with its allies, played a significant role in stabilising global crude oil prices during the 2020 pandemic. The cartel remained focused on bringing the prices from the negative territory to the pre-pandemic level. The significant production cut decisions by the OPEC have served well to clean the previous oil glut from the market.

Let us glance at the iconic decisions taken by the OPEC to stabilise the oil market.  

Comment


Disclaimer