opec and the world oil industry
OPEC
is an organization dedicated to the stability and prosperity of the petroleum
market. Membership is open to any country which is a substantial net exporter
of oil and which shares the ideals of the Organization.
Member
Countries supply more than 40 per cent of the world's oil and they possess
about 78 per cent of the world's total proven crude oil reserves.
OPEC
coordinates oil production policies to help stabilise the oil market
and help oil producers achieve a reasonable rate of return on their investments.
This policy is also designed to ensure that oil consumers continue to receive
stable supplies of oil.
OPEC
has eleven member nations from Africa (Algeria, the Socialist People's Libyan
Arab Jamahiriya and Nigeria); Asia (Indonesia); the Middle East (the Islamic
Republic of Iran, Iraq, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates);
and Latin America (Venezuela).
Cartel in decline?
Although OPEC is sitting on 75% of the world's identifiable reserves of oil, it no longer has the same price-setting influence on the world market as it did twenty five years ago.
The eleven members of the organisation account for only 40% of total world
oil production and OPEC has found it difficult to get its members to stick
to agreed production cuts. In November
1998, OPEC output was 27.38 million barrels per day, up 500,000 barrels from
October and the exact opposite of what is needed to stop the world price falling.
Recent
divisions within OPEC have highlighted the inherent uncertainty
and fragility of producer cartels. Indeed some economists believe price-fixing cartels
are always doomed to collapse because of the way the output
quota system works.
Economic theory tells us that to price stability requires control over market supply. Whilst OPEC would like the eleven nations as a whole to stick to output cuts to reduce excess supply in the market, each individual producer has an incentive to expand output to increase their revenue. What is rational for one nation also holds for others. This results in over-production and lower prices and profits for each barrel of oil extracted.
Cuts in market supply can force up the market price
Students familiar with the theory of the Prisoner's Dilemma will see useful parallels with the problems OPEC is having. Perhaps they need some new countries to join the cartel to reinforce the credibility of its quota system.
Russia and Mexico have been touted as potential new entrants to the organisation.
Oil and the UK Economy
UK crude oil and gas supply remains a major industry for the economy. Capital investment by the sector in 1997 accounted for 16% of total industrial investment. Gross Trading Profits (net of stock appreciation) were over £12 bn - a sizeable proportion of which goes to the Treasury in tax revenue.
The oil and gas sector also added 2% of total UK GDP and is a major contributor
to the balance of payments.
Balance
of Payments
The
UK is a net exporter of crude oil and oil products. In 1997, UK exports
were valued at £9.5 bn and accounted for 5.6% of total UK exports (the fourth
largest export by commodity). Imports totalled £5.2 bn (2.8% of UK imports
and the 11th largest import
Between 1980-89, the average surplus per year from trade in oil was £4.2 bn. From 1990-96 that average fell to £2.9 bn but increased production in 1997 brought the surplus back above £4.7 bn. The fall in oil prices in 1998 caused a slump in the oil surplus. But the higher prices seen in 1999 and through most of 2000 has boosted the net surplus on oil for the UK balance of payments. The chart below tracks the annual surplus in oil for the Uk over the last decade.
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