Ms. Rumi Roy: Assistant Professor Vivekananda Law School

Ms.
Rumi Roy
Assistant Professor
Vivekananda Law School
OPEC
The Organization of the Petroleum Exporting Countries (OPEC) is a permanent,

intergovernmental Organization, created at the Baghdad Conference on September 10–14, 1960,
by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. OPEC was formed in September 1960 by
five oil-producing developing countries (Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela) with
the objective: to coordinate and unify petroleum policies among Member Countries, in order to
secure fair and stable prices for petroleum producers. The Organization shall devise ways and
means of ensuring the stabilization of prices in international oil markets, with a view of
eliminating harmful and unnecessary 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 countries, 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 membership is open to any country that is a substantial exporter of oil and that shares the
ideals of the organization. As of 2011, OPEC had 12 member countries, including founder
members Iran, Iraq, Kuwait, and Venezuela. OPEC's influence on the market has been widely
criticized. Because its member countries hold the vast majority of crude oil reserves (about 80%)
and nearly half of natural gas reserves in the world, the organization has considerable power in
these markets.
The Heads of Delegation to OPEC are the official representatives of each Member Country to
the OPEC Conference. They are therefore normally Their Excellencies the Ministers of Oil,
Mines and Energy of Member Countries.
At that time, the international oil industry - outside the USA, Canada, the USSR, and China -
was characterized by the dominant position of the large multinational oil companies known as
the 'Seven Sisters'. Host governments did not participate in the production or pricing of crude
oil, acting only as competing sellers of oil concessions, and in return they received a
stream of income through royalties and income taxes.
Each of the Seven Sisters was vertically integrated and had control of both upstream
operations (exploration, development, and production of oil) and, to a significant but
lesser extent, downstream operations (transportation, refining, and marketing). At the same
time, they controlled the rate of supply of crude oil going into the market through joint
ownership of companies that operated in various countries. Such vertical and horizontal
linkages enabled the multinational oil companies to control the bulk of oil exports from the
major oil- producing countries and to prevent large amounts of crude oil accumulating in the
hands of sellers, thus minimizing the risk of sellers competing to dispose of unwanted
crude oil to independent buyers and thus pushing prices down (Penrose, 1968). At the
heart of the concession system was the concept of a 'posted' price, which was used by the oil
companies to calculate the stream of revenues accruing to host governments. Being a fiscal
parameter, the posted price did not respond to the usual market forces of supply and
demand and thus did not play any allocation function. The formation of OPEC in 1960
was an attempt by member countries to prevent the decline in the posted price (Skeet, 1988) 8
and thus for most of the 1960s, OPEC acted as a 'trade union' whose main objective was to
prevent the income of its member countries from falling.
The global economy represented the main risk to the oil market early in the decade, as global
macroeconomic uncertainties and heightened risks surrounding the international financial system
weighed on economies. Escalating social unrest in many parts of the world affected both supply
and demand throughout the first half of the decade, although the market remained relatively
balanced. Prices were stable between 2011 and mid-2014, before a combination of speculation
and oversupply caused them to fall in 2014. Trade patterns continued to shift, with demand
growing further in Asian countries and generally shrinking in the OECD. The world’s focus on
multilateral environmental matters began to sharpen, with expectations for a new UN-led climate
change agreement. OPEC continued to seek stability in the market, and looked to further enhance
its dialogue and cooperation with consumers, and non-OPEC producers.

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The Organization of the Petroleum Exporting Countries (OPEC) is a permanent,

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