Article by Kelvin Tutani
OPEC is an acronym for the Organization of Petroleum Exporting Countries. The grouping was formed in 1960 by the five founding members of Iraq, Iran, Saudi Arabia, Kuwait and Venezuela. The current headquarters of the organization is in Vienna, Austria. The goal of Opec, since its formation, is to coordinate petroleum policies of member countries in order to maintain price stability in the oil market, for the efficient and economic supply to consumer nations, and for a fair return on capital investment for the oil industry.
This means that when oil prices plummet sharply, members of the organization may reduce their crude oil output and restrict supply on the international market. Resultantly, prices will be propped up from such actions. This is vital to the group so that the state-owned oil industries of Opec, can operate profitably and revenue accrued can continue to be used to support the government budgets of the respective countries, for the ultimate welfare of their citizens. Today, the oil firms in the Opec countries are mostly nationalized but it was not so before. From 1920, through to the early 1970s, oil firms in these nations were mainly private multinational corporations, which, however, had been losing their grip on ownership since the founding of Opec until their replacement.
From 1960 to date, membership of Opec has grown to include U.A.E and the seven African countries of Nigeria, Angola, Algeria, Lybia, the Republic of Congo, Equatorial Guinea and Gabon. The grouping produces about 30% of global oil output and has approximately 80% of the world’s oil reserves. The size of their reserves is more convincing of their importance in the international market because the alternative producers who are currently making the other 70% of global oil production, outside of Opec, have oil reserves that are already dwindling, sharply. In 2016, 11 non-Opec oil-exporting countries decided to align with Opec and became a grouping now known as Opec+, which coordinates policies for the overall sustainability of the oil industry. Among the members of the extended grouping, are, Russia, Mexico, Kazakhstan, Oman and other smaller Middle Eastern nations. The non-Opec members in Opec+ have 10% of the world’s oil reserves and their alliance with Opec means that the extended grouping has 90% of the world’s oil reserves in their custody, which makes it easier to influence oil prices and stability in the global market.
Oil is indispensable to the world economy. The effects of a steep hike in its prices or shortages in supply are sure to be felt around the world, in the form of inflation and retraction of economic growth. With global oil demand set to reach an all-time high of 102 million barrels per day, according to the International Energy Agency’s March 2023 oil market report, the fate of oil is sealed as the most valued commodity, worldwide. As economies advance and grow, there will be further growth in oil demand which is expected to reach its peak around the year 2040. The USA is the pre-eminent oil producer, globally, although it fails to meet its needs on account of demand outstripping supply. Even as it produces the best quality crude oil, internationally, branded as West Texas Intermediate (WTI), the reserves of the nation are limited and will likely deplete completely within the next decade. West Texas Intermediate, also known as Texas Light Sweet, is a highly favourable oil because of its lightness and its low sulphur content when compared to other crude oils across the world. The country currently produces around 12 million crude oil barrels per day, with fluctuations occurring due to phenomena such as weather, changes in demand and supply plus capacity.
China is also a top global crude oil producer, reaching around 4 million barrels per day although this, in similar fashion to the U.S, is a fraction of their domestic demand. India, another top consumer of crude, produces much less than its demands. As a major oil consumer, the country has registered growth in oil demand for 15 consecutive years, leading to a record 4,8 million barrels per day in consumption, as compiled by the Indian Oil Ministry’s Petroleum Planning and Analysis Cell, in February 2023. It is reliable to say that there will be growth in oil consumption in emerging market economies for the foreseeable future. More key consumers of this prized and finite energy source of crude oil, are, the European Union and nations in The Far East such as Malaysia, Thailand, South Korea and the Philippines. Since most nations cannot meet their oil demand by domestic production and the majority of the world does not have oil reserves, interest and expectation are then set upon those nations that can provide it. These nations with the capability to export oil in massive quantities are the same that make up the exclusive producers group of Opec and Opec+.
Oil can be found inland and extracted through a process of fracturing rocks called fracking. This is what the U.S is doing in Texas and then transporting the commodity in pipelines to the Midwest and the Gulf of Mexico for refinement. It can also be extracted from a water body such as the sea. When oil forms where there is a water body, drilling also takes place in order to extract the resource. The oil will be layered up above the water because water is denser than oil and so the two do not mix. This inability of water and oil to mix is unlike the inseparable phenomena of politics and oil. A look at the notable members of the extended Opec+ grouping and the largest oil consumer countries in the world shows that where there is oil, there are invariably active political influences, interfering.
Saudi Arabia is the largest oil producer in Opec, with an average production of 11.5 million barrels per day in 2022. The country has the second largest oil reserves, which are estimated at between 16- 17% of global reserves. In 1973, the nation was part of the Opec embargo on oil exports to the U.S, Netherlands, Portugal, Rhodesia (now Zimbabwe) and South Africa, in defiance of their support for Israel during the Yom Kippur War of October, that year. As a result, global oil prices galloped about four times from $2.65 per barrel to around $11.90 as oil firms in the exporting countries had drastically cut production. Fuel queues, inflation, fuel rationing and a slump in economic production were the eventual outcome. The embargo was ultimately removed by the Arab states in March 1974. The remaining part of the decade was consequently affected by a sharply contracted global economy. More recently, Saudi Arabia and the U.S seem to be taking conflicting policies again, stemming from the 2018 murder of popular Saudi journalist and adviser-turned-critic of the Saudi monarchy, Jamal Khashoggi. The U.S holds the Saudi Crown Prince, Mohammed Bin Salman responsible for the death Khashoggi, who was exiled in the U.S at the time of his murder and writing monthly columns for the Washington Post. The writer was assassinated upon visiting the Saudi consulate in Turkey, when he had travelled from the U.S. Since then, Saudi Arabia has been making policies which uphold the rivals of the U.S in the oil market. For example, the monarchy has intimated its willingness to accept the Chinese Yuan for oil sales, which will be at the detriment of the U.S dollar.
In October last year, Saudi Arabia agreed on an oil production cut which was seen as tacit support for Russia amid the sanctioning of Russian oil by the U.S and EU, as the cut would lead to increased revenue for Russia, which would enable it to finance the war in Ukraine. Further oil production cuts were instituted in April this year and will have the same effect of upholding the price of sanctioned Russian oil. In another apparent show of defiance, the country joined a prominent grouping led by China, the newest rival of the U.S, called the Shanghai Cooperation Organization.
Iraq has had its unfair share of oil and politics “blendings”. The country was part of Opec during the Arab oil embargo of 1973. Later, in August 1990, the country invaded its fellow Opec member, Kuwait, in an invasion whose motivation, some argue, was driven by the need to annex Kuwait’s oil reserves and to cancel the debt that Iraq owed its neighbour. Consequently, the U.S involved itself in the defence of annexed Kuwait and liberated the smaller nation from its aggressor. Some state that America had a stake in this war because of its reliance on oil imports from that region. In March 2003, America invaded Iraq after a U.S congress resolution, with the aim of disarming the nation of weapons of mass destruction. This claim by America, turned out to be false. Some senior bureaucrats in the U.S government at that time, maintain that the actual decision of invading Iraq was to grant U.S companies access to Iraq’s oil. Former Federal Reserve Bank Chairman, Alan Greenspan, agreed, writing in his memoir, “I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil.” Before the U.S invasion, Iraq oil was produced strictly by the government and foreign multinational corporations were prohibited. After the invasion, the country’s oil was then dominated by major Western oil firms such as ExxonMobil, Shell, Haliburton, Chevron, etc.
Iran and Russia are yet more members of Opec+ which show that where there is an oil-exporting nation, there is explosive global or regional politics. Iran nationalized its oil in 1951, taking the industry from the Anglo-Iranian Oil Company (AIOC), a Western multinational corporation. Not long after, their prime minister, Mohammad Mosaddegh, was toppled in a coup and replaced by a monarch who was allied to America and the West. The coup was funded by the U.S and Britain. Decades later, America had a fallout with Iran over the Iranian nuclear deal in 2018. The U.S reinstated sanctions on The Islamic Republic, including their oil exports. Iranian oil exports are now, reportedly, finding their way to the Chinese black market and The Far East, after shady processes such as the forging of documents, as a method to evade sanctions. Russia has found itself in a similar situation. After its invasion of Ukraine, the country’s oil exports were banned by the U.S and sanctioned by the EU. The country has resorted to selling its exports to China, India and Northern Africa at discounted prices. As a result, Russian oil exports have reached a three-year high, for March 2023, at 8.1 million barrels per day, according to the International Energy Agency (IEA). However, their corresponding revenues have contracted, when compared to the previous year, owing to price caps and embargos on their exports.
In Africa, Nigeria has the continent’s largest production capacity and reserves. The country has the capacity to produce 2.5 million barrels per day but is currently producing 1.3 million barrels per day. The West-African nation has been having challenges with insurgents in the oil-rich region of Niger Delta, who have been carrying out militant attacks, sabotage and theft of the oil resource on account of their grievances as neglected residents of the region. The people of the Niger Delta largely live in poverty whilst the country is raking in huge revenues from the resource in their area. The government of Nigeria has had immense challenges as it has also failed to maintain oil refineries for processing crude to final products such as gasoline and diesel. As a result, the country has been selling its crude oil in the form of swaps of crude for finished petroleum products from developed countries. A consortium of foreign and local companies has been managing the swaps on a direct sale, direct purchase basis. These swaps are expected to end this year, however, as both government and private players such as Dangote Petroleum Refinery, are building more capable refineries with ample capacity. The country’s oil ministry is also appealing to investors on the African continent to consider building refineries and other technologies for the oil industry in their country.
The Opec story cannot be complete without mention of Venezuela, the country with the largest oil reserves in the world. It is odd that Venezuela, the country with the largest oil reserves, is a poor performing member of OPEC, manufacturing less than 1 million barrels per day. This means it is operating much below countries like Nigeria and Angola. The case of Venezuela seems to be one of a country which had a political leader with great theoretic ideals but poor economic literacy. On the other hand, Venezuela has been subjected to immense political and economic pressure from the U.S, due to the sanctioning of oil imports from the country and other key economic activities. Former president, the late Hugo Chavez, began his reign in 1999 in Venezuela, whilst his country was producing a peak of around 3,5 million barrels of oil per day, the previous year. He then went on to nationalize private oil firms with the aim to provide public services and increase welfare programs for the citizens. This took a bitter turn as the country’s oil production plummeted leaving the nation in need of support from Iran, another sanctioned country, for technology and logistics in exporting its oil, which also ends up either in China or other nations of the Far East. It could be that President Chavez introduced too many leftist policies at one time or the pressure from the U.S was too much for the nation to bear. Venezuelan crude oil is also tagged as “sour” in the oil market, meaning that it contains undesirable amounts of sulphur and is thus more expensive to process. However, after the banning of Russian oil in America, some U.S companies are buying Venezuelan oil once again.
In the next 45 years, the world’s oil reserves are set to be depleted, totally, according to Opec. Since oil is finite, the world is already working on a transition from oil to renewable energies such as wind, solar and electricity for vehicles. This transition to climate-smart and renewable methods will depend on resources such as lithium, copper, cobalt and rare earth minerals. The question remains- Will there be another energy commodity alliance, based on these transition commodities? Countries that are rich in these resources may learn from the case of oil-exporting countries which are now using oil revenues to diversify their economies in order to broaden their revenue sources. Developing countries such as Chile, Argentina, Zimbabwe and DRC have a rare opportunity to coordinate their policies around the lithium resource, for example, as they have it in rich amounts. On the other end, South Africa, Madagascar, Namibia and Zambia can also congregate policies pertaining to their healthy stock of rare earth elements.
Coordinating policies has a better effect than having one country going in its separate direction. In Zimbabwe, the government has already banned the export of unprocessed lithium with the aim to have miners invest more in the value chain, for higher employment, greater revenues and skills and technology transfers. The move has yielded some positive results so far as miners such as Premier African Minerals have finished building a lithium processing plant which should be operational this month. Another firm, Zhejiang Huayou Cobalt has also invested in lithium processing and is doing production trials at their Arcadia plant which is 40km outside of Harare, the capital. The case of Opec also confirms that countries with “green-energy” commodities should prepare for reverberating politics, internally and globally because where there is energy, there are strong political interferences.
Kevin Tutani is a political economy analyst.
The views expressed in this article are those of the writer and do not necessarily represent those of the Zimbabwe Broadcasting Corporation.