A guide to the inner workings of Opec

The Gulf Three, The Volatiles, The Rivals ... and all you need to know about Opec.

Saudi oil minister Ali Al-Naimi (second left) with UAE Energy Minister Suhail Al Mazrouei (right) during the opening session of the 10th Arab Energy Conference in Abu Dhabi. AFP
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Opec was founded in 1960 to help governments gain a bigger share of revenue from oil production in their own countries. At the time, the oil companies in places such as Saudi Arabia and Venezuela were owned by the oil majors – for example, Shell, Exxon and BP. The dominant global producer of oil was Texas, and its ability to produce unlimited volumes enabled the international oil companies to drive hard bargains with the governments of the countries which would ultimately come to form Opec.

Opec was intended as a counterweight to Anglo-American dominance. For the exporting countries, the early decades of Opec were scrappy – a fight against far better financed, politically connected and technologically sophisticated western oil companies.

But that fight ended more than 30 years ago. Opec won, and life has moved on. With common goals achieved, what remains is more diversity than unity. Those differences underpin the analytical approaches necessary to understand intra-Opec dynamics. Here’s how I categorise the countries:

The Gulf Three

When we think of Opec, we think of countries with spare capacity, discretionary financial resources, large oil production and a willingness to moderate or accelerate oil production to actively influence global oil prices. In Opec, only Saudi Arabia, Kuwait, the UAE and Qatar really meet these requirements. One can even exclude Qatar because it is primarily a producer of liquid natural gas, not oil. This leaves us with the Gulf Three: the Saudis, Emiratis and Kuwaitis. To me, this is the true Opec.

One is sorely tempted to add Russia. It qualifies on almost every count. It is a major producer, centrally run, potentially with substantial financial reserves and with an interest in managing oil prices for economic and political reasons. The nature of Russia’s resources – thousands of old producing wells—makes it harder to shut in or expand production there.

To influence oil prices, Russia would need to be able to add or withdraw 1 million barrels per day for six months, which could be achieved with a storage capacity of 400 million barrels. Were Russia to establish an actively managed strategic petroleum reserve, it could become a swing producer to rival Saudi Arabia. Given that Russia and Saudi Arabia often have similar interests in oil prices, a Russian strategic storage capacity would move Russia closer to the kingdom as a partner. Russia would then be a core Opec member – not because of formal membership, but because of aligned interests.

The Rivals

Iran and Iraq constitute The Rivals. Anyone who prepares oil market forecasts knows that Iran and Iraq have very different dynamics from the Gulf Three.

Iraq is seeking to increase production after decades of under-performance. Iran is suffering under western sanctions and producing well under its potential. When observers are calling for Opec production cuts, neither of these countries comes into consideration. The Iraqis will not cut, as it conflicts with the essence of their strategy; the Iranians will not because they are already producing 1 million barrels per day below normal levels.

Iran and Iraq also share membership in The Volatiles.

The Volatiles

No countries cause analysts more pain and suffering than do The Volatiles. These are countries whose output, for internal political and security reasons, is simply impossible to forecast with any certainty to the medium term. Iran, Iraq, Libya and Nigeria fall into this category.

Countries can enter and exit this list depending on developments on the ground. Libya, for example, would have been listed in the Steady Producers just five years ago.

The Steady Producers

These are the members with generally stable, authoritarian governments without substantial financial reserves, production growth ambitions or demonstrated interest in managing global oil prices. Algeria and Angola arguably fall into this category.

None of the Steady Producers hold material spare capacity or possess massive financial reserves that can be called upon, nor do any appear to have ambitions to materially raise production. They may follow Saudi Arabia’s lead, but do not dictate policy on their own. The best guess for their long-term production is today’s level. If they are partners in Opec, they are junior partners.

The Latin Americans

Why Venezuela and Ecuador should be members of Opec is a mystery. The logic of Venezuela’s membership revolved around increased profit-sharing and the nationalisation of the oil industry there. This was accomplished long ago, and the rationale for continued membership in Opec seems unclear.

Venezuela’s peers are more Mexico’s Pemex and Brazil’s Petrobras, in which oil industry professionals operate in the context of socialist populism and endemic corruption.

After Opec

Real Opec, the group ready and able to modify production to manage oil prices, principally comprises the Gulf Three, with some supporting help from the Steady Producers. But The Volatiles can make a mockery of Opec strategy, as internal political turmoil can undermine the best-laid Opec plans – as events in Libya demonstrate. The Rivals are simply following an independent strategy, and will do so for years to come. And so might Venezuela, if there is political change there.

If Opec was ever a monolith, it no longer is today. Understanding Opec will require a closer look at the diversity of interests and capabilities within the group.

Steven Kopits is the president of Princeton Energy Advisors

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