OPEC on its 57th birthday: Still alive

THIS year marks the 57th anniversary of the creation of the Organization of Petroleum Exporting Countries (OPEC). The world’s bestknown oil organization was born on Sept.14, 1960 in Baghdad with five founding members: Saudi Arabia, Kuwait, Iran, Iraq, and Venezuela.

Created to defend oil prices and safeguard their producers’ interest against the international oil companies, known as the “Seven Sisters,” that dominated the market up until the 1970s.

The history books reveal that the organisation was the brainchild of two men, Juan Pablo Perez Alfonzo, the Venezuela oil minister, and Abdullah Tariki, his Saudi Arabian counterpart. However, some claim the idea of OPEC came before 1960, and it wasn’t the Seven Sisters that Venezuela feared. It was the Middle East oil producers.

Many trace OPEC’s creation to the year 1959 when Perez Alfonzo and Traiki met other ministers and representatives in April during the first Arab Oil Congress in Cairo. Author Pierre Terzian, however, traces back the origins of OPEC to the year 1946, when Perez Alfonzo first thought of it.

In his book “OPEC: The Inside Story” Terzian mentions that oil from Saudi Arabia and others started flooding the US market, so Venezuela started to lose market share there and prices started to fall.

Ever since the 1940s, Venezuela sent delegations to oil producers in the Middle East trying to reach agreement on protecting prices and the interests of producers. The South American country was always hopeful of reaching an agreement and after 14 years of negotiations OPEC was born.

It was not, however, an easy ride. Iran resisted joining at the start and some countries like Mexico did not want to join at all. Standing against the Seven Sisters was not easy as they controlled everything in the market from oil prices to refining systems.

Bringing producers together under any agreement is as hard today as it was back in the 1960s. And 57 years after its creation, OPEC members can still be found to agree to disagree.

A year ago there were many who were predicting the end of OPEC, claiming the organization no longer had to tools to fix the imbalance in the market.

For two years oil prices were down and the market was seeing the worst rout since the 1990s. It was indeed hard to convince anyone that OPEC had a future. However, the group, on its 57th anniversary, showed the that it can stand up to the challenges whenever oil prices are at stake.

Last September, it made a pact to cut output, and in November the agreement to curtail 1.2 million barrels per day (bpd) was finalized. In December it added 13 producers from outside the group to the accord, cutting a reported additional 600,000 bpd.

Today the oil market is more stable than at any time before. Oil stocks are falling gradually, and the deal was able to establish a price floor and oil is trading at little above $55.

OPEC has succeeded in dispelling all the myths of its demise but this is not to say that the situation is perfect.

OPEC is still suffering from many old illnesses and its credibility is still at stake when it comes to conformity with pledged cuts. The market is still not sure how long will the deal will last and what should be the response of OPEC and its allies to next year’s anticipated challenges, including rising supplies from Libya and Nigeria who are exempted from the cuts agreement.

What OPEC didn’t succeed in doing after all these years is to become the horse and not the carriage. It still as reactionary an organization today as it was when it was created.

The list of shortcomings does not end there. Political division among its members still harms stability. That was evident in 2014 and again in Doha in 2016.

Also, OPEC still suffers from inability to read the future and preempt any threats. Its member countries have very limited physical interaction in the market. They have little to no joint investments in energy. They do not invest in refineries and they do not develop technologies to help them extend their dominance in the market.

OPEC has enough energy and financial resources but they may not have enough time to reform.

QWael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?”. He can be reached on Twitter @waelmahdi