4 Ways Oil Prices Impact Opec Countries’ Economy and Currency
What does OPEC stand for? OPEC stands for the Organization of Petroleum Exporting Countries. The OPEC cartel dominates oil and gas supply around the world and influences crude oil prices in both oil-producing countries and oil-purchasing countries. It’s important for global investors to understand how OPEC’s policies affect the economies and currencies around the world.
4 WAYS OIL PRICES IMPACT OPEC COUNTRIES’ ECONOMY AND CURRENCY
- OPEC Regulates Oil Prices
- Fracking Has Driven Down Oil Prices
- OPEC Keeps Oil Production Levels High
- OPEC Oil Embargo Spurred U.S. Domestic Oil Production
Since the supply and demand for oil depends upon world economic and political events, OPEC conferences continue to discuss how oil-producing nations can seek a steady income for their oil exports in a volatile world.
1. OPEC Regulates Oil Prices
OPEC regulates oil prices to stabilize the economies of oil exporting countries. Its goals are to coordinate the petroleum policies of all its members. The idea is to supply petroleum to buyers while earning a steady income and providing petroleum investors with a fair return on their money.
2. Fracking Has Driven Down Oil Prices
Fracking in the US and other new energy production technologies used by countries outside OPEC has forced the price of oil down. This has reduced the economic stability of OPEC countries, lowering their influence in the oil markets.
As oil production around the world has increased and prices dropped, OPEC’s influence has declined–it is not as significant a player in the oil industry as it used to be. If it were not for the fracking revolution in the United States, almost every other country in the world would have paid far more for the oil in the past decade. Without the oil boom in the United States, OPEC and Russia would have dominated world energy markets.
3. OPEC Keeps Oil Production Levels High
Since June 2016, OPEC has kept oil production levels high. Although lower prices led to a loss in revenue, the long-term plan was to push oil producers like Canada and the United States with a higher production cost out of the market.
OPEC thought the plan would help its members regain global energy market share. The high-pressure plan failed because US shale oil remained resilient. In response to this high-pressure plan, American companies cut oil exploration expenses and production costs.
4. OPEC Oil Embargo Spurred U.S. Domestic Oil Production
Prior to the OPEC oil embargo in 1973, the United States did not embark on extensive domestic oil exploration because it was not cost effective to keep large crude oil inventories. It was far more economical to buy cheap oil from the Middle East than to invest in local oil production. There was no incentive to increase the production of domestic oil fields. OPEC received widespread criticism during the OPEC oil embargo, which is also sometimes referred to as the Arab oil embargo.
Egypt and Syria attacked Israel on October 6th, 1973, on the Jewish holiday Yom Kippur. The surprise invasion led to territorial gains around the Suez Canal and the Golan Heights. However, Israeli troops not only regained their lost territories but also seized Egyptian and Syrian land.
To pressurize Western countries to coerce Israel to withdraw from the occupation, the Arab members of OPEC took swift and drastic action. They cut oil production, started radical price increases, and banned oil supply to countries that had supported Israel.
This drastic action affected many countries, leading to a global energy crisis. Many developing countries could no longer afford to buy as much oil as before and OPEC countries stopped oil shipments to the US and the Netherlands. By 1974, the price of oil had quadrupled, and both the US and its European allies had to reassess their reliance on oil from the Middle East.
Since its foundation in 1960, OPEC has focused on establishing good relationships with all its worldwide customers. On the surface, its sudden geopolitical manipulation of worldwide oil distribution appeared to be in retaliation for the Western support of Israel. But, in fact, the Middle East’s simmering resentment toward the West had started much earlier–when US President Nixon released the dollar from the gold standard and declared it a fiat currency.
The abrupt devaluation of the dollar revived the sluggish US economy at the expense of the Arab world. Since the revenues from oil sales were in US dollars, their economies suffered a colossal loss. The devaluation of the dollar came as a shock because the gold standard had been in place since the end of the Second World War. Since the demand for Middle Eastern oil had doubled over twenty-five years, oil-producing countries in the region had accumulated their enormous wealth based on the strength of the US dollar.
Because of the OPEC oil crisis, the US government imposed domestic rationing of fuels for trucks and cars and lowered driving speed limits across the freeways. Besides emphasizing the need for energy efficiency, the US also invested in building its own domestic oil industries.
The OPEC oil embargo kept tensions so high that President Nixon considered military action to save the US economy. He was prepared to invade the Middle East and commandeer major oil fields in Saudi Arabia, Abu Dhabi, and Kuwait. He believed such action necessary to keep the United States from experiencing an economic slowdown. However, in March 1974, frenetic negotiations in Washington lifted the oil embargo, making a military action unnecessary.
OPEC: Organization, Membership, Influence
Here is a brief overview of OPEC’s organizational structure, membership, and global economic influence.
What Is OPEC?
The Organization of Petroleum Exporting Countries (OPEC) is a cartel of 14 major oil exporting nations that serves as an intergovernmental organization.
Founded in September 1960 in Baghdad by Iraq, Iran, Saudi Arabia, Kuwait, and Venezuela, OPEC aimed to coordinate petroleum policies and support member countries with economic and technological help.
OPEC’s headquarters are in Vienna, Austria, where they carry out day-to-day operations. According to OPEC news, Mohammed Sanusi Barkindo of Nigeria has been the organization’s chief executive officer since March 2019.
What Countries Are in OPEC?
According to the statutes of OPEC, the cartel is open to any significant oil exporting country (including developing countries) that shares its ideals. Besides its five founding members — Iraq, Iran, Saudi Arabia, Kuwait, and Venezuela — there are now nine more countries in OPEC. The current OPEC countries list includes Algeria, United Arab Emirates, Libya, Ecuador, Nigeria, Angola, Equatorial Guinea, and Congo.
The countries of OPEC are subject to changes in policy based on geopolitical factors, changes in currency exchange rates, trade disputes, and so on. Qatar and Indonesia, for example, are no longer OPEC members because of disagreements with the organization.
A map of OPEC countries does not include all the large oil-producing countries in the world. Substantial oil producers like the United States, China, and Russia are not OPEC members and they have their own independent oil production policies.
How Does OPEC Influence the World Market?
OPEC has a considerable market influence on the global energy supply because OPEC nations produce 80% at the world crude oil reserves and about half of the world’s natural gas reserves. Usually, OPEC has exerted its global influence to keep oil prices high to benefit its members. But occasionally, it has tried to influence geopolitical issues—the most notable occurring during the Arab oil embargo.
Does the IEA Oppose OPEC?
On the surface, it would seem that the International Energy Agency (IEA) and OPEC have contrasting agendas. The IEA is committed to ensuring a sustainable environment while OPEC is engaged in exploiting the earth’s resources for profit. Although OPEC was founded in 1960 to support the interests of oil-producing nations while IEA was founded in 1974 to support the interest of oil-consuming developed economies, over the years, talks between the two organizations have agreed on three common policies regarding production in the oil market—the first one is to enhance the oil market’s predictability; the second, to increase its reliability, and the third, to enhance its stability.
Abiding by these three oil policies will enable the IEA to ensure less pollution and still allow OPEC to produce oil at a profit. The reason for this domino effect is simple: Energy production and distribution affect economic growth.
The IEA appears resigned to the fact that fossil fuels are here to stay despite many sources of clean energy now available. They are more concerned with stabilizing the global oil market, natural gas production, and shale oil production than in trying to disrupt these technologies. They are like the US Energy Information Administration, who is more focused on discussing how U.S. monthly electricity is increasingly coming from renewable sources than condemning coal-fired generation. The primary concern of these organizations designed to improve environmental pollution is not to push alternative technologies too rapidly and to risk an economic slowdown.
How OPEC Impacts the World’s Economy and Currency
In the 1960s, when OPEC first emerged, world governments saw it as an organization interested in cooperation with other nations. By the early 1970s, this attitude changed abruptly. OPEC became widely criticized for precipitating a global economic crisis by raising prices and reducing production and supply.
OPEC asserted its economic clout for two reasons: to retaliate against Western democracies who had adopted a pro-Israeli and anti-Arab stance during the Yom Kippur War, and also out of resentment for the huge revenue losses Arab states experienced after the US dollar dropped the gold standard and became a fiat currency. However, it had to retreat from its tough policies, and so rejoined the US and Western Europe. At the time, US President Richard Nixon escalated pressure on OPEC delegates to come to an agreement in Washington DC by flatly stating that he planned to seize Saudi oil fields through military force as a last resort.
Until 2014, oil production and prices remained fairly steady, then oversupply by non-OPEC producers caused natural gas and global oil prices to fall. Today, oil prices, as exhibited by WTI oil price charts on the New York Mercantile Exchange, is on a wild ride. Recently, for instance, crude futures buoyed upwards because of an outage at a US East Coast refinery. In the long run, however, analysts are expecting the price to decline as US shale oil output increases. If you compare the 2018 volume of WTI oil prices for West Texas Intermediate crude oil to the prices in 2019, you can see a drastic drop in price.
While this is good news for nations on the side of oil imports, it is an alarming situation for OPEC nations on the side of oil exports because oil is often their main source of revenue. Venezuela currency, for example, is in a critical economic condition because of declining oil revenues. OPEC’s plan to undermine oil competitors like the US and Canada has backfired although these non-OPEC oil producers have higher production costs.
Production and pricing fluctuate based on trading patterns between nations, news of currency recaps, demand from rapidly industrializing Asian countries, and the oil production level of non-OPEC producers. Even news of the Iraqi dinar revaluation can affect crude oil prices. The US invasion of Iraq not only changed the regime of Saddam Hussein but also affected oil supply quotas around the world, thus affecting the economy of countries that had nothing to do with the war.
Geopolitical factors like US-China trade tensions have a ripple effect on indirectly determining crude oil prices in OPEC member countries. The recent conflict between the Trump administration and Iran over a drone shot down by the Iranian air force could cause a change in Iranian oil supply quotas to US allies. Even such things as thoughtless comments made by the energy minister of the United Arab Emirates at an OPEC meeting—if reported by the press—could trigger a trade dispute and currency rates and even affect oil output and OPEC production quotas. The world’s economy is now so interconnected that even trade disputes in non-OPEC countries affect OPEC production decisions.