By: Andy Maslowski
July/August 2010

The Organization of Petroleum Exporting Countries was created in September 1960. Fifty years later, the cartel controls most of the planet’s crude oil supply and a considerable amount of its natural gas reserves.

: The prolific petroleum producing organization hits the 50-year milestone.

What does OPEC want for its anniversary? Probably another customer like the United States of America! The USA is indeed its best customer, and has purchased more than 60 billion barrels of oil from the various OPEC members during the past half century. Sixty billion barrels in 50 years!

The majority of that, more than 30 billion barrels, arrived on American shores in the past 20 years. And that doesn’t include American oil imports from other non-OPEC nations like Canada, Mexico and Russia.

When it comes to petroleum importing, no nation does it better than the USA. It makes one wonder, what would we do without OPEC today? What would OPEC do without us?

OPEC at 50
OPEC was founded on September 14, 1960, in Baghdad, Iraq by five oil-exporting countries that decided to join forces “to safeguard their legitimate rights and exercise control over their petroleum resources after years of manipulation.”

By statute, and since its formation, the organization has been committed to three main objectives: “securing a steady income for the producing countries; ensuring an efficient, economic and regular supply of petroleum to the consuming nations; and bringing about a fair return on capital for those investing in the petroleum industry.”

The five founding members of OPEC were Iraq, Iran, Saudi Arabia, Kuwait and Venezuela. Over the years the size of OPEC has changed a number of times as members have joined and withdrawn from the organization for various reasons. Today there are 12 members, the original five plus Algeria, Angola, Ecuador, Libya, Nigeria, Qatar and the United Arab Emirates.

OPEC Secretary General Abdalla Salem El-Badri from Libya

OPEC Secretary General Abdalla Salem El-Badri from Libya, marked the 50th anniversary milestone in March at an International Energy Forum ministerial meeting in Cancun, Mexico. “Few could have imagined at its inception how a small group of developing states could evolve into an organization that today has such influence and recognized acclaim within the global energy community,” he said.

The world’s landscape has changed dramatically since OPEC was formed five decades ago, El-Badri explained. “The North-South divide has given way to globalization, where the benefits of interdependency continue to break down barriers and open trading channels to previously closed-door economies. This opening up of borders is serving to enhance OPEC’s reach and development, which has already been substantial. Over the years, its unity and strength have enabled it to overcome a series of formidable challenges associated with an international oil market that has continued to evolve with the changing global economic environment.

“Throughout, member countries have endeavored to adhere to OPEC’s defining principles and objectives, which has periodically proved to be difficult, what with the oil shocks of the 1970s and 1980s, the Asian economic crisis in the 1990s, and, most recently, the global financial meltdown.”

El-Badri also announced a slogan for OPEC’s 50th anniversary — “Supporting Stability, Fuelling Prosperity.” As this suggests, OPEC’s policy decisions in the years ahead will continue to be aimed at creating harmony and stability in the international oil market for the benefit of the producers, the consumers, the investors and the global economy at large.

El-Badri also promised OPEC countries will continue to work hard to increase the efficiency and environmental credentials of petroleum, and join with the United Nations in its goal of poverty eradication. “A catalyst in helping alleviate poverty is access to modern energy services. In the developing world, 1.5 billion people have no access to electricity and 2.5 billion do not have adequate energy services. Thus, it is critical that the world community makes sure everyone has access to reliable, affordable, economically viable, socially acceptable and environmentally sound energy services.”

OPEC production
Naturally, oil production around the world fluctuates every day. However, in early spring OPEC’s daily production was close to 29.2 million barrels of oil a day (MMbopd). In addition, the organization estimated its production from natural gas liquids (NGLs) was about 5 MMbopd, placing liquid petroleum production at about 34 MMbopd. Considering world production is in the neighborhood of 85 MMbopd, that means OPEC generates about 40 percent of the total. This is the big picture!

The OPEC crude oil producing king is Saudi Arabia, which averaged more than 8 MMbopd in 2009. The next three largest are Iran at 3.7 MMbopd, Iraq with 2.3 MMbopd and Kuwait coming in at 2.3 MMbopd. With NGLs, Saudi liquid petroleum production is closer to 11 MMbopd.

The U.S. Department of Energy (DOE) estimated about half of American oil imports derive from OPEC nations. But again, this varies from month to month. The DOE reported for January and February 2010, Nigeria was the leading OPEC exporter to the USA, sending an average of about 961,000 BOPD our way. This represented about 10.4 percent of our total imports. Venezuela was next at 947,000 BOPD (10.2 percent) while Saudi Arabia averaged about 932,000 BOPD (10.1 percent). Incidentally, Canada was the biggest supplier of oil for the USA, exporting more than 2.3 MMbopd (about 25 percent) of the total. All tallied, the USA was importing about 9.2 MMbopd earlier this year.

OPEC also exports oil to many other countries. Besides the USA, other big oil importers, taking in more than 2 MMbopd on average, were Japan, China, Germany, South Korea and India. Other large exporting nations outside of OPEC included Russia, Canada, Norway and Kazakhstan.

Prices
Up to a point, supply and demand still greatly affect oil prices in the global marketplace. But if OPEC members want to influence oil prices they can do so more than any other group. They have the power of capacity. Removing a few million barrels from daily production will certainly change (i.e. raise) the price of oil.

The OPEC “basket price” for oil is now the world standard. It is the weighted average price for crudes produced by the various members, such as Arab Light from Saudi Arabia, Iran Heavy or Bonny Light from Nigeria. OPEC is also famous for its production quotas set for each member. Depending on market conditions these quotas are often ignored, although the Saudis, the largest oil producer on the planet, have the most excess capacity in times of need.

Oil prices have ranged from about $3/barrel in the early 1960s to more than $140/barrel in 2008. How much money have Americans given to OPEC nations in oil sales over the years? Who knows? It’s hard to calculate considering the changing prices and membership of OPEC. But it has to be way north of $1 trillion.

Do the math. Sixty billion barrels multiplied by an average price of $20/barrel is $1.2 trillion. But remember the majority of that, more than 30 billion barrels, arrived in the USA in the past 20 years, when average oil prices were higher. It could surpass $2 trillion. That’s a lot of jack!

It’s really much more than that in terms of total American investment. The various military conflicts and wars in the Middle East, in the Persian Gulf and in Iraq have taken a huge toll in terms of lives of U.S. military personnel. And many say a great deal of our nation’s defense expenditures are used to protect, either directly or indirectly, the oil and gas fields and related infrastructure of the Middle East, including those of the largest OPEC producers.

The national security ramifications of petroleum production and imports have been discussed for decades. President Nixon called for “energy independence” in his State of the Union address in 1974. Every president since has done the same with immunity.

A recent report by the Congressional Research Service released in April and entitled, “U.S. Offshore Oil and Gas Resources: Prospects and Processes,” admitted the first source of oil by a nation like the U.S. is domestic production, if available. The second source typically is imports from countries not party to OPEC. “Finally, residual demand is met by OPEC,” the report said.

It also stated “the ultimate impact of oil and gas development in offshore areas will depend on oil and gas prices, volumes of resources actually discovered, infrastructure development, and restrictions placed on development, all of which currently carry significant uncertainties.”

The report was published after the tragic destruction of the Deepwater Horizon rig and oil spill in the Gulf on April 20, 2010, but before the full effect of the disaster was realized. Obviously, offshore drilling in deep water will never be the same.

Moratoria on leasing and drilling do nothing for American oil resources. That means that future domestic oil production is likely to decrease further and oil imports will only grow. It is very difficult to satisfy a nation that needs a mind boggling 19 MMbopd. No doubt OPEC nations will be there to meet a great deal of the “residual demand” that arises in the future.

So Happy Anniversary OPEC! But we hope the fine organization doesn’t forget to thank its best customer for all the years of continued, loyal business.