OPEC

Sustainability, competitive behaviour or an oligopolistic approach against the international oil market. How has OPEC been able to affect world politics and employ cartel stability from 1973–1985 and the present?

A B S T R A C T

The Organization of the Petroleum Exporting Countries (OPEC) is a non-state actor which was established on 14th of September 1960 in Baghdad by the main five founding members of Iran, Iraq, Saudi Arabia, Kuwait and Venezuela. The organization was founded to employ the pricing-over-volume strategy to control the global oil price and stabilize the oil market. However, the decision making system in this organization has not only been targeting world economics, but, it has also been influencing world politics since the 1960's until the present. The coordination of private and state oil firms, their influences on the major international political issues and conflicts, and their influential role on controlling the production, distribution and the price of oil, the most strategic natural product on the planet, has illustrated a picture of an oligopolistic cartel organization. On the other hand many still believe that OPEC is still employing a fair competitive behavior and influences world politics towards global sustainability and market transparency. This article will discuss both sides of the argument and critically analyse the influential role of this non-state actor within world politics.

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The evolution of the notion of globalization and the expansion of structuralist neo-liberal ideologies and policies has introduced a new political order, highly influenced and dominated by major international institutions, intergovernmental organizations, transnational activists and non-state actors. OPEC, the Organization of Petroleum Exporting Countries is an influential non-state actor determining the distribution, production and the pricing process of crude oil. Sustainability of the oil market, a fair transparent competitive behavior or an oligopolistic approach targeting the international oil market; subsequently this article will critically analyse and argue how OPEC has been influencing world politics since its establishment in the 1960's until the present. From coordinating private and state owned oil firms to lobbying between the first and second sector (States and Markets), OPEC is not just facilitating the oil market and the world economics, but it plays an influential role in agenda setting, norms and values promotion, policy change and directly participating amongst different discourses of world politics, regionally and globally. Formation of networks and political coalitions allows this non-state actor to be highly influential in applying pressure and persuasive techniques to maintain a stable oil market. Therefore, to be able to maintain and stabilize the oil market, OPEC needs to be strategically involved in political relations between members and nonmembers. This article will discuss whether OPEC is an international cartel, an oligopolistic organization or a competitive neoliberal organization influencing world politics. In the light of the above, this essay will subsequently elaborate on the concept of cartel stability, the theory of oligopoly, the oil security and sustainability, and the dynamic volatilities in the global system level on crude oil, influencing world politics and international relations between states and non state actors.

OPEC, is a highly influential organization within the market and industry sector; However, to be influential within world politics as well, the organization needs to have certain strategies and implement certain policies. To get a better understanding of the strategies and policies of OPEC affecting world politics, the concept of cartel stability and the theory of oligopoly needs to be explained. Since the day of establishment, OPEC was acting as a non-state platform for petroleum importers and exporters to connect, negotiate and in some scenarios collude to achieve national interests. According to Stigler (1964, 46–47), intergovernmental organizations and international institutions performing as non-state actors are always the best suitable platform for political collusion between states. Therefore, the above suggests that although these organizations have economic objectives, but, they remain highly influential on the power politics of a region or at global system level. According to the same concept, the strategy and policy being designed and implemented inside the OPEC, remains highly influential on world politics, as members employ these strategies to control the price and distribution of oil in their own interest which proves their offensive oligopolistic approach against the market and world politics. These oligopolistic approaches allow the organization to maintain sustainability in their own favour which implies the employment of cartel stability to revive the influential role of the organization in world politics. Matsumura and Matsumisha (2005, 262–3) states that the engagement of subsidiary firms or states in a cartel organization and their employment of interest maximization strategies while implementing ‘tacit collusion’ policies can sustain a state of cartel stability in politics as well as economics related to that non-state actor. But is OPEC an international cartel organization?

Since the establishment in the 1960's, OPEC has experienced what scholars refer to as the ‘Golden Age’ from 1973 to 1985. The golden age initiated with industrialization of the five founding members of OPEC and ended with the recession of the oil market in the peak of the conflict between Iran and Iraq. To approve the above statement, Gurcan (1996) suggests that based on cointegration and causality tests on the activities of OPEC state members and subsidiary firms, “This is the only period in which the causality from OPEC production to the price of oil is statistically significant.” Therefore, quadrupling the oil price in 1974, curbing the production in order to set a new price and taking advantages of political contests and economic volatilities in the favour of the organization can imply that OPEC is an international cartel organization implementing cartel stability strategies to control the market in their own favor, set political agendas, promote norms, change policies and participate directly in the decision making system to influence the world politics. However, Gurcan (1996) also suggests that due to political insecurities and arguments between major members of the organization, OPEC, during certain periods were unable to implement their policies, but, they still had their influential power dynamics within world politics by controlling the oil price. To expand on that, Alhaji and Huettner (2000, 38) states that the control over the extraction and distribution of crude oil has enabled OPEC to reduce the competitiveness in the market by coordinating private and state oil firms such as the Saudi Aramco, Iranian N.I.O.C and Iraq National Oil Company as the major producers, to implement pricing over volume strategy; Although, OPEC does not have an official price setting ability, but the organization tends to dictate the crude oil price by controlling the extraction and distribution. Subsequently, the price setting ability allows OPEC to participate directly in regional and world politics by setting the oil price as a changing variable to pursue and put pressure on other non-state actors, organizations or even states.

Amongst the core members of OPEC, three countries of Iran, Saudi Arabia and Kuwait have the most significant influence on the market and world politics. Considering Iran’s confirmed oil reserves of 155 billion barrels, Kuwait’s 101 billion barrels and Saudi Arabia’s 267 billion barrels (OPEC.ORG), these three states are the most influential states on the policy making system of the organization. According to Danielsen (1980, 63–4), based on the empirical measures of stability, and the theory of bargaining, these three states have always been employing reserves sacrifice policies to keep the oil price above the compatible price, thus the organization and it’s core members can take the advantage of having the upper hand in transnational negotiations. Therefore, the participation of the core members in world politics can be portrayed as highly influential. To expand on the above, Huppmann and Holz (2015, 2) argues that although, Iran and Saudi Arabia are the core members and influential actors of the OPEC, the rivalry between the two states has turned the organization itself into an economic and resource proxy war which Iran and Saudi Arabia implement the reserve sacrifice strategy against each other; thus, to be able to politically set agenda, promote norms, change policies and intervene directly in the opposition’s decision making system. The current tensions between the two states consisting of United States’ international oil embargo regulations against Iran, the strikes on Saudi’s Aramco, attacks on international oil tankers in the Persian Gulf and the Sea of Oman, and the proxy war between the two states in Yemen and Iraq can illustrate the major role that the oil market stability and volatility plays in influencing world politics and bilateral relations between states.

As discussed earlier in this paper, the main purpose of the Organization of Petroleum Exporting Countries (OPEC) is to stabilize the oil market and set and maintain the oil price over the compatible price in the advantage of OPEC members. However, some also suggest that the volatility in the oil market is in the favor of OPEC members and stabilizing the market is not certainly the aim of the core and other members of the organization. According to Ghassan and Alhajhoj (2016, 388), “the adjustment process of OPEC prices to the positive discrepancies is slow which implies that OPEC producers do not prefer moderate oil prices;”. The aim of these dynamic volatilities has been explained as maintaining the superior influence in the oil market and world politics. Politically writing, the insecurities and volatilities in the oil market increases the international need to the existence of such an organization, therefore, the members and the organization as a whole receive high value of credibility which advantage them in world politics. In the light of the above, OPEC’s exercising of political power, subsequently increases its marginal barrel capacity which privileges the member states to have a superior role in determining the security of the market and international relations in world politics. To support the above, Brown and Huntington (2017, 517–8) suggests that the instability of the oil production and distribution by OPEC members has caused the oil market to be insecure; which is believed not to be certainly unintentional. Therefore, the political oligopolistic approach of the OPEC member states suggests that their individual national interests within the oil market lays down on the instability of the market; to be politically powerful and persuasive. Thus the OPEC members remain highly influential on world politics and intergovernmental relations.

The sovereign dominant control over the production of oil of the members allows OPEC to be tactically influential within the internal and foreign affairs of the member states. Therefore, the implemented policies by the organization can affect both OPEC members and non members. To get a better understanding of the above, Behrouzifar, Araghi and Meibodi (2019,510–1) even the announcement of the total crude oil reserves by OPEC state members officials has been having a significant influence on world politics and the global oil market order. However, political tensions and proxy conflicts between some of the member states such as Iran and Saudi Arabia, has turned these total crude oil reserve announcements into a political tactic to attack the opposition in the market and world politics. Weaponization of such policies has been used in the recent years; when the United States imposed oil embargo and sanctions on the Iranian Government, Saudi Aramco which is a state owned oil firm decided to increase their daily extraction and distribution of oil from 6.5 million barrels a day into 9 million barrels a day. Subsequently, the OPEC also compromised with the decision and did not allow the oil price drop due to any lack of supply by the Iranian National Oil Company. Going back to Matsumura and Matsushima (2005, 270), this paper suggests that OPEC’s full control on the demand and supply market of crude oil and the ability to maintain the oil price under any circumstances, is proving the cartel stability strategies being implemented by this organization, which has a significant influence on world politics. To expand on that, Alkhathlan, Gately and Javid (2014, 220) states that Saudi’s outcome behavior within its relations with OPEC members and non members varied over time, but due to their high potential of crude oil production and distribution, OPEC have been able to use this advantage to dictate the oil market and influence the world politics.

Consequently, the influence of the Organization of Petroleum Exporting Countries on world politics have been visible since their establishment in the 1960's, during different political economic situations. With the expansion of global pandemic (COVID-19) these days, the volatilities in the oil market and the insecurities within world politics have been frustrating the world politics and economics. However, after almost a month that the oil price was experiencing a great fall, Iran, Kuwait and Saudi Arabia had political negotiations under the discourse of OPEC with Russian Federation (OPEC +) to decrease their production of crude oil to be able to imply sustainability into the market. In conclusion, this paper argues that OPEC has been implementing structuralist liberal policy within the world politics which are empowering economic solutions and reviving middle powers within the oil market; to be able to oligopolistically control the volatilities within the market. Subsequently, the economic control power and their employment of cartel stability within the crude oil market gives OPEC a significant potential influence on the current world politics by monitoring, controlling and influencing the international relations between states. Studying OPEC’s history in influencing world politics in different events such as controlling the oil price after the Iranian revolution, the gulf war, expansion of terrorism and insurgencies in MENA, civil war in Syria and the Saudi-Iranian proxy war in Yemen; can portray the power dynamics of OPEC in influencing, agenda setting, norm promotion and direct participation within the political context of the region, and the global world politics.

Studying Master of International Affairs at Johns Hopkins SAIS