Introduction: What will OPEC do?
Introduction: After the end of the “oil embargo” in 1973, OPEC began to implement an independent oil policy. So far, the international oil market has undergone a cyclical transition from high oil price equilibrium to low oil price equilibrium, and then to high oil price equilibrium. However, there is still widespread controversy in academia regarding OPEC’s ability to influence oil prices. OPEC research has also become a difficult point in oil supply research and international oil price research.
Looking back at the history of OPEC research, we will find that theoretical research often applies a certain theory to a specific historical period and obtains evidence of its existence. Therefore, the current situation of OPEC research is that each theory has its own rationality, but the differences are still huge. This article attempts to view the period from 1973 to the present as a whole and explore the relationship between OPEC and international oil prices through OPEC’s policy practices.
1、 The formation of OPEC’s oil policy
The OPEC oil policy is a means for OPEC to achieve its own goals. In the more than 50 years since its establishment, although OPEC has put forward many specific goals based on changes in the international oil market, the fundamental goal of the organization has never changed, which is to protect the interests of oil producing countries and ensure that they obtain stable oil revenue. Therefore, when formulating oil policies, OPEC pays special attention to two issues: the real purchasing power of oil revenue and the competitiveness of oil. However, due to different national conditions, OPEC member countries have differences in specific goals, and OPEC’s ultimate policy is often the result of mutual struggle and compromise among OPEC member countries.
（1） OPEC’s Goals
OPEC was founded in 1960 and has a history of more than 50 years. During this 50 year long history, OPEC has put forward many goals to strive for based on changes in the international oil market. However, the fundamental goal of the organization is contained in the 1961 OPEC Treaty, which is based on the 1960 resolution and summarizes OPEC’s objectives. The treaty stipulates that OPEC’s main objectives are:
Firstly, coordinate and unify the policies of member states, and determine the most effective means to safeguard their interests individually or collectively;
Secondly, maintain the stability of international oil prices through various means and methods, and eliminate harmful and unnecessary fluctuations in oil prices;
Thirdly, ensure that the interests of oil producing countries are safeguarded and that they can obtain stable oil revenues; Ensure that oil consuming countries can obtain effective, economical, and normal oil supply; Ensure that investments in the petroleum industry receive reasonable returns.
From the above objectives, OPEC is not an offensive organization, but a defensive organization. The establishment of OPEC was not intended to create shortages, raise oil prices, or extract as much wealth as possible from oil consuming countries. On the contrary, the establishment of OPEC was to safeguard the interests of oil producing countries. Although OPEC has also set the goal of ensuring oil supply security, it is because OPEC recognizes that oil supply security is closely related to oil demand security, and ensuring oil supply security is actually ensuring oil demand security. Therefore, although OPEC has many goals, all of them are centered on safeguarding the interests of oil producing countries. This is also the starting point for all policies and actions of OPEC.
（2） Considerations for OPEC Policy
The OPEC oil policy is a means for OPEC to achieve its own goals. In official documents, OPEC explicitly states that the following factors should be considered when formulating oil policies: the actual purchasing power of oil revenue, the competitiveness of oil, stable growth of the world economy, and OPEC market share. However, the fundamental goal of OPEC is to safeguard the interests of oil producing countries. Therefore, compared with other goals, the actual purchasing power of oil revenue and the competitiveness of oil, which are directly related to the interests of oil producing countries, have become the two most important factors that OPEC attaches great importance to when formulating oil policies.
- Actual purchasing power of oil revenue
The vast majority of OPEC countries have a relatively single economic structure, and most of the industrial and agricultural products needed for domestic economic development rely on imports, with oil being the main source of export earnings. Therefore, when Western countries experience inflation leading to an increase in imported commodity prices or a decrease in the value of the US dollar weakening the actual purchasing power of oil export revenue, OPEC countries can only maintain balance of international payments by raising the nominal price of oil.
After the 1970s, the continuous depreciation of the US dollar drew OPEC’s attention to the value and price level of the US dollar. In December 1970, at the 21st OPEC Congress held in Caracas, a resolution was passed stating that “adjustments to oil prices should reflect changes in exchange rates of major industrialized countries.” Thus, OPEC established the principle of formulating oil pricing policies based on industrial product prices and the US dollar exchange rate. In 1980, the OPEC Ministerial Long Term Strategy Committee, led by Saudi Minister of Oil and Mines Amari, once again clarified the principles of adjusting oil prices according to prices and foreign exchange rates in its report on long-term oil strategy issues. The purpose of OPEC considering the actual purchasing power of oil revenue when formulating oil policies is to ensure that oil producing countries’ oil revenue will not be lost due to oil price issues.
From the adjustment of OPEC’s target oil prices after 1986, it can be seen that OPEC was actually striving to preserve the achievements made after the 1973 oil embargo. In 1986, at the 80th meeting, OPEC set a target price of $18 per barrel. If calculated at 1973 prices, this is roughly equivalent to the prices in 1974 after the outbreak of the first oil crisis. In July 1990, OPEC raised its target price to $21 per barrel. If calculated at 1973 prices, this is only $1 lower than the price in 1974. In March 2000, OPEC officially passed the resolution to implement a price band at its 111th meeting, and set the price band at 22-28 US dollars per barrel. Calculated based on actual prices, it is not much different from the prices in 1974.
From the 1986 OPEC target price setting and the subsequent two adjustments, it can be seen that OPEC has always taken the actual purchasing power of oil revenue as the basis of its oil price policy. The 1974 oil price adjusted according to prices and foreign exchange rates was also considered by OPEC as the basic oil price that could safeguard the interests of oil producing countries.
- Competitiveness of oil
Oil is just one of many energy sources, and there is a certain degree of competition among them. Oil surpassed coal as the most important primary energy source in 1965, thanks to its low price. Based on cost advantages, there is still no energy source that can replace the position of oil. Due to the time required for equipment updates and energy development, it is difficult for different energy sources to replace each other in the short term. However, in the long run, there is a high degree of substitutability between energy sources.
The high degree of substitutability between energy sources determines that long-term demand for oil will be affected by price cross elasticity. Low oil prices will inhibit the development of alternative energy sources and promote long-term demand for oil; High oil prices will stimulate the development of alternative energy sources and reduce the long-term demand for oil. Therefore, maintaining the competitiveness of oil has become one of the principles of OPEC’s oil policy.
At the beginning of OPEC’s establishment, international oil prices remained at a relatively low level because their position was not affected by other energy varieties due to their low prices. However, the oil crisis and soaring oil prices in the 1970s stimulated the development of alternative energy in Western countries. Faced with the rapid development of alternative energy, OPEC countries also began to pay attention to the competitiveness of oil.
In its first Solemn Declaration adopted in 1975, OPEC explicitly stated that “oil prices must take into account the availability, utilization, and cost of alternative energy sources.” Since then, oil competitiveness has been an important concern for OPEC. In the third “Solemn Declaration” adopted at the OPEC Riyadh meeting in 2007, OPEC once again declared that “the formulation of oil price policies should take into account the competitiveness of oil with other energy sources.
The purpose of considering oil competitiveness when OPEC formulates oil policies is to avoid the loss of cost advantages for oil and the development of alternative energy sources damaging the long-term demand for oil. It is based on this consideration that OPEC always takes action during periods of high oil prices to curb the rapid rise in oil prices. However, the competitiveness of oil is not a concern for all OPEC member countries. Among OPEC countries, only countries with abundant resources and low funding needs, such as Saudi Arabia, will truly focus on the long-term demand for oil.
From the oil policies of these countries, it can be seen that during the high oil price period from 1973 to 1981, Saudi Arabia and the United Arab Emirates consistently opposed a significant increase in OPEC benchmark oil prices. In the period of high oil prices that emerged after the new century, countries such as Saudi Arabia attempted to curb the continuous rise in oil prices through adjustments in oil production and capacity. It can be seen that in order to ensure the competitiveness of oil, OPEC has always regarded suppressing excessively high oil prices as an important basis for its oil policy formulation.
（3） The struggle and compromise between hawkish and dovish factions within OPEC
When formulating oil policies, there is significant controversy among OPEC member countries regarding the issue of curbing excessively high oil prices due to different national conditions. Based on different oil policy stances, OPEC member countries are generally divided into “doves” represented by countries such as Saudi Arabia and “hawks” represented by countries such as Iran.
The terms “dovish” and “hawkish” stem from differences in oil price policies. “Dove” countries have a more moderate attitude towards setting target oil prices, believing that oil prices should rise slowly, while “hawkish” countries advocate for a significant increase in oil prices. In fact, the difference in price claims is just a superficial phenomenon. The difference in positions between the two types of countries actually stems from differences in national goals. Dove countries have abundant oil resources and do not require large amounts of funding to support domestic construction. Their oil price policies are often based on long-term considerations, maintaining oil prices within a reasonable range. However, “hawkish” countries require large amounts of funding to support domestic construction, but their production is difficult to increase. Therefore, when formulating oil policies, they “prefer to maintain high oil prices and obtain more oil revenue.
In terms of production, “hawkish” countries generally choose to produce at full capacity, while “dovish” countries will stabilize oil prices through production adjustments. In fact, the “Report on Long Term Oil Strategy Issues” adopted by OPEC in 1980 clearly proposed the principle of adjusting oil prices based on inflation rates, exchange rates, and economic growth rates of OECD member countries. However, due to the hardline stance of hawkish countries on oil price policies, all principles were ultimately not implemented. In fact, from the mid-1970s to the mid-1980s, many policies introduced by OPEC were the result of mutual confrontation and compromise between “doves” and “hawks”.
However, as a “cartel”, OPEC affects oil prices through production adjustments, and the difference in remaining production capacity determines the differences in strength among OPEC member countries. Among OPEC countries, “dovish” countries hold surplus production capacity and have the ability to adjust production, while “hawkish” countries have limited production adjustment capabilities. Therefore, “dovish” countries take the initiative in formulating OPEC oil policies. The ‘hawkish’ countries can only achieve their high oil price policies by exerting pressure on the ‘dovish’ countries, especially Saudi Arabia (i.e. forcing Saudi Arabia and other countries to reduce production).
In the 1970s and 1980s, OPEC’s hawkish countries, especially Iran and Iraq, were able to use their strong political and military power to force countries such as Saudi Arabia to accept their claims. But the successive outbreaks of the Iran Iraq War in 1980 and the Gulf War in 1991 led to a sharp decline in the regional influence of OPEC’s “hawkish” countries. The “dovish” countries represented by Saudi Arabia have actually become the dominant players in OPEC’s oil policy since the mid-1980s.
2、 The Evolution of OPEC’s Oil Policy
In 1960, the establishment of OPEC did not change the subordinate position of oil producing countries in the international oil market. International oil companies led by the “Seven Sisters” still controlled the oil resources of oil producing countries. It was not until the mid-1970s, when OPEC oil producing countries regained sovereignty over their own oil resources, that the organization began implementing an independent oil policy. Since the first oil crisis, OPEC’s oil policy has gone through four stages of development.
（1） Price Increase and Value Preservation Strategy (1973-1981)
In March 1974, all OPEC member countries except Libya ended their oil embargo on the United States. In the following years, the international oil market remained calm. From 1974 to 1978, although there was a slight increase in nominal oil prices. However, due to the continuous rise in inflation rates in Western countries and the continued depreciation of the US dollar, the real price of oil has decreased instead of rising. According to nominal prices, from 1974 to 1978, although international oil prices rose by 18%, actual prices fell by 21% 8%. Therefore, during this period, raising the nominal price of oil to avoid losses in oil revenue for oil producing countries due to the depreciation of the US dollar and rising inflation rates in Western countries has become the starting point of OPEC’s oil policy.
The “price increase and value preservation” strategy includes two aspects:
Firstly, adjust the price of oil
In the stage of price increase and preservation, although OPEC member countries unanimously agree that the benchmark oil price should be raised, there are significant differences in the magnitude of the oil price increase. At the end of the first oil crisis, Saudi Arabia took a different stance from other member countries and insisted on freezing oil prices. Under the influence of Saudi Arabia, OPEC did not raise oil prices throughout 1974 and announced at the end of 1974 that it would continue to freeze oil prices until September 1975.
However, the high inflation that occurred in Western countries from 1974 to 1975 caused significant losses to the oil revenue of oil exporting countries. By 1975, as the oil price freeze was about to end, raising the nominal price of oil and maintaining the actual purchasing power of oil revenue became an urgent issue for OPEC to address. Therefore, raising OPEC oil prices became the theme of the 45th OPEC meeting held in Vienna in September 1975. However, there was a fierce conflict between the “hawkish” countries represented by Iran and the “dovish” countries represented by Saudi Arabia regarding the increase in oil prices (see table). The meeting ultimately passed a compromise plan: starting from October 1st, oil prices would rise by 10% and then be frozen for 9 months.
Afterwards, there were disputes and struggles among OPEC member countries over the magnitude of oil price adjustments. For example, at the 48th OPEC meeting held in December 1976, OPEC reached its first agreement on dual pricing, with Saudi Arabia and the United Arab Emirates raising prices by 5% and other countries raising prices by 10% in two stages.
In June 1977, after repeated negotiations, OPEC countries reached a compromise that all countries except Saudi Arabia and the United Arab Emirates (raising prices by 5%) would abandon further price increases. Since then, the relationship between OPEC’s hawkish and dovish countries has eased, and OPEC’s benchmark oil prices have not been adjusted again. After the 48th OPEC meeting, despite Saudi Arabia extracting oil at maximum capacity, the rise in oil prices could not be suppressed. Spot oil prices remained between the official prices of the two OPEC factions, while other OPEC member countries, especially Gulf oil producing countries, lost some market share due to Saudi Arabia’s increased production.
However, in October 1978, the Iranian oil workers’ strike broke this harmony and marked the beginning of the second oil crisis. From 1978 to 1981, the shortage of oil supply and continuous political events pushed oil prices to high levels. Faced with the soaring spot oil prices, the issue of price hikes has once again become the focus of OPEC’s contradictions. In June 1979, all oil producing countries except Saudi Arabia and the United Arab Emirates raised their oil prices, and OPEC once again experienced a situation of double pricing. Of course, in the face of rapidly rising oil prices, OPEC’s oil price policy has almost completely lost its influence.
Secondly, adjust oil production
At this stage, OPEC’s policy is mainly focused on oil prices, but maintaining OPEC’s benchmark oil prices still requires member countries to cooperate in oil production. However, from the production adjustments of OPEC countries, except for Saudi Arabia and the United Arab Emirates (in some periods), the production adjustments of other countries are not driven by the need to maintain benchmark oil prices, but by their own interests.
In 1975, faced with a decline in oil demand, the vast majority of OPEC member countries reduced their oil production. Although OPEC member countries reached a consensus in their behavior, this was mainly because OPEC oil producing countries believed that the sluggish demand would soon end and were unwilling to sell their domestic oil resources at a low price. The adjustment of production based on expectations by member countries of Peck was more evident during the second oil crisis.
The second oil crisis was divided into two stages. During the Islamic Revolution in Iran, almost all OPEC member countries increased their oil production and once again reached consensus on production adjustments. But the increase in production this time is mainly stimulated by high oil prices. OPEC member countries believe that this shortage is only a temporary phenomenon, so they have seized the opportunity to sell oil at high prices. In fact, except for Saudi Arabia, stabilizing oil prices is not the fundamental reason for OPEC member countries to increase production. Therefore, after the outbreak of the Iran Iraq War, when OPEC member countries realized that the war was difficult to end in the short term and that oil shortages would be a long-term phenomenon, all OPEC member countries except Saudi Arabia reduced their oil production.
（2） Production Limitation and Price Protection Strategy (1981-1985)
Shortly after the end of the second oil crisis, the international oil market rapidly shifted from a seller’s market to a buyer’s market. In June 1981, oil prices began to fall, and the international oil market’s “surplus demand” for OPEC rapidly decreased. The changes in market structure are mainly driven by four factors:
The economic recession in OECD countries has led to a decrease in oil demand;
Concerns about energy security have stimulated the development of alternative energy sources in oil importing countries;
High oil prices lead to the expansion of non OPEC oil producing countries’ capabilities;
Oil consuming countries and oil companies release their inventories.
In order to prevent the decline of oil prices, OPEC began to respond to the oversupply situation in the oil market by reducing production, and this policy persisted until the end of 1985.
The “production restriction and price protection” strategy mainly includes the following three aspects:
Firstly, end double pricing
After the end of the second oil crisis, OPEC still maintained a dual price situation. Saudi Arabia uses a benchmark oil price of $32 per barrel, while other countries use a benchmark oil price of $36 per barrel. In June 1981, due to the decline in spot market prices, non OPEC oil producing countries reduced their official selling prices for oil. But Saudi Arabia did not immediately reduce production in order to force other member countries to lower oil prices and bring OPEC oil prices back to unity, and still maintained high oil production. Under pressure from Saudi Arabia and non OPEC oil producing countries, OPEC finally unified the standard oil price to $34 per barrel at its 61st meeting in October 1981 and officially established the price difference between various OPEC crude oils.
Secondly, establish the OPEC quota system
After the 61st meeting, the situation of oversupply in the oil market was severe, and the spot price of oil was sluggish. In this context, OPEC held its 63rd meeting in March 1982 and announced that the organization’s production quota was 18 million barrels per day, while also announcing the production quotas of each member country. In OPEC’s quota allocation, wealthy OPEC countries have made significant concessions to poor countries. If we compare the quotas of OPEC member countries in April 1982 with their 1977 production, we can see that Ecuador’s quota accounted for over 90% of 1977 production, Nigeria’s was 69%, and except for Iran, Iraq during the war, and Algeria’s shrinking production, the quotas of poor OPEC countries generally accounted for over 70% of 1977 production. In terms of this proportion, the OPEC rich countries are much lower, usually around 50%, and Kuwait is even lower at 40%.
However, in the OPEC quota system, Saudi Arabia holds a special position. As usual, in order to maintain policy independence, Saudi Arabia did not accept the quotas allocated to it by OPEC. At this point, Saudi Arabia is ready to take on the task of being a “mobile oil producing country” and respond to changes in OPEC’s “surplus demand” in the oil market through production adjustments. So, after 22 years of establishment, OPEC finally became a “cartel” organization implementing a market share system at this meeting.
Although a quota system was established, OPEC’s quota system encountered many difficulties from the beginning: the quota did not specify Iraq’s production, Iran clearly stated that it would not comply with the quota, and Algeria and Venezuela expressed dissatisfaction with the quota. Therefore, the quota was not strictly adhered to at the beginning. In 1982, OPEC’s production reached 18.99 million barrels, significantly exceeding the quota set by OPEC.
Thirdly, adjust OPEC oil prices and quotas
In fact, the implementation of the quota system has not changed the situation of oversupply in the international oil market. In March 1983, the 67th OPEC meeting had to further lower the benchmark oil price to $29 per barrel. Although this meeting did not change the total quota of OPEC, there were some changes in the composition of quotas among OPEC member countries. The quotas of OPEC poor countries such as Algeria and Iran have been increased to varying degrees, while Saudi Arabia’s implied quota has been reduced to 5 million barrels per day. In addition, the meeting also made the following decision: if other countries are unable to maintain the benchmark oil price even after reducing production according to quotas, Saudi Arabia should undertake any reduction in production to protect the benchmark oil price. But in fact, most OPEC member countries have a very serious problem of overproduction, and most of the task of reducing production falls on Saudi Arabia. By 1984, Saudi Arabia’s production was only over 4 million barrels per day, which was less than half of what it was in 1981.
Although OPEC’s actual production is lower than the quota due to Saudi Arabia’s efforts. However, the sluggish demand for oil has not improved. In mid October 1984, Norway announced a monthly adjustment of oil prices based on spot market prices. Subsequently, the UK also took the same action. Faced with the chaos in the oil market, OPEC lowered the total quota to 16 million barrels per day at its 71st meeting in October 1984 (Saudi Arabia’s implied quota was further compressed to 4.35 million barrels per day).
But this move did not prevent the decline in spot oil prices. In February 1985, OPEC was forced to announce that it would lower its benchmark oil price, which had been held for nearly two years, to $28 per barrel. Shortly thereafter, the harsh reality forced Saudi Arabia to issue an ultimatum to other OPEC members, stating that it would produce according to quotas. If other member countries did not reduce production, international oil prices would fall sharply. In September, Saudi Arabia fulfilled its promise and signed an oil supply contract with Aramco using a net return method. This behavior means that Saudi Arabia has abandoned the benchmark oil price and the strategy of limiting production and ensuring prices.
（3） Low price coverage strategy (1986-2004)
During the “production restriction and price protection” stage, although OPEC had a serious problem of overproduction, by 1985, the organization’s total production had been reduced to 14.9 million barrels, only half of what it was before the outbreak of the second oil crisis. Except for Saudi Arabia, OPEC’s wealthy countries have made significant contributions to OPEC’s strategy of limiting production and maintaining prices. In fact, during the entire stage of “limiting production and ensuring prices”, countries such as Saudi Arabia have been preparing for the recovery of the oil market. However, the downturn in the oil market far exceeded the expectations of these countries, and the continuous reduction in oil production has brought heavy pressure to their economies. From 1981 to 1985, the gross domestic product of Saudi Arabia, Qatar, Kuwait, Libya, and the United Arab Emirates decreased by 37% respectively 2%, 29 0%, 26 7%, 23 7% and 11 0
Faced with the many difficulties brought by the decline in oil production to economic development, the wealthy countries in OPEC, especially Saudi Arabia, can no longer afford the high cost of supporting the “production limit and price protection” strategy. It was in this context that OPEC announced a new market strategy at its 76th meeting in December 1985, which was to “maintain OPEC’s reasonable share in the international oil market and ensure that OPEC oil producing countries obtain the necessary income for their own economic development”. This decision also marks the official beginning of OPEC’s “low price guarantee” strategy.
The main contents of the “low price coverage” strategy include:
Firstly, implementing the 1986 “price war”
In September 1985, Saudi Arabia signed an oil supply contract with Aramco using the net return method. This action marks Saudi Arabia abandoning its benchmark oil price and instead selling oil at spot market prices. Subsequently, other OPEC oil producing countries have also taken similar actions. The initial policy shift of OPEC did indeed secure a certain market share from non OPEC oil producing countries. However, in early 1986, non OPEC oil producing countries also began to compete for market share through price reduction sales. Afterwards, the “price war” between OPEC and non OPEC oil producing countries for market share erupted comprehensively.
The situation of oversupply in the oil market has led to a continuous decline in international oil prices. In fact, the decline in oil prices has dealt a heavy blow to the economies of oil producing countries, but compared to other oil producing countries, the Gulf Cooperation Council oil producing countries have been much less affected by the rapid increase in oil production. By mid-1986, Saudi Arabia’s oil export revenue had actually increased year-on-year. The enormous financial pressure has forced non OPEC oil producing countries as well as hardliners in OPEC oil producing countries to compromise. At the end of 1986, after receiving production reduction commitments from non OPEC oil producing countries (the UK did not commit to reducing production), OPEC reintroduced its quota system at its 80th meeting held in December of that year. The newly set quota for OPEC was 16.6 million barrels per day, a reduction of approximately 1 million barrels per day from OPEC’s actual production in 1986. Thus, the year long price war finally came to an end.
Secondly, to compete for market share in OPEC and re-establish the OPEC quota system
Although the price war has ended, the struggle among oil producing countries continues and has evolved into a market share dispute within OPEC. In December 1986, the 80th OPEC meeting announced the reintroduction of quotas, with a quota structure that was not much different from before the “price war”. However, Saudi Arabia, Kuwait, and the United Arab Emirates are not satisfied with this quota arrangement that favors “OPEC poor countries”. After the meeting, Saudi Arabia and other countries not only did not reduce production according to quotas, but also continuously increased oil output to strive for more market share.
From 1987 until the Gulf War, the three countries mentioned above became the countries with the most severe overproduction in OPEC. For example, in 1989, there were a total of 5 OPEC countries with double-digit overproduction, all of which were members of the Gulf Cooperation Council except for Ecuador and Nigeria. Among them, the United Arab Emirates had overproduction of 61% 2%, Kuwait’s overproduction reached 23 2%, Saudi Arabia’s overproduction has also reached 11% 9%.
As the competition for market share in OPEC intensified, the Gulf War triggered the ‘Third Oil Crisis’. However, during this crisis, OPEC quickly increased its oil production, and OECD countries also took coordinated actions to release their inventories. With the rapid end of the war, the international oil market quickly returned to calm in 1991. The allocation of OPEC quotas has once again become a focal point of debate among OPEC countries. However, due to the tough stance of the Gulf Cooperation Council countries, OPEC was unable to immediately establish a production allocation agreement that was unanimously recognized by its member countries after the crisis ended.
It was not until the 92nd meeting in November 1992 that OPEC finally reached a consensus on production allocation. However, as the meeting did not limit Kuwait’s production, it was not until the second half of 1993, when Kuwait’s oil production resumed, that OPEC’s new quota system was finally established. The new quota system of OPEC actually meets the requirements of wealthy Gulf Cooperation Council countries for oil production. Compared to previous quotas, although almost all OPEC countries have significantly increased their quotas, Saudi Arabia, Kuwait, and the United Arab Emirates have all doubled their quotas.
Thirdly, establish OPEC’s production policy
After 1993, the quota structure of OPEC basically stabilized without significant adjustments throughout the entire “low price guarantee” stage. This is mainly due to a series of geopolitical changes that have occurred since the 1990s.
Firstly, due to the Lockerbie air disaster and the Gulf War, Libya and Iraq have been subject to United Nations economic sanctions, making it difficult to significantly increase their oil production. More importantly, the dramatic changes in the Soviet East brought about a significant decline in oil production in the former Soviet Union, and the international oil market’s “surplus demand” for OPEC oil rapidly increased. After Saudi Arabia, Kuwait, and the United Arab Emirates increased their oil production to a desirable level in 1993, they all stopped expanding their production.
After the 1990s, Iran, Iraq, and Libya were unable to significantly increase their oil production capacity due to political factors. In this way, the most important oil producing countries in OPEC are either unwilling to increase production (Saudi Arabia, Kuwait, UAE) or unable to increase production (Iran, Iraq, Libya), and OPEC’s new quota system is finally established.
After October 1993, OPEC’s production policy was actually based on the needs of the oil market, to some extent through quota adjustments to maintain OPEC’s target oil prices. When oil supply is interrupted, OPEC releases surplus production capacity to prevent the rise of oil prices. When the economic crisis leads to a decrease in oil demand, OPEC cuts production to suppress the decline in oil prices. Therefore, in the “low price guarantee” stage, the biggest difference in OPEC’s production policy from before is that OPEC countries such as Saudi Arabia have abandoned their absolute support for OPEC official prices during periods of oil price decline. When demand is sluggish, countries such as Saudi Arabia no longer cut production without restrictions, but only undertake their own share of production reduction tasks based on OPEC quota adjustments.
Fourth, establish and adjust OPEC target oil prices
During the “low price guarantee” phase, OPEC’s biggest adjustment in price policy was the establishment of a target oil price system. Although from a policy perspective, OPEC seems to have returned to its previous fixed price system. But the target oil price system is completely different from the benchmark oil price system implemented by OPEC before. The main difference between the two lies in the composition of oil prices. The previous fixed price only used Saudi light oil as the benchmark oil price for OPEC, and then set the difference between other oils and the benchmark oil.
The issue of price difference has always been the source of conflicts among OPEC member countries, and the rationality of price difference has also become a concern
An excuse for OPEC member countries to overproduction. The current target oil price is the comprehensive price of seven types of crude oil (also known as a package oil price), and the price difference between various types of oil is determined by the market. The new oil price system passed in December 1986 effectively transferred Saudi Arabia’s responsibility for maintaining stable OPEC oil prices to all OPEC members.
From the setting and adjustment of OPEC’s target oil prices, it can be seen that from 1986 to 2004, OPEC consistently adhered to a low oil price policy. OPEC established $18 as its target price at the 80th meeting. If exchange rate and inflation factors are excluded, this price is equivalent to the price in 1974, which is also what Saudi Arabia has been trying to defend as its “reasonable oil price” since the first oil crisis. Afterwards, OPEC made two adjustments to its target oil prices, namely the $21 price range in 1990 and the $22-28 price range in 2000, but in real terms, they did not deviate from the oil prices of 1974.
（4） The strategy of “maintaining moderate market tension” (2005 present)
After entering the 21st century, especially since 2003, the rapid economic development of emerging countries such as China and India has driven a rapid increase in international oil demand, and international oil prices have also begun to rise rapidly.
In 2004, the average oil price of OPEC reached $36, which was $8 per barrel higher than the upper limit of the price range of $22-28 set by OPEC. Under market pressure, in January 2005, the 134th OPEC special meeting decided to abandon the “unrealistic” price band policy. This meeting also marks the complete end of OPEC’s price control policy. Afterwards, OPEC did not propose any guidance prices aimed at influencing the international oil market, and the focus of OPEC policy was entirely on production. Since 2005, international oil supply and demand have remained tight, and capacity adjustment has become an important part of OPEC’s policy, with the aim of maintaining moderate tension in the international oil market.
The main content of the strategy of “maintaining moderate market tension” is:
Firstly, gradually loosen the quota system
After 2005, the overall international oil supply and demand were relatively tight. In most years, the international community’s “surplus demand” for OPEC was increasing, and OPEC hardly needed to face the pressure of quota cuts. In this way, OPEC’s quota system has also become loose.
From the establishment of the quota system in 1982 to October 2006, OPEC announced the specific quota numbers for each member country.
During the period from November 2006 to October 2007, OPEC no longer disclosed the specific quota numbers for each member country. Only the quota adjustments for each member country were announced at the OPEC Consultative Conference in October 2006 and the 143rd OPEC Special Meeting in December 2006.
During the period from November 2007 to October 2008, OPEC only disclosed the overall scale of quota adjustments, and even stopped disclosing the quota adjustment figures for each member country.
It was not until the outbreak of the 2008 financial crisis, which led to a rapid decrease in oil demand and a drop in international oil prices, that OPEC redefined the quota adjustment scale for each member country at its 150th special meeting in October 2008. However, OPEC’s quotas have not been well adhered to. At the 151st meeting of OPEC in December 2008, the organization announced a reduction of 4.2 million barrels per day based on actual production in September 2008 (production before the 150th meeting), and used it as OPEC’s new quota. However, OPEC’s announcement still did not specify the extent of quota reduction for each member country.
As of the end of September 2012, even in the face of the interruption of Libyan oil supply caused by the Arab Spring; The oil embargo imposed by the United States and Europe on Iran has led to a significant reduction in the country’s oil production and other unexpected situations, but OPEC’s quota has not been changed.
Secondly, adjust OPEC’s production
After 2005, Saudi Arabia’s role in OPEC became more prominent. In fact, during this stage, the international oil market remained tight. Since 2007, the vast majority of OPEC oil producing countries have been producing oil at their maximum capacity. Among OPEC countries, only a very small number, especially Saudi Arabia, have the ability to adjust production. After 2007, Saudi Arabia once again assumed the role of a “mobile oil producing country” in the international oil market.
From June 2007 to June 2008, facing the increasing “surplus demand” from the international oil market for OPEC and the limited production capacity of other member countries, Saudi Arabia increased its oil production by 1 million barrels per day.
In December 2008, when OPEC announced the decision to cut production at its 151st meeting, Saudi Arabia’s actual production reduction was as high as 2.98 million barrels per day.
In 2010, after the outbreak of the Arab Spring, faced with a supply shortage of 1.5 million barrels per day caused by the Libyan conflict, Saudi Arabia alone increased production by as much as 1 million barrels per day. However, after 2005, the production policies of countries such as Saudi Arabia have weakened their intervention in the international oil market.
Compared with the period of “low price coverage”, the weakening mainly reflects the period of rising oil prices. From 1986 to 2004, faced with the increasing “surplus demand” from the international oil market for OPEC, OPEC always took prompt action to curb the rise in oil prices by increasing production. However, after 2005, in the face of the increase in OPEC’s “surplus demand” in the international market, countries such as Saudi Arabia will only meet the growth of normal demand and will not meet the growth of “excess demand”. “Excess demand” is generally reflected in oil inventories. That is to say, if the oil inventories of oil consuming countries rise beyond the normal trend, Saudi Arabia will consider that normal demand has been met and will not increase production to suppress the rise in oil prices.
Thirdly, adjust OPEC’s production capacity
After entering the new century, thanks to the continuous rise in oil prices, the financial situation of many oil producing countries, including OPEC, has improved. With the decrease in funding demand, the nationalization movement of oil has once again spread among oil producing countries. Faced with increased investment risks, the rise in oil prices has not brought prosperity to upstream investments by international oil companies. Especially after the end of the Iraq War in 2003, the country fell into chaos and international market hopes for increased production were dashed. The potential shortage of production capacity in the international oil market has become a concern for market participants. In this way, compared to quota and production adjustments, how to adjust upstream investment to meet the future demand of the international market while avoiding overcapacity has become a more concerned issue for OPEC, especially for core OPEC countries such as Saudi Arabia.
From the practice of OPEC’s oil policy after 2003, countries such as Saudi Arabia, Kuwait, and the United Arab Emirates have actually taken on the role of “capacity maneuvering countries”. After the end of the Iraq War, facing the potential shortage of production capacity in the oil market, countries such as Saudi Arabia announced plans to implement new upstream oil investment projects.
In April 2005, Abu Dhabi National Oil Company (ADNOC) of the United Arab Emirates signed a strategic cooperation agreement with ExxonMobil to jointly develop the Upper Zakum site, with ExxonMobil holding a 28% stake.
Kuwait also began attracting foreign investment into its upstream business through “preferential repurchase contracts” in 2005.
In early April 2005, Saudi Minister of Oil and Mines Ali Naimi announced that Saudi Arabia’s proven oil reserves would increase by 200 billion barrels over the next 15 years, reaching 461 billion barrels. Subsequently, with the recovery of the security situation in Iraq and the rapid increase in oil production, especially after the outbreak of the 2008 financial crisis, the global economy fell into a downturn. Faced with the uncertainty of oil demand, countries such as Saudi Arabia successively cancelled or delayed some upstream investment projects planned for implementation.
The characteristic of oil production is that early investment in exploration and development requires a large amount of capital, and if oil resources are developed without production, the maintenance cost of the oil field is also a significant expense. Due to economic considerations, countries such as Saudi Arabia are more cautious in adjusting production capacity. Before determining that the existing production capacity in the international oil market cannot meet future new demand, these countries will not invest too much capital in the upstream sector, but only ensure a certain production adjustment capability to the oil market.
Since 2005, OPEC has repeatedly proposed a “reasonable” surplus capacity of 10% or 15% of production, which is approximately 3 to 6 million barrels per day of oil production. Although the production adjustment capacity of 3-6 million barrels per day can cope with general oil supply interruptions, the lower limit of the remaining production capacity of 3 million barrels per day will be insufficient to cope with severe supply interruptions. Therefore, after 2005, OPEC’s oil policy was to maintain moderate tension in the international oil market.
3、 The impact of OPEC oil policy on international oil prices
From 1973 to 2004, OPEC’s oil policy included a clear oil price policy. Before 1986, OPEC directly intervened in oil prices through its pricing system. After 1986, although OPEC gave up direct control over oil prices, it still set target oil prices. Although OPEC’s production adjustments can to some extent affect fluctuations in international oil prices, from the relationship between oil spot prices and OPEC’s target prices, OPEC has not controlled the trend of international prices at any stage, and the adjustment of OPEC’s target oil prices is only a response to the spot market.
After 2005, OPEC directly gave up its control over oil prices and instead made the balance of oil supply and demand the main consideration for its production adjustments. Therefore, rather than saying that OPEC is the maker of international oil prices, it is more accurate to say that it is a follower of international oil prices.
（1） OPEC’s means of influencing oil prices
From the practice of OPEC policy, OPEC’s oil price policy has undergone a continuous weakening process, evolving from initially directly fixing prices to indirectly affecting oil prices through production adjustments, and now aiming to balance oil supply and demand, abandoning intervention in oil prices.
- Direct fixed price (mid-1970s to mid-1980s)
OPEC adopted the practice of directly fixing prices during the price increase and preservation stage and the production restriction and price protection stage. The fixed price system of OPEC is based on Saudi Arabia’s 34 ° light oil as the benchmark oil price for OPEC, and then uses the benchmark oil price as the basis to determine the price difference between various types of oil.
The price difference system based on pricing actually fixes the oil sales prices of OPEC member countries, and the stability of the price difference system is based on all member countries giving up their autonomy in adjusting production. Each member state must produce oil according to the “surplus demand” left for itself by the international oil market. Although different types of crude oil have homogeneity, the market risks borne by different types of crude oil vary due to reasons related to petroleum refining. This means that the price differential system has created unfairness for OPEC member countries to bear market shocks.
Specific market shocks only affect the ‘surplus demand’ of certain countries, but have limited impact on the ‘surplus demand’ of other countries. For example, Brent crude oil from the UK is a direct competitor to Nigeria’s “Boni” crude oil, and the impact of Brent crude oil price reduction on Nigeria is much greater than other countries. And OPEC does not have a compensation mechanism for the affected countries. Therefore, it is difficult for OPEC member countries to give up their autonomy in adjusting production in order to maintain the price difference system, and adjusting production can lead to distortions in the price difference system.
In fact, as a monopolist, to control the price of a product, one only needs to fix one between production and price. But during the stage of limiting production and ensuring prices, OPEC adopted a practice of fixing both prices and production. The reason why OPEC fixes production while maintaining fixed prices is mainly because in the continuously sluggish oil market environment, OPEC’s price differential system has become very distorted, and many member countries are selling oil at prices lower than official prices. In this context, OPEC had to implement a strategy of fixed production.
In April 1982, OPEC began implementing a quota system. However, from OPEC’s policy perspective, fixed prices remain the main means for OPEC to influence oil prices at this stage. In order to maintain OPEC’s benchmark oil prices, Saudi Arabia has actually taken on the responsibility of being a “mobile oil producing country” since 1982.
Throughout the entire production restriction and price protection phase, countries such as Saudi Arabia made significant sacrifices in terms of production to maintain OPEC benchmark oil prices. The significant reduction in oil export revenue has brought serious financial difficulties to these countries. Under the pressure of national finances, countries such as Saudi Arabia eventually gave up direct control over oil prices and began to adopt competitive behavior by increasing oil production to improve the country’s financial situation. Thus, OPEC has also ended its oil policy of directly fixing oil prices.
- Indirect impact on prices through production adjustments (1986-2004)
The failure of the “production restriction and price protection strategy” has made OPEC realize that it does not have the ability to influence oil prices. Therefore, in the “low price guarantee” stage after 1986, although OPEC also set target oil prices, it actually abandoned the method of directly fixing oil prices and began to adopt a fixed production strategy, indirectly affecting oil prices through production and quota adjustments.
The price war in 1986 and the subsequent struggle for OPEC market share gave Saudi Arabia, the United Arab Emirates, and Kuwait, the three Gulf oil producing countries, the dominant position in OPEC policy, making them the core countries of OPEC. After 1986, the core countries of OPEC were mainly concerned with oil revenue, and the influencing factors of oil revenue were nothing more than production and prices. Compared to controlling prices, controlling production is obviously less difficult. Therefore, the oil policies of these countries are all formulated around production volume. This is to first stabilize production on the basis of ensuring oil revenue, and then adjust production to affect prices according to market changes. The above policies also constitute the main content of OPEC’s oil policy during the “low price guarantee” period.
- With the goal of balancing oil supply and demand, abandon intervention in prices (2005 present)
The strategy of using oil revenue as the core and indirectly affecting oil prices through moderate adjustments in production continued until 2004. Afterwards, facing the pressure of continuously rising oil prices, OPEC officially announced the abandonment of its price band policy in 2005. Afterwards, OPEC did not formulate a clear oil price policy and only stated that it would intervene appropriately in oil price fluctuations caused by fundamentals. This means that only when it is determined that the rise in international oil prices is due to supply-demand imbalances, rather than other factors such as speculation, will OPEC increase oil production to curb the rise in oil prices.
（2） The Effect of OPEC on Oil Prices
- The impact of OPEC on oil price fluctuations
Oil is a commodity with low demand price elasticity because it is difficult to replace in the short term, and fluctuations in oil prices do not bring about significant changes in oil demand. Therefore, even slight changes in oil supply can cause significant fluctuations in international oil prices. The characteristic of oil demand has brought great convenience to OPEC in influencing oil prices.
From 1973 to present, according to OPEC’s policy practice, in many cases, OPEC’s production adjustments have a direct impact on oil price fluctuations. The oil embargo launched by OPEC Arab oil producing countries in 1973 directly triggered the first oil crisis. The “price war” launched by Saudi Arabia in 1986 quickly lowered international oil prices to below $10.
In March 1999, OPEC signed a 200 degree agreement with non OPEC countries The 40000 barrels per day reduction agreement triggered a sustained increase in oil prices that year, reaching a level of $30 in January 2000.
In March 2000, OPEC established a “price band” of 22-28 US dollars and maintained international oil prices within the “price band” through four consecutive increases in production.
In 2001, OPEC successfully suppressed the decline in oil prices through three production cuts, and in January 2002, it once again reduced production to bring prices back to pre 9/11 levels.
In 2008, after the outbreak of the global financial crisis, OPEC’s timely production cuts played an important role in curbing the sustained decline in oil prices.
During the turbulent situation in the Middle East from 2010 to 2011, timely production increases by countries such as Saudi Arabia successfully suppressed the rapid rise in international oil prices caused by the interruption of Libyan oil supply. From this, it can be seen that in many cases, OPEC can influence the fluctuations of international oil prices through adjustments in production.
- The impact of OPEC on oil price trends
Although OPEC can have an impact on oil price fluctuations, it is powerless to control the trend changes in oil prices. From the relationship between OPEC’s target oil price and spot oil price, it can be seen that OPEC cannot fully control the trend of international oil prices, whether it adopts price control or production control methods.
From the graph, we can see that from 1974 to 1975, the price of Saudi 34 ° light oil was not much different from that of West Texas Intermediate oil. However, after 1976, the international oil market began to recover and the price of West Texas Intermediate oil began to increase. OPEC has not been able to control the rise of oil prices in the spot market, but has continuously raised the OPEC benchmark oil price under the pressure of oil demand. After the “second” oil crisis, OPEC attempted to maintain the OPEC price of $34 per barrel set in 1981 through the strategy of “reducing production to protect prices”. However, under the pressure of declining demand, OPEC also had to follow the spot price and lower the price, ending the fixed oil price strategy with the “price war” in 1986.
Since 1986, OPEC’s control over oil prices has completely shifted towards fixed production. However, compared to before, OPEC’s ability to influence oil prices has further decreased. In 1986, OPEC set its target oil price at $18 per barrel, raised it to $20 per barrel in 1990, and set a price range of $22-28 per barrel in 2000. However, the OPEC basket of oil prices remained below the target oil price set by OPEC for most of the mid to late 1980s and 1990s. The several adjustments made by OPEC to target oil prices are only a response to changes in the spot market oil prices. After 2003, OPEC was unable to control the continuous rise in international oil prices and ultimately abandoned the strategy of setting target prices in early 2005.
From the relationship between international oil prices and OPEC target oil prices, it is not OPEC’s target oil price that dominates the trend of international oil prices, but rather the trend of international oil prices determines the setting of OPEC’s target oil price. The reason why OPEC cannot control the trend of international oil prices is closely related to its limited production adjustment range. Market participants generally view OPEC as a “cartel” organization. However, whether the “cartel” chooses fixed prices or fixed output methods to affect prices, it ultimately achieves this through the adjustment of output. This is also true for OPEC, which has been using surplus production capacity to influence oil prices since the 1973 oil embargo.
The significance of surplus production capacity is that when the international market’s “surplus demand” for OPEC increases, OPEC can immediately release surplus production capacity to avoid rising oil prices. When the international market’s “surplus demand” for OPEC decreases, OPEC will seal off some of its production capacity to avoid a drop in oil prices. However, due to the huge upfront investment costs (exploration and development costs) in the oil industry, maintaining surplus production capacity is also costly, and OPEC will not indefinitely maintain surplus production capacity. The fixed amount of surplus production capacity determines the upper limit of OPEC’s production increase. Assuming OPEC takes 10% or 15% of its production as surplus capacity, when the international market’s “surplus demand” for OPEC increases, OPEC can only increase its production by a maximum of 10% or 15%.
On the other hand, the financial situation of oil producing countries determines the limit of OPEC’s production cuts. When the international oil market’s “surplus demand” for OPEC decreases, OPEC member countries will not reduce production in proportion to OPEC’s quota adjustments. Instead, they will make their own production reduction decisions based on their respective financial situations. When national finances cannot bear the economic losses caused by production cuts, they will adopt competitive behavior and give up intervening in prices. It is precisely because OPEC’s ability to adjust production is very limited compared to changes in international oil supply and demand that OPEC finds it difficult to achieve its goal of controlling oil price trends.
4、 Conclusion and unresolved issues
Although OPEC was established as early as the 1960s, for a considerable period of time after its establishment, the organization’s actions mainly focused on fighting for the oil rights of oil producing countries, rather than actively intervening in the international oil market. It was not until the outbreak of the “oil crisis” in 1973, when major Middle Eastern oil producing countries such as Saudi Arabia gained resource sovereignty, that OPEC began to independently implement oil policies aimed at influencing the international oil market.
Since 1973, OPEC’s oil policy has gone through four stages:
The “price increase and value preservation” strategy from the mid-1970s to the early 1980s;
The “production restriction and price protection” strategy from the early 1980s to the mid-1980s;
The “low price coverage” strategy from 1986 to 2004;
The strategy of “maintaining moderate supply and demand tension in the oil market” after 2005.
Participants in the international oil market often view OPEC as a “cartel” organization, and whether OPEC can influence oil prices is a controversial issue. However, from the relationship between international oil prices and OPEC target prices, although OPEC’s production adjustments may have a direct impact on international oil price fluctuations at times. However, whether adopting a fixed price strategy or a fixed production strategy, OPEC has not controlled the trend of international prices, and the adjustment of OPEC’s target oil prices is only a response to the spot market. Therefore, rather than being a leader in international oil prices, OPEC is more like a follower of international oil prices.
The reason why OPEC cannot influence the trend of international oil prices is mainly because its ability to adjust production is very limited compared to changes in international oil supply and demand. Like other ‘cartels’, surplus production capacity is a tool for OPEC to influence the oil market and international oil prices.
However, unlike other industries, oil production has the characteristic of a high proportion of initial investment. For OPEC, expanding surplus production capacity means huge capital consumption, which cannot bring any economic benefits. Therefore, OPEC holds an extremely conservative attitude towards expanding surplus production capacity. When the international oil market’s “surplus demand” (often caused by speculative factors) exceeds OPEC’s surplus production capacity, OPEC loses the ability to suppress oil price increases. There is also an upper limit to OPEC’s ability to reduce production, which is the financial situation of oil producing countries. To this day, the vast majority of OPEC oil producing countries have not shaken off a single economic structure that heavily relies on oil resources.
Because oil export revenue is the economic lifeline of OPEC member countries, OPEC member countries will only participate in OPEC’s production cuts if they do not threaten their own economic security. On the contrary, if production cuts threaten the normal development of their own economies, OPEC member countries will not choose to reduce production, but will adopt competitive strategies to increase oil output.
Given that the ability to adjust production is relatively limited compared to changes in international oil supply and demand, OPEC’s production adjustments cannot influence the trend of international oil prices, but can only reduce the volatility of international oil prices to a certain extent. However, it is too early to conclude that OPEC is no different from other oil producing countries and does not have monopoly power. The original intention of establishing a “cartel” is not to influence price trends, but to obtain monopoly profits. Therefore, the criterion for evaluating OPEC should not be whether OPEC can control the trend of oil prices, but whether OPEC can obtain a monopoly high price.
From 1973 to 2003, 30 years later, the international oil market ushered in a new cycle of high oil prices. Despite the high oil prices, a global economic crisis emerged after the high oil prices. However, as important participants in the market, international oil companies exhibited completely different behavior patterns.
During the high oil price cycle from 1973 to 1985, international oil companies increased their upstream investments, laying the groundwork for overcapacity and low oil price cycles in the second half of the 1980s and throughout the 1990s. Since 2003, international oil prices have repeatedly hit new highs, but international oil companies still remain cautious in their upstream investments. It is precisely because of the caution of international oil companies that after the outbreak of the 2008 financial crisis, there was no overcapacity in the oil market. After a brief wave of price cuts, market participants began to worry about insufficient production capacity.
However, the cautious attitude of oil companies is somewhat related to the actions of OPEC, especially core OPEC countries such as Saudi Arabia. After 2003, facing the continuous rise in oil prices, oil investment became profitable, and international oil companies increased their upstream investment efforts. However, because resources with better geological conditions were either monopolized by oil producing countries or required high oil rents, international oil companies could only operate in areas with more adverse geological conditions and higher investment risks, which led to the continuous rise in oil production costs.
According to statistics from the US Energy Information Administration on the activities of major international oil companies, Canada had the highest cost of oil production in the world from 2001 to 2003 and from 2002 to 2004, with sliding averages of approximately $18 per barrel of oil equivalent and $27 per barrel of oil equivalent, respectively; The regions with the highest oil production costs in the world from 2003 to 2005 and 2004 to 2006 were Central and South America, with three-year moving averages of approximately $33 per barrel of oil equivalent and $49 per barrel of oil equivalent, respectively.
But by the time OPEC core countries announced their oil investment plans in 2005, international oil companies’ enthusiasm for investing in high cost oil fields quickly faded. The number of offshore drilling in Latin America reached double-digit growth rates in both 2003 and 2004. But there was negative growth from 2005 to 2006.
After 2005, the upstream activities of international oil companies returned to low-cost OPEC countries, and the countries with the fastest growth in global drilling numbers became OPEC oil producing countries located on the African continent, such as Libya, Algeria, Nigeria, and Angola.
From the policy interaction between OPEC core countries and international oil companies, it can be seen that the high oil price cycle since 2003 is directly related to OPEC’s actions. But is this high oil price equilibrium maintained by OPEC? If so, what conditions does OPEC need to meet to maintain this high oil price equilibrium? Only by clarifying the answers to the above two questions can we make a clear definition of OPEC’s market attributes and the future trend of international oil prices, which is also an issue that OPEC research needs to further clarify.