IMUNTC'24 OPEC PDF

Organization of Petroleum Exporting Countries Introduction to the Committee The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization created at the Baghdad Conference in 1960 by five oilproducing developing countries (Iraq, Iran...

Organization of Petroleum Exporting Countries Introduction to the Committee The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization created at the Baghdad Conference in 1960 by five oilproducing developing countries (Iraq, Iran, Kuwait, Saudi Arabia and Venezuela), at a time of economic and political transition in which the international oil market was owned by the “Seven Sisters” multinational companies. This organ aimed at coordinating the petroleum policies of its members, and providing Member States with technical and economic aid. Later on, in 1969, 10 more countries joined the organization. However, Indonesia suspended its membership in 2016. Thus, the current members of the organization are Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela. The organization adopted a ‘Declaratory Statement of Petroleum Policy in Member Countries’ in 1968, which emphasized the undenyable right of all countries to exercise permanent sovereignty over their natural resources in the interest of their national development; and established as its primary objective “to coordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.” Since its creation, the majority of the world's proven oil reserves have been controlled through OPEC. Little over 81% of the world's confirmed oil reserves were held by OPEC members as of 2015, with Saudi Arabia and Venezuela combined controlling nearly half among those reserves. Despite controlling most of the world’s crude reserves, however, OPEC in 2015 only accounted for roughly 43% of world oil production. In fact, OPEC only produced more than 50% of the world’s oil for a brief period from 1969 to 1978 Key Terms and Vocabulary Seven Sisters : The seven major oil companies also referred to as Big Oil ; BP, Texaco, Chevron, ExxonMobil, Shell, TotalEnergies, Eni Currency : a system of money in general use in a particular country. Reserve Currency : a strong currency widely used in international trade that a central bank is prepared to hold as part of its foreign exchange reserves. Capital : Wealth in the form of money or other assets owned by a person or organization or available for a purpose such as starting a company or investing. Volatility : Liability to change rapidly and unpredictably, especially for the worse. Monetary Policy: Monetary policy is a set of actions to control a nation's overall money supply and achieve economic growth. Embargo : an official ban on trade or other commercial activity with a particular country. WMD : Weapons of Mass Destruction Coup : A sudden, violent, and unlawful seizure of power from a government. Monopoly : The exclusive possession or control of the supply of or trade in a commodity or service. Production Quotas : A goal for the production of a good. Can be set high to encourage production, or can be used to restrict production to support a certain price level. Sanctions : a threatened penalty for disobeying a law or rule. Introduction to Topic A In the current day and age there is a massive demand for oil and other forms of hydrocarbons due to the energy input needed for civilizations to prosper. This demand for oil is a great form of revenue for oil supplying countries. Since oil is in such high demand and limited in supply and production, oil producers must take full advantage of the sheer volume exported of this precious resource nicknamed "Black Gold". Oil could determine the worth of a country's currency and this is a crucial macroeconomic factor which affects the microeconomic landscape of a country. The US Dollar was almost the only currency oil was sold in by OPEC members but this shifted by the course of time and as geopolitical issues arose. The price of oil and the currency it is sold in affects the country's economic independence as the country would not be dependent on policies the owner of the said currency makes thus giving flexibility to the exporter in many are Petrocurrencies A petrocurrency is a currency of an oil-producing nation whose oil exports are sufficiently significant as a percentage of total exports for the currency to fluctuate in value along with the price of oil. In other words, a petrocurrency increases in value when the price of oil increases and decreases in value when the price of oil declines. The currency will fluctuate in connection to the price of oil given the high percentage of exports. The relationship between oil prices and the exchange rate could get even stronger if the percentage of oil and gas exports rises further. Saudi Arabia, Russia, Norway, Canada, and Mexico are among the oil-producing nations that depend greatly on income from oil exports. Here are examples of petrocurrencies that have significant exposure to fluctuating oil prices. Canadian dollar Russian ruble Columbian peso Norwegian krone Brazilian real Additional exporting countries whose currencies have a strong link to oil prices include Saudi Arabia Iran Iraq Nigeria Venezuela The Petrodollar System The Petrodollar system, also known as the oil-dollar system, was a system created in the 1970s designed by Henry Kissinger during the Cold War. It was a system where oil-exporting countries, such as Saudi Arabia and Kuwait, were required to use the US dollar as the currency in which their oil was sold. This meant that the US dollar became the primary currency used to buy oil around the world which led to nations across the world amassing large reserves of U.S. dollars, and a huge influx of capital into the American economy. However, the petrodollar system began to unravel in the 1980s when OPEC nations realized they were not getting fair value for their oil and began to accept other currencies for oil transactions. This further weakened the petrodollar system and eventually led to its collapse in the 2000s. Petrodollar Recycling Petrodollar recycling is the process by which countries export oil and use the proceeds to purchase other assets, such as bonds, stocks, or foreign currencies. While this strategy can be beneficial in some cases, it can also create a number of drawbacks and problems. For example, when countries recycle petrodollars, they are often unable to invest in their own domestic economies, leading to a lack of economic growth. Additionally, petrodollar recycling can lead to financial speculation, which can create market volatility, as well as inflationary pressure. Finally, petrodollar recycling can create a large imbalance in the global economy, as some countries may be able to accumulate large stores of foreign currency, while others may be unable to purchase them. In summary, petrodollar recycling can be a useful tool, but it must be used with caution to avoid creating serious economic imbalances. Petroyuan The Petroyuan is a recently introduced Chinese currency, designed to challenge the US dollar as the world’s primary reserve currency. The Petroyuan is the first oil-backed currency to be introduced in the world, and is backed by China’s massive foreign exchange reserves. It is meant to reduce the dominance of the US dollar in the global economy, by offering a more attractive currency for international trade and investment. The Petroyuan is also meant to help China gain greater control over its domestic oil industry, as well as to provide a more transparent pricing mechanism for global oil transactions. The Petroyuan is likely to be adopted more widely over time, as its value is expected to increase as the Chinese economy continues to grow Overview of the Topic The volatile nature of supply and demand in the oil market is causing price fluctuations which result in not so sound economic policies. The dollar is very unpredictable and inflation is increasing across the globe. Oil exporters are aware of the uneven exchange they made in the past and with the introduction of rising super powers they’re seeking to increase their profits and economic independence. The economic independence of each nation in OPEC is vastly different from one to another but those countries have a very good weapon that could possibly create wars. OPEC countries were aware of the use cases and possible outcomes of adopting new monetary policies on exports but lacked the political environment needed for the change. Since the world is seemingly following towards an economic recession the countries got the opportunity to shift the tides in the oil market to their advantage. The petrodollar is on the verge of irrelevancy and the system Henry Kissinger built is no longer viable for long term economic sucess. The geopolitical stances of OPEC countries are fought in proxy wars in different regions which keep the US busy so the countries could achieve their long term goals without interference. The Oil prices drastically affect petrocurrencies so determining the price of oil would have a huge impact on petrocurrencies such as the Russian Ruble. This economic power gives OPEC the power to influence a country’s economy and the geopolitical landscape. This was further emphasized especially in the Arab-Israeli conflict as the oil exporting arab nations decided to cut exports to the united states and since they were waging a war exporting oil was a lot more difficult and the world suffered severely thus resulting oil prices to skyrocket. The Arabs lost the war but the power of oil was further emphasized as it could make and break wars while retaining its value. Countries in OPEC were also sanctioned, especially in the case of Iran as the country was -allegedly- developing WMDs which caused The US and several others to embargo Iran and take them out of the oil trade. Another example for the power of oil could be the pricing Saudi Arabia took to weaken the Iranian economy as Saudi’s were undercutting the price of oil to ensure Iran wasn’t selling any oil. Previous Attempts to Resolve the Issue 1 Saddam Hussein and the Euro In the early 2000s Iraq's Leader saddam hussein attemped to transition to Euro and had brought Iraq a fortune of hundreds of millions of euros. Iraq focused on switching from the US dollar—"The currency of the enemy"—to the more multinational euro in October 2000. from 2001 to 2003, the majority of Iraq's oil export payments made through the UN's oil- forfood program have been made in euros. He was toppled down by Coalition Forces in the Gulf War and later executed in 2006 Muammar Ghaddafi’s attempt Libyan leader Muammar Ghaddafi has been vocal in his opposition to the petrodollar system. He has argued that the system, which places the US dollar as the world's major reserve currency, has enabled the US to gain an unfair advantage in the global economy. He has also argued that the US has abused its position of power, creating an economic system where developing countries are further impoverished and the US benefits at their expense. As a result, Ghaddafi has proposed creating a new, unified African currency as a way to undermine the petrodollar system. He has also called for a boycott of US-based banks, international financial organizations and multinational corporations. Ghaddafi's stance on the petrodollar system has been met with strong opposition from the US and its allies. However, his views have resonated with many in the developing world who have been adversely impacted by the current economic order. He was toppled down just like Saddam soon after Anglo-Iranian Oil Company and Mohammad Mosaddegh Mohammad Mosaddegh was the Prime Minister of Iran from 1951 to 1953. Before his office the Persian oil was being pillaged by the British company “Anglo-Persian Oil Company” (now British Petroleum). Mossaddegh decided it wasnt a fair deal and nationalized the oil companies to remove foreign companies extracting oil in Iran He was famously overthrown by an MI6 and CIA-backed coup in 1953, which was motivated by the United States' desire to gain access to Iranian oil. This coup was supported by the British government, who sought a continued stake in Iranian oil. The coup was also supported by the Shah of Iran, who was eager to keep control of the country's oil production. Mosaddegh's overthrow ultimately led to the creation of the petrodollar system, in which oil- producing countries were paid for their oil in U.S. dollars. This system was a way for the United States to maintain its hegemony in the Middle East and to ensure its access to oil. The petrodollar system also enabled the U.S. to influence the internal politics of oil-producing countries, as well as to control the price of oil on the global market. Venezuela and Sanctions Venezuela had moved to sell oil in boilvar in 2017. This was a move that was being seen as a way to try and reduce the country's reliance on the US dollar. The move was very ambitious for the future of oil trade since Venezuela houses the largest proven oil reserves on earth. The US was not in favor of this move and imposed sanctions on Venezuela after those actions were taken. The economic sanctions were so intense that the country suffered from hyperinflation and black markets emerged resulting in turmoil for the following years. Current Situation The ongoing economic crises and rising energy costs are the prime reason OPEC countries are concerned and since inflation is on the rise for the US Dollar alternatives are being considered by the member states. OPEC countries are still considering other forms of export currencies including their own currency Though the dominant currency is still the US dollar. Kuwaiti Model Countries such as Kuwait have found a workaround to get rid of the USD monopoly by selling in US dollars which are instantly converted to Kuwaiti denars in transaction, similar to the situation for gold in Bretton Woods system. This process keeps the demand for Kuwaiti denars high thus benefitting the economy of kuwait by keeping the money inside. Saudi Arabian threat to the oil market Saudi Arabia Considers Accepting Yuan Instead of Dollars for Chinese Oil Sales. Talks between Riyadh and Beijing have accelerated recently. in case of a shift to the Yuan, the US dollar would be affected severely and ,since Saudi Arabia is the largest oil producer, would cause a domino effect across the Gulf states. 2019 Attack on Saudi Aramco  The Abqaiq–Khurais attack of 2019 was a major attack on the world's largest oil processing facility and the second largest oil field in the world owned by Saudi Aramco. The attack resulted in a massive supply shock, causing the price of oil to skyrocket. The effects of the attack were felt across the globe, with the resulting price spike having a negative effect on the global economy. The attack has also caused geopolitical tensions to increase between major oil-producing countries in the region, as well as between the United States and Iran. The Abqaiq–Khurais attack serves as a stark reminder of the power and danger associated with the global oil market, and the need to ensure the security of oil infrastructure. Main Actors Saudi Arabia Saudi Arabia is a founding member of the Organization of Petroleum Exporting Countries (OPEC) which was established in 1960. As the world's largest oil exporter, Saudi Arabia is a major player in OPEC and has a significant influence over the cartel's decisions. It is responsible for setting production quotas and prices. Saudi Arabia has been able to use its influence in OPEC to further its own economic interests, such as securing favorable terms for its oil exports. Additionally, Saudi Arabia owns the worlds third most valuable company ARAMCO (Arabian American Oil Company) which is debateably owned by the Saudi Royal Family and is responsible for the oil extracted in Saudi Arabia Iran Iran is one of the largest oil producers in the Middle East and a major OPEC member. It has the second-largest reserves of natural gas in the world. The country is also one of the leading consumers of oil and gas. As a result, Iran has a lot of influence on global petroleum markets. According to 2015 figures, Iran contributes 17 percent to the total output of OPEC. This high percentage is due to Iran's large oil reserves and its willingness to participate in all levels of production within the organization. As a result, Iran has a lot of power when making decisions regarding the production, marketing and distribution of petroleum times, this power has led to corruption within the organization as members strive to increase their own profits at the expense of consumers. Venezuela Venezuela is the largest country in South America and is also the continent's third most populous. It boasts a wealth of natural resources and is rich in oil, gold, coal and other minerals. Despite its rich history. Venezuela's recent economic woes have garnered international attention. While some question the cause of these woes, many stand in solidarity with the Venezuelan people against the authoritarian policies of president Nicolás Maduro. Venezuela's stance on petrodollars is very evident and the country clearly wants to trade oil in a variety of currencies or preferably their own to get hold on their economic independence. The economy of venezuela is still recovering from the hyperinflation that the counrty has faced recently. Due to the massive proven oil reserves, it serves as one of the most influential countries in OPEC but suffers efficiency problems and corruption which bogs down the potential of the country’s reserves and production output. Possible Solutions Unified Oil Currency A unified oil currency could be implemented replacing the current monopoly of the dollar. This was attempted by the Libyan government in the early 2000’s by the authoritarian leader Muammar Ghaddafi. The plan was to introduce a new unified currency to the African continent similar to the EU and the Euro.This could highly benefit the region due to the accesibility and would give the currency a high value and stability due to the immense volume this currency would get traded. The developing countries wouldnt waste their money by outsourcing the production of banknotes, merchants would expand their marketplace and the currency would be regulated with the unanimous approval of a commission that would be created. There are a few drawbacks to this solution which might be the inequal status of african countries and since the geography is extremely unstable it mightve affected the currency. Another drawback would be that countries would not have as much flexibility on the monetary policies they implement which would hinder the economic development. National Trade of Oil Oil would be sold in the currency in which the oil was produced. The oil producing countries would have more flexibility on the currency by doing the trade specifically on their own currency. So in case of an oil sale, the exporting country would be selling the oil in their own currency, forcing the importer to purchase the exporter’s currency in advance. This would benefit the market by determining a supply and demand balance as if the country exports too much their currency would be valued higher thus resulting in higher prices. The major problem with this issue is that the importers would have a hard time every time they decide to purchase oil from an exporter. The OPEC countries would prosper economically but the member states should keep in mind that if the price of oil is too high, either the market will shift from oil to other sources of energy, or they will purchase oil from a non-OPEC member for a cheaper price. Free Market Solution The oil producers would export in the currency they wish to trade in, so they might accept the importers choice of currency during the transaction. This benefits both the importer and the exporter. The importer could pay in their own currency making it easier and the exporter would get hold of various currencies in their reserves giving economic power to the exporter. This would add lots of variety to the currency reserves of oil producers and would harm the system of Petrodollar Recycling as the oil producer would not be limited to a single currency for their investment ITUMUN’23 SECRETARIAT Questions to be addressed How can the oil producing countries tackle the global economic stagnation? Is petrodollar still a viable system for oil producers? How can oil producing countries increase their oil production? How could the oil producing countries take advantage of the current oil prices? What kind of system will be implemented for OPEC countries to prosper? What kinds of alternative currencies are available for oil exporters? Is there an alternative for petrodollar recycling? Is there a way to stabilise the geopolitical landscape of oil producers? Further Research and Bibliography Understanding Petrodollar - Short Video History of Oil and Middle East OPEC The Cartel Big Oil https://en.wikipedia.org/wiki/Big_Oil https://www.researchgate.net/publication/322087449_IMPORTANCE_OF_IRAQI_ OIL_IN_THE_ECONOMIC_DEVELOPMENT_DURING_THE_PERIOD_1970_- _2011 https://www.aa.com.tr/en/energyterminal/finance/venezuela-opts-to-use-chinese- yuan-for-oil-trade/763 OPEC ASB 2017 https://www.opec.org/opec_web/static_files_project/media/downloads/publications/ OB04_052022.pdf https://www.opec.org/opec_web/en/publications/4140.htm https://www.thebalancemoney.com/what-is-a-petrodollar-3306358 https://www.wsj.com/articles/venezuela-stops-accepting-dollars-for-oil-payments- following-u-s-sanctions-1505343161 https://www.jstor.org/stable/3012610 https://energyeducation.ca/encyclopedia/OPEC_(brief_history) ITUMUN’23 SECRETARIAT https://onlinelibrary.wiley.com/doi/10.1111/j.1468-0270.1985.tb01054.x https://www.reuters.com/world/saudi-arabia-gathers-chinas-xi-with-arab-leaders- new-era-ties-2022-12-09/ https://www.jstor.org/stable/20039989 https://archive.globalpolicy.org/nations/sovereign/dollar/2003/03oil.htm