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OPEC
Chair: Phoebe Rogers
Director: Paul Yang
OPEC PMUNC 2016
Contents
Letter from the Chair…….………………………...……………………...3
Committee Description………………………….…………………….…….…………….4
Topic A: Raising Prices.…..…..………………….....……………..……….6
Introduction…..………………………………….……………………….……..…………6
History of the Topic………………………..…………………………..….…….…………7
Current Status…………………………………….………………...…….……...………...11
Country Policy…...………………………………………………..…….………………....16
Keywords……………………………………....……………….........…………….…..…..18
Questions for Consideration………..…………….……………….........…….……….…....19
Topic B: Swing Production ……......…………………..…………………21
Introduction……..…………………..………...……………………………………..……21
History of the Topic.…………………….….…….…....…………..………………...……22
Current Status………………………….……….………………………………………....25
Country Policy.….…………………...….……….……...…..……………………………..30
Keywords……………………………….…………….……………………………….......32
Questions for Consideration............……….…….…….…………………..……………….33
Bibliography……………….……………………………………………………………..34
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Letter from the Chair
Dear Delegates,
My name is Phoebe Rogers, and I am part of the Princeton class of 2019. I am majoring in
Economics through the math track, and pursuing a certificate in Applications of Computing. This
will be my first year staffing PMUNC as I was unfortunately unable to make it last year, and I am
very excited to be a part of PMUNC 2016! I began Model UN my sophomore year of high school,
and this is my second year as part of the Princeton MUN Team. On campus, besides MUN, I am a
member of Envision and work for Rocky-Mathey Dining Services. Last summer I interned at Veritas
Technologies, and I am interested in continuing to work in the tech industry in the future. I am
originally from Eugene, Oregon, and when I’m not studying I love skiing, backpacking, hiking,
kayaking, and biking. I look forward to seeing you all at the conference in November!
Sincerely,
Phoebe Rogers
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Committee Description
OPEC, the Organization of the Petroleum Exporting Countries, is an international body of
some of the world’s prominent oil-exporting countries. Its official mission is to, “coordinate and
unify the petroleum policies of its member countries and ensure the stabilization of oil markets in
order to secure an efficient, economic and regular supply of petroleum to consumers, a steady
income to producers and a fair return on capital for those investing in the petroleum industry.”1 All
decisions regarding the organization are made in OPEC Conferences, where delegations from each
member country are typically headed by their respective oil minister. These conferences are held
twice a year on average at the Vienna headquarters2, but additional sessions may be called when
necessary. All members of OPEC have, for the most part, a vote of equal weight in the decision
making process for the organization, based on the fact that all member countries pay equal
membership fees into the annual budget. The decisions made at these meetings often surround
production levels and oil prices, but any and all changes occurring in the organization are also
discussed in these meetings.
OPEC was created in September of 1960 at the Baghdad Conference by five Founding
Members: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela3. These member countries were later
joined by Qatar, Indonesia, Libya, United Arab Emirates, Algeria, Nigeria, Ecuador, Angola, and
Gabon. Throughout the 1960’s OPEC leaders worked to set the foundation for the organization,
establishing its Secretariat in Geneva before moving it to Vienna, and in 1968 adopting a ‘Declaratory
Statement of Petroleum Policy in Member Countries’ that stressed, “The inalienable right of all
"Our Mission." OPEC : Our Mission. Accessed June 22, 2016.
http://www.opec.org/opec_web/en/about_us/23.htm.
1
2
“OPEC Meetings.” OPEC: OPEC Meetings. Accessed August 15, 2016.
http://www.opec.org/opec_web/en/311.htm
"Brief History." OPEC : Brief History. Accessed June 22, 2016.
http://www.opec.org/opec_web/en/about_us/24.htm.
3
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countries to exercise permanent sovereignty over their natural resources in the interest of their
national development.”4
The 1970’s brought OPEC considerable recognition as it rose to become a dominant force
in the international oil market. However, turmoil also ensued in the 70’s due to the Arab Oil
Embargo of 1973 – and the subsequent international energy crisis – and the Iranian Revolution of
1979, both drastically driving up oil prices5. In 1975 OPEC held the first Summit of Heads of State
and Government of its members, calling for increased economic development and stability through
cooperation in international relations6. This marked one of the first demonstrations of OPEC’s intent
to truly become a stable, lasting, and globally influential force in the oil market. The early 80’s saw
record level prosperity for oil producers until a major price crash began due to falling demand after
the 1970’s energy crisis. This crash is the largest crisis that the young oil market has yet faced, and it
has primarily been caused by a reaction on the consumer side of the market to the shortage of oil in
the previous decade. It is now 1986, the peak of the price crash and the early years of the oil glut, and
oil prices have fallen from $27 to below $10 already this year7. The market is in crisis and now is the
time for all large global oil producers, and this committee, to take decisive action and enact drastic
change.
"Brief History." OPEC : Brief History.
Ibid.
6 Ibid.
7 Hershey Jr., Robert D. (1989-12-30). "Worrying Anew Over Oil Imports". The New York Times.
4
5
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Topic A: Raising Prices
Introduction
Faced with plummeting oil prices, both OPEC and non OPEC producers in international oil
market are in crisis. Prices have dropped to record lows, bottoming out below $10 per barrel.
Without the profits brought in by stable high prices, the economies and populaces of oil exporters
are suffering. In 1986 daily revenue from oil in Saudi Arabia dipped below 100 million, less than a
quarter of the near 400 million daily that they had been making in 1980-818. Oil represents one of the
primary exports of the individual member countries of OPEC, and neither they nor other
international oil producers can afford for prices to continue at their current levels.
Since the beginning of the oil glut OPEC has done its best to limit its production of oil in order
to reduce global supply and thereby raise prices. Unfortunately efforts as of yet have not been
successful, and both prices and profits continue to drop. Individually, each major oil producing state
(or organization such as OPEC) has been unable to affect change in the world market. International
producers are desperate to raise prices, and anxious that oil may be losing its standing as the world’s
primary energy source. Consumption continues to fall, and new worries have arisen that
consumption will inevitably keep declining into perpetuity and never again recover to previous levels.
Many, who feel attuned to the markets, believe that the situation is a temporary reaction to the record
level high prices of the early 80’s and a lingering result of the energy crisis in the 70’s. US economists
have expressed worry that the American public is beginning to believe in lasting low prices, and that
in the long run once the market levels out once again, “The break in prices . . . may jeopardize many
hardwon achievements, such as conservation and sharply reduced dependence on OPEC oil.”9
8
Gately, Dermont. Lessons from the 1986 Oil Price Collapse. Master's thesis, New York University, 1986.
Brookings Papers on Economic Activity.
9
Hershey, Robert D., Jr. "THE DARK SIDE OF THE OIL GLUT." The New York Times, March 21,
1982. http://www.nytimes.com/1982/03/21/business/the-dark-side-of-the-oilglut.html?pagewanted=all.
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Whatever the cause of the glut, apathy is not an option. OPEC, alongside other international
producers, are compelled to lower oil supply and increase prices if they hope to maintain the
economic advantages and political influence that being at the forefront of a major global market like
oil has afforded them.
History of the Topic
Long standing tensions between the Middle East and the West flared during the Arab-Israeli War
in 1973, during which the United States supported and supplied Israel. This resulted in the Arab
members of OPEC imposing an embargo against the US and other countries that supported Israel
including the Netherlands, Portugal, and South Africa. Included in the embargo was a ban on the
exportation of petroleum to the above nations and the introduction of general oil production cuts in
order to raise prices even further10. The embargo primarily affected oil importing countries that
depended on affordable OPEC oil to fuel its populace, highlighting the world’s increasing
dependence on OPEC as an oil producer.
At the time, OPEC was the largest producer of oil on the global market. As they reduced their
production levels throughout the embargo, international oil prices per barrel first doubled and then
quadrupled11. OPEC grew more and more influential as countries with limited oil stockpiles struggled
to meet domestic demand, setting the stage for a world where resources, particularly oil, determine
leverage on the international playing field. As prices continued to rise and supply dwindled,
consumers across the world began to adjust their spending habits. Massive energy shortages in the
West led to austerity measures, many of which outlasted the embargo. The establishment of long
lasting speed limits and growing environmentalism accompanied temporary gas price controls and
rationing12. The ingrained consumer caution brought on by the 1973 Oil Embargo and the
"Oil Embargo, 1973–1974." Milestones: 1969–1976. Accessed June 22, 2016.
https://history.state.gov/milestones/1969-1976/oil-embargo.
11 "Oil Embargo, 1973–1974." Milestones: 1969–1976.
12 "Energy Crisis (1970s)." History.com. 2010. Accessed June 22, 2016.
http://www.history.com/topics/energy-crisis.
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consequent 1970’s Energy Crisis, combined with record high oil prices, played a major role in
causing the Oil Glut of the 1980’s. Although the Arab Oil Embargo was lifted as early as 1974,
OPEC’s significant price increases remained and the energy crisis was sustained for multiple years
following.
During and following the major energy crisis, governments sought out alternatives to Middle
Eastern oil. Smaller non-OPEC oil producers including Brazil, Egypt, India, Malaysia, and Oman
doubled their output between 1979 and 198513. During the 1980’s commercial exploration by states
not aligned with OPEC increased, developing large oilfields in Siberia, Alaska, the North Sea, and the
Gulf of Mexico14. During the early 1980’s OPEC was hopeful to maintain the high price of oil in
spite of the end of the energy crisis. However, international supply for oil caught up with demand
and prices began to fall. In an attempt to keep prices high, OPEC decreased oil production by nearly
half throughout various production cuts between 1980 and 198615. Their efforts were largely
unsuccessful, and oil-importing countries simply turned to cheaper producers. By 1981 OPEC lost its
standing as the world’s largest oil producer to the Soviet Union16. By early 1982, the Boston Globe
reported that OPEC’s production, having peaked in 1977, was at its lowest level since 196917. In
1985, OPEC’s share of the world oil market dropped to less than a third, from the nearly half it had
sustained during the 1970’s18.
Divided opinions and dissent arose out of frustration within the OPEC member countries.
Members were expected to meet production quotas set by the organization, but as a reaction to the
falling profits due to low prices, many of the states, “inflated their reserves to achieve higher quotas,
"1980s Oil Glut." PediaView.com. Accessed June 22, 2016.
https://pediaview.com/openpedia/1980s_oil_glut.
14 Ibid.
15 "1980s Oil Glut." PediaView.com.
16 Ibid.
17 Warsh, David (1982-02-28). “The economy: the Oil Glut deepens; OPEC’s grip loosens; but a
boom or a bomb could spur prices back up”. Boston Globe.
18 "1980s Oil Glut." PediaView.com.
13
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cheated, or outright refused to accord with the quotas.”19 In 1985 OPEC’s daily output was down to
approximately 3.5 million barrels per day from around 10 million in 198120. The same year, Saudi
Arabia abandoned its position as the organization’s swing producer, creating a, “huge surplus that
angered many of their colleagues in OPEC.”21 It is typically the swing producer’s responsibility to
adjust their output to balance changes in the market, and the loss of the primary swing producer at
such a time of crisis was a great blow to oil producers.
In the above graph, Brent refers to Brent Crude, which is, “a major trading classification of sweet
light crude oil that serves as a major benchmark price for purchases of oil worldwide.”22 This graph
Ibid.
Ibid.
21 Koepp, Stephen (1986-04-14). “Cheap Oil!”. Time. Retrieved 19 January, 2008.
19
20
22
"UK brent, crude oil, brent crude". One Financial Markets/CB Financial Services Ltd. 2012.
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demonstrates the precipitous drop in oil production following 1981 as producers continuously
lowered output in the hopes of raising prices.
It is now 1986, and the prices are at their lowest point in the oil glut so far. Oil-exporting
countries across the world have faced major losses in revenue, and oil-importing nations have begun
adjusting their economies to depend on the current low prices. OPEC and its members are not the
only ones to have suffered. Mexico experienced an economic and debt crisis in 1982, burgeoning
civil unrest has erupted in the Soviet Union, and the growing American oil market was stunted
dramatically as cheap Middle Eastern oil became the most cost effective option in the short term.
Current Status
Before 1986 the oil market experienced a price crash due to low demand and a growing
multitude of suppliers. In early 1986, many OPEC members followed the rebellious attitude
displayed by Saudi Arabia in rejecting its position as swing producer and began producing above
OPEC-prescribed levels23. In these member countries’ attempt to recapture a larger share of the
world market, they inadvertently caused the price crash to develop into the much discussed “glut of
oil” in the market24. Their desire to increase revenue through increasing production is responsible for
the massive over-supply of oil in the international market today. These desperate times have
fractured OPEC, once a strong and influential body, and left it rife with internal dissent. Frustration
over the market situation led to the breach of organization-denoted quotas, which in turn only
caused the situation to worsen further. As of yet, neither working together nor pursuing individual
interests has resulted in an improvement in the state of the market.
It would evidently be in the best interest of all oil producing nations, both within and outside of
OPEC, to find a way to raise prices. Whether a sufficient number of producers would be either
willing or able to work together to effectively raise prices is another matter. Each producer now faces
23 Danielsen, Albert L. "OPEC." Encyclopedia Britannica Online. Accessed June 25, 2016.
http://www.britannica.com/topic/OPEC.
24 "Crude Oil Price Collapse of 1986." Crude Oil Price Collapse of 1986. May 2002. Accessed
June 22, 2016. http://www.freerepublic.com/focus/news/2019385/posts.
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choices that may heavily impact the future oil market and their own future prosperity. With one of
the largest and most influential world markets at its lowest point in history, there are many directions
this crisis might take us.
There are many points of contention and obstacles that must be overcome if a workable
solution to the current crisis is to be reached. Firstly is the fundamental issue of OPEC' being a type
of formalized cartel. Cartels are known as producers that have entered into a non legally binding
agreement to minimize competition and maintain high prices in the market. Though OPEC does not
have a complete monopoly on the oil market, as an organization they have historically controlled a
substantial share of the market25. This organization, however, is not a cohesive unit. It is made up of
14 individual countries that will understandably act in their own interest. It so happens that in the
past their interests have aligned with those of OPEC as a whole, but ever since the magnitude of the
price crash has become apparent, the interests of the organization and the individual have begun to
diverge. The immediate result of this divergence in interest has been the refusal of member countries
to comply with OPEC quotas and the subsequent ‘oil glut’ and worsening of the market crisis26. The
discord between the members of OPEC and their lack of desire to reduce their personal profits for
the good of the group is, however, not an issue unique to this body at this point in time. Cartels are
unstable by nature, and it is nearly always in the interest of the individual members to ‘cheat’ on the
other members and produce more than their quotas permit27. This crisis reminds us of the necessity
for complete cooperation and collaboration in order to ensure the wellbeing of the organization
while simultaneously highlighting the extreme conflicts of interest within the membership.
It is important to remember that OPEC does not exist in a vacuum. It is not the world’s
only oil producer, and currently neither is it the world’s largest oil producer. The Soviet Union and
Danielsen, Albert L. "OPEC." Encyclopedia Britannica Online.
Yergin, Daniel (1991). The Prize: The Epic Quest for Oil, Money, and Power. Simon & Schuster.
27 Parkin, Michael; Melanie Powell; Kent Matthews (2007). Economics. Pearson Education. p.
25
26
134.
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other smaller producers are also extremely influential participants in the global market28.
Furthermore, it has become clear that there are a multitude of factors that play a role in the shaping
of the market, just a few of which are presented in the following. The United States began pumping
oil from Alaska in 1977, and throughout the 1970’s and 1980’s many new oilfields have been
discovered in the North Sea29. Cars are becoming more fuel efficient by the year, and electricity
generated from coal, nuclear power, and natural gas have all played a role in reducing demand for
oil30. The oil market has become far more competitive than in years past, and consumer dependence
on oil is also diminishing. These factors are uncontrollable, but nevertheless relevant in the
deliberation surrounding how all oil producers should proceed in the face of this crisis.
In recent years OPEC has worked to maintain the high prices it first achieved during the
energy crisis in the 70’s. It was this prioritization of price over market share that led to the loss of
their status as world’s largest producer in 198131. It is clear that cutting supply and raising prices has
not been effective for the organization and has resulted in significant losses and discontent within the
membership. However, once member countries began abandoning production quotas last year the
price crash was only exacerbated and turned into a veritable oil glut. Neither of these two options
has successfully led to any sort of recovery from the price crash. This is primarily because OPEC is
no longer the influential power it once was in the global market. Not only has the oil market lost
some of its strength as a result of the price crash, but OPEC is no longer even the primary power
within the market. It will be difficult, though not impossible, for the organization to change the tide
of the market forces.
If OPEC were to collaborate with other large oil producers to cut global supply and prop
prices, there would likely be a larger chance that their efforts might be successful. That being said, the
chance of OPEC being either willing or able to work cooperatively with other nations is an extremely
"1980s Oil Glut." PediaView.com.
Ibid.
30 Portney, Paul R.; Parry, Ian W.H.; Gruenspecht, Howard K.; Harrington, Winston (November
2003). "The Economics of Fuel Economy Standards".
31 Hershey Jr., Robert D. (1989-12-30). "Worrying Anew Over Oil Imports".
28
29
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small one. A time of crisis, both within the market and within OPEC itself, is not the time to look to
outside producers, but instead a time to introspect and strengthen the existing organization.
The member countries of OPEC have historically had a hard time achieving internal peace
and cooperation as evidenced by the ongoing war between Iran and Iraq32. On the other hand
however, many OPEC members have far worse relationships with producers that are not a part of
the organization, such as the tenuous relationship between much of the Middle East and the West.
Regardless of the temptation to stray from the cartel and find greener grass elsewhere, it is in the best
interest of all OPEC members to instead focus their energies on the task at hand, that being doing
everything in their power to recover from the current crisis by utilizing the joint resources of the
organization members.
As noted previously, cartels are fundamentally unstable because they are not bound by any
official legal contract (due to the fact that the formation of cartels and the practice of collusion are
illegal)33. Each member of a cartel or each participant in a business agreement to collude is not legally
bound to their arrangement. Herein lies the problem of achieving full cooperation of all OPEC
members. While it might seem logical for the involved parties to adhere to their agreement given that
it benefits them all, there is no guarantee of this. Furthermore, it is nearly always in the immediate
best interest of a member to cheat on the agreement assuming that all other members adhere to it.
The road to a full recovery from this price crash might be a long one, but this recovery will never be
reached if OPEC members feel that it is acceptable or allowable for them to cheat on the rest of the
cartel. Complete cooperation will be necessary, though this will be impossible without some form of
incentive (whether that be a positive or negative incentive) for members to adhere to organization
standards.
With many member countries following the lead of Saudi Arabia and abandoning the
regulated quotas of OPEC, the organization finds itself in a difficult yet crucial conflict. The essential
32
33
Danielsen, Albert L. "OPEC." Encyclopedia Britannica Online.
Parkin, Michael; Melanie Powell; Kent Matthews (2007). Economics.
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question of how to handle the disobedient member countries must be raised in the deliberations over
how OPEC can continue as a united body. The current crisis has undoubtedly been frustrating and
damaging to the members of OPEC, and after seeing that a number of these members are willing to
renege on the rules of the organization it may be difficult to repair relations. First is the issue of
whether the member countries that are currently committing infractions will be willing to revert to
the quotas set by OPEC and thereby fully rejoin the body. However even if these countries concede
to doing the above there is currently no definitive regulation stopping them from reneging on their
agreement again at a later point in time. Now that the option appears open to them, there is far more
danger of further infractions. Before any progress can be made within the market, OPEC must first
address this pressing internal issue.
Once OPEC is once again unified and in a place to affect any real change in the global
market, then it must turn to economic strategy. There is no quick way to fix a problem of the
magnitude of the current crisis. Nevertheless, steps toward recovery must be taken with the long
term in mind. It will be necessary for OPEC members to devise a way in which to relieve the price
crash and oil glut in the short term, yet maintain its competitive status with other large producers in
the long run. This will necessitate a difficult balancing a number of priorities, such as high prices
versus market share, but a healthy balance must be reached if OPEC hopes to remain a competitive
and successful power in the oil market.
Country Policy
Middle East
Though the Arab OPEC member countries might seem to be an obvious bloc within the
organization, there has been substantial internal conflict within the region. Following the recent
Arab-Israeli War in 1973, the OPEC Siege in 1975 (in which OPEC oil ministers were taken hostage
by Palestinian militants), the Iranian Revolution in 1979, and the continuing Iran-Iraq War that began
in 1980, the region occupied by six out of fifteen OPEC members is all but peaceful. Given the state
of war existing between Iran and Iraq in particular, relations among the Arab OPEC members are
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tenuous at best. That being said, much of the Middle East is united in its mutual conflict with the
West. The West, and the United States in particular, provides a common enemy for the Arab OPEC
members, as evidenced in recent years by the targeting of Western oil importers during the Arab Oil
Embargo. The members of OPEC that are more closely aligned with Western powers are likely to
feel some resistance or mistrust from the Arab members as a result of this long standing conflict.
Central/South America
Venezuela and Ecuador, being the only two Central/South American OPEC members, share
some similarities that are not shared with the majority of the other members. One of the most
significant of these is their mutual cooperation with the United States. Both of these two countries
have historically been aligned with the West, which may draw conflict between them and the Middle
Eastern members. Aside from Western alliances, however, Venezuela and Ecuador have little in
common. Venezuela was one of the Founding Members of OPEC and has massive oil reserves,
similar in volume to Saudi Arabia34. Ecuador, on the other hand, is one of the smaller producers in
the body and has a much less involved history with the organization.
Africa
The four African members of OPEC are very diverse, and as a group they share little besides a
continent. Libya and Nigeria are large oil producers that have very little trouble participating fully as
members of the organization. Algeria and Gabon, in contrast, are far smaller producers than the
majority of OPEC members. For these countries it is sometimes difficult to meet the OPEC
production quotas, and their relative lack of petroleum resources has at times translated to a lack of
influence in the organization. The membership fees and production quotas required by OPEC are
sometimes a significant issue for these producers, and the benefits of being a member do not always
outweigh the burden35. At a time when OPEC, and the entire oil market, find itself in crisis, it is
unclear whether these low producing countries will find it beneficial to remain members. On the
34
"Member Countries." OPEC. http://www.opec.org/opec_web/en/about_us/25.htm.
35
"Opec." PediaView.com. Accessed June 25, 2016. https://pediaview.com/openpedia/Opec.
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other hand, it is now more important than ever that OPEC show a united front and work together to
build the necessary internal confidence to effectively recover from this crisis.
Indonesia
Indonesia is the only Southeast Asian member of OPEC, and as a smaller oil producer it shares
many of the concerns of Algeria, Gabon, and Ecuador. Furthermore, the geographical and regional
constraints of Indonesia might not be shared by the other OPEC members, leading to a type of
isolation from the interests of the rest of the body.
Keywords
Cartel - an association of manufacturers or suppliers with the purpose of maintaining prices at a
high level and restricting competition36
Glut – an excessively abundant supply of something e.g. in the market
Collusion – “a non-competitive agreement between rivals that attempts to disrupt the market's
equilibrium. By collaborating with each other, rival firms look to alter the price of a good to their
advantage. The parties may collectively choose to restrict the supply of a good, and/or agree to
increase its price in order to maximize profits. Groups may also collude by sharing private
information, allowing them to benefit from insider knowledge.”37
Production Quota - a goal for the production of a good. It is typically set by a government or an
organization, and can be applied to an individual worker, firm, industry or country. Quotas can be set
high to encourage production, or can be used to limit production to control the supply of goods.
Iran-Iraq War – “prolonged military conflict between Iran and Iraq during the 1980s. Open
warfare began on Sept. 22 1980, when Iraqi armed forces invaded western Iran along the countries'
joint border. The roots of the war lay in a number of territorial and political disputes between Iraq
and Iran. Iran wanted to seize control of the rich oil-producing Iranian border region of Khuzestan,
Parkin, Michael; Melanie Powell; Kent Matthews (2007). Economics.
"Collusion Definition | Investopedia." Investopedia. 2007. Accessed June 22, 2016.
http://www.investopedia.com/terms/c/collusion.asp.
36
37
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a territory inhabited largely by ethnic Arabs over which Iraq sought to extend some form of
suzerainty.”38
Questions for Consideration
Where does your country rank among the top global oil producers?
Where does your country rank among the producers in OPEC?
What relationship does your country have with other producers in OPEC?
Would your country be willing to “cheat” (produce more than agreed upon) on other members
of your cartel?
Would your country be willing to revert to low OPEC quotas if they are currently cheating on
their quotas?
What measures should be taken to ensure that in the future members refrain from cheating on
their quotas?
Will OPEC be capable of continuing as a cohesive unit in spite of the disloyal actions of multiple
members?
Is it possible for countries at odds (for example Iran and Iraq) to cooperate in matters of the
market without letting their national issues get in the way?
Is the price crash merely a temporary circumstance due to natural economic cycles that will end
in a few years without the need of interference in the market?
How can OPEC stay competitive in the market in spite of growing international production and
decreasing dependence on oil?
"Iran-Iraq War." Encyclopedia Britannica Online. Accessed June 22, 2016.
http://www.britannica.com/event/Iran-Iraq-War.
38
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Topic B: The Question of the Swing Producer
Introduction
The issue of the swing producer is more technical in nature, and the way in which OPEC
handles this topic may be dependent on the outcome of the previous issue. In order to fully
understand the issues surrounding the swing producer, it is first useful to have some basic knowledge
of economics and markets. By definition:
"a swing producer is a supplier that has a large amount of spare capacity; so much so that they
can influence market prices by ratcheting their output up or down at will. Typically, swing producers
try to 'balance', or artificially regulate the market to keep prices robust and stable."39
Swing producers can exist in somewhat competitive markets, where the market is not fully
dominated by a monopoly or oligopoly40, though they are most frequently referred to in the context
of less competitive markets. De Beers, for example, has a near monopoly on the diamond market and
acts as the market's swing producer, adjusting its production levels as needed to maintain high prices
and large profits41.
In a massive market such as petroleum, a swing producer will almost inevitably emerge. In
the past, when OPEC was the main power in the oil market, the swing producer of OPEC has also
fulfilled the role of swing producer for the entire market. However, given that OPEC has fallen
behind other global producers and in view of all the new oilfields being developed, it is essential that
it is expediently determined what will become of the position in the future.
Tertzakian, Peter. "Defining the Swing Producer - ARC ENERGY IDEAS." ARC ENERGY
IDEAS. ARC Financial Corp, 2015. Web.
40 Ibid.
41 Ibid.
39
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History
OPEC led oil world oil production throughout the 1970's, but began losing market share
toward the end of the decade as a result of increasing non-OPEC production42. Moving into the 80's
OPEC struggled to maintain high prices in the face of growing worldwide production and slowly
decreasing global dependence on oil. The organization continued cutting its own production levels in
order to raise prices, but this only led to further decreases in their market share from 47% in 1979 to
below 30% in the mid-eighties43. As the OPEC market share has decreased, so has OPEC's influence
in the market. The Soviet Union is now the main power in the oil market, having surpassed OPEC
production levels in 1981. Mexico and Norway are also developing powers in the market given the
recent discovery of large oilfields within their territories.
Since the establishment of OPEC, Saudi Arabia has acted both as unofficial leader and de
facto swing producer of the organization. Possessing 18% of the world's proven petroleum
reserves44, it is one of the most oil-rich countries in the world and was therefore the obvious choice
for both of these leadership positions in OPEC. Throughout the lifespan of OPEC, the oil
production level of Saudi Arabia has acted as a buffer, increasing when other member countries were
unable to produce up to their quotas, and reducing when prices dropped in order to balance the
market. They have been an effective swing producer in the past, capable of adjusting their oil
production by one million barrels per day in either way in the space of a month45. This fluctuation is
42 “OPEC: Crude Oil Prices Versus Market Share.” WTRG Economics OPEC: Crude Oil Prices
Versus Market Share. Accessed July 09, 2016. http://www.wtrg.com/opec.html.
43 Ibid.
44 "Saudi Arabia." Organization of the Petroleum Exporting Countries. Accessed July 09, 2016.
http://www.opec.org/opec_web/en/about_us/169.htm.
45 "Swing Oil Production And The Role Of Credit: A Synthesis Of Best-In-Class Research
Views - ValueWalk." ValueWalk. 2016. Accessed July 09, 2016.
http://www.valuewalk.com/2016/06/swing-oil-production-and-the-role-of-credit-a-synthesis-ofbest-in-class-research-views/.
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OPEC PMUNC 2016
possible because of the country’s large spare capacity that they keep on hand for market
management46.
The role of swing producer finds itself somewhere between a position of power and an
oppressive responsibility. It is true that the swing producer has the power to affect change in the
market and adjust prices to some extent, but this often comes at the expense of their own profit. In
order to maintain stable high prices, it is often necessary for the swing producer to produce below
their capacity, meaning that they must sacrifice potential profit for the stability of the market47.
Furthermore, instead of capturing their full market share based on their oil reserves, the swing
producer gives up a portion of the market that ends up being taken advantage of by smaller
producers. Smaller producers necessarily benefit from the regulatory actions of the swing producer,
and are free to produce at their full capacity due to the prices established by the swing producer48.
The producer that fills this position plays a vital role in the market, and the rest of the players in the
market, both producers and consumers, are very much affected by the actions of the swing producer.
This being said, the spare capacity of a swing producer is not always a sufficient power to counteract
the fluctuations in the market.
There has historically been no official regulation of the swing producer in the petroleum
market by any extra-governmental organization. Large international markets often regulate
themselves, and a swing producer (or multiple swing producers) tends to emerge organically as the
producer with the largest spare capacity49. It was natural that Saudi Arabia became the swing
producer in OPEC given that it had the most proven petroleum in reserve out of the Founding
Members at the time of the organization’s establishment. During the 1970’s OPEC overtook the
Seven Sisters, a group of seven then-dominant oil companies that controlled close to 85% of the
"Swing Oil Production And The Role Of Credit: A Synthesis Of Best-In-Class Research
Views - ValueWalk." ValueWalk.
47 “OPEC: Crude Oil Prices Versus Market Share.” WTRG Economics OPEC: Crude Oil Prices
Versus Market Share.
48 Ibid.
49 Tertzakian, Peter. "Defining the Swing Producer - ARC ENERGY IDEAS." ARC ENERGY
IDEAS. ARC Financial Corp, 2015.
46
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OPEC PMUNC 2016
world’s oil reserves until the energy crisis beginning in 197350. As OPEC surpassed the Seven Sisters,
Saudi Arabia also took on the role as the primary international swing producer due to OPEC’s
newfound domination of the market. Although no official guidelines govern the position of the
swing producer, in an interdependent organization such as OPEC both the swing and the regular
producers are forced to work collaboratively and cooperate in order to secure the success of all
parties involved.
Up until 1985 the Saudis faithfully fulfilled their contract to OPEC, but they have since
abandoned the role. Neither them nor all of OPEC is now the largest oil producer in the world, and
no one yet knows where the burden of swing production will fall next. At the July Conference, it will
be necessary for OPEC members to select new swing producers and instate a new strategy with
regard to swing production. The failure of the most recent swing producer has highlighted the need
for a more effective system in order to balance the unpredictable nature of production and of the
market.
Current Status
As evidenced by the current disastrous state of the oil market, there is no one acting as the
swing producer at the moment. The 1980’s price crash turned into an oil glut once the swing
producer abandoned their position and flooded the market, with various other OPEC member
countries following suit and disregarding their quotas51. The beginning of the oil glut has reinforced
the importance of the swing producer, and also highlighted the failings in the way the position has
been regarded in the past. Throughout the lifespan of the modern oil market, a swing producer has
always emerged in a rather organic and unstructured manner. There has never been any legislation or
regulation surrounding the position, and it has always been merely accepted by all parties that the
swing producer in the oil market would be a single entity rich in petroleum that is determined
50 Mann, Ian (24 January 2010). "Shaky industry that runs the world". The Times (South Africa).
Archived from the original on January 27, 2010.
51 "1980s Oil Glut." PediaView.com.
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OPEC PMUNC 2016
without any official deliberation or negotiation. This was how the position was passed to the
previous swing producer. Given the crisis in which the market now finds itself, and considering the
role the previous swing producer played in worsening the situation, it would be prudent to develop
new policies among the oil production blocs with regard to the position.
The role of the swing producer is at once extremely powerful and extremely burdensome.
Whoever fills this role has the ability to influence prices and control the market, punishing other
producers by flooding the market or aiding them by maintaining low levels of production and
thereby keeping prices high52. On the other hand, the swing producer also has the responsibility of
managing the market. They are forced to give up a portion of their market share in order to keep
prices high53. The swing producer for OPEC functions as the authority figure of the body, taking on
the responsibility of cleaning up after the other member countries and also taking it upon themselves
to come to the aid of the rest of the membership. Although the swing producer undoubtedly fills a
position of power, they are also very much constrained by the responsibility that comes with the role.
The below graph shows the drastic decrease in production that Saudi Arabia, as the swing
producer at the time, was inclined to submit to just before 1986. Far more so than any other OPEC
member, they were forced to minimize production and thereby revenue in order to benefit the rest of
the body.
52 Morecroft, John D. W.; van der Heijden, Kees А. J. М. (1990). "MODELLING ТНЕ OIL
PRODUCERS" (PDF). System Dynamics Society.
53 Tertzakian, Peter. "Defining the Swing Producer - ARC ENERGY IDEAS." ARC ENERGY
IDEAS. ARC Financial Corp, 2015.
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OPEC PMUNC 2016
Weighing both the benefits and the obligations that come with filling the role of the swing
producer, it is doubtful that a single entity will be able to faithfully fulfill the commitments of the
position without causing damage to the market or the other producers. It would be naïve to believe
that a single producer would be able to fill a position of such power without regulation and
simultaneously avoid inflicting harm on OPEC as a whole. The history of OPEC has provided a
strong example of why a single unregulated swing producer in the oil market is generally unable to
act as a permanent fixture. It might therefore be practical, looking forward, to implement some type
of legislation with regard to the position. In fact, a complete overhaul of the way the swing producer
functions may be necessary. These regulations will need to create a swing production role that will be
sustainable and outlast whatever crisis the market or the individual producer might suffer.
23
OPEC PMUNC 2016
The first option is then to make no changes to the current system, and allow a swing
producer to emerge organically and continue to act as it sees fit, being held accountable by no official
regulation. A second solution is not dissimilar to the first, also making use of a large single producer,
but simultaneously implementing regulations surrounding the production levels of the entity, thereby
ensuring that they are at no point able to flood the market or otherwise punish the other producers.
If the second solution were to be successful, the regulating body would require some sort of leverage
over the swing producer, some credible threat that would incentivize the swing producer to act in
their favor. There is a wide spectrum and varying degrees of regulation even with a single unchanging
swing producer, ranging from a complete lack of regulation all the way to hand picking the swing
producer and closely monitoring their levels of production to the point where any deviation from the
standard is punished harshly. Utilizing a single swing producer is not the only option though, and
depending on the market situation exiting the price crash and oil glut, possibly not the most prudent
option.
Theoretically it is possible to have a market with no swing producer, or in other words a
market where all producers act as swing producers. However this is really only possible in more
competitive markets than oil. The oil market does not have a massive number of producers due to
the fact that petroleum is a natural resource that takes a significant amount of time to replenish
organically. As such, the market is rather a less competitive one, and different producers have very
different production capacities. It is unlikely that a solution will emerge in the oil market in which all
producers act collaboratively and simultaneously as the swing producer.
In spite of the unlikelihood of an oil market in which everyone acts simultaneously as the
swing producer, it is nevertheless possible that multiple producers might fill the role of the swing
producer. For example, a system might be implemented in which there are a small number of states
that simultaneously act as the swing producer. These producers could each have smaller spare
capacities, and share the burden of either increasing or decreasing production between themselves so
as to minimize the negative impact on any one country. Furthermore, if one of the swing producers
24
OPEC PMUNC 2016
were to have a production failure, the other producers would easily be able to pick up the slack. One
of the drawbacks of this system, however, is that it would require extensive regulation and
maintenance, and might be difficult to implement among countries that have historically experienced
internal conflict or conflict amongst themselves.
In the same vein of utilizing multiple producers, in a well-organized and cooperative bloc it
might be possible to put into place a system of rotation. A number of countries within the bloc, or
even all of the countries depending on their respective spare capacity, might take turns spending a set
amount of time acting as the swing producer for the body. This potential solution would alleviate
some of the pressure felt by a single swing producer to continuously manage the market while still
giving them the power to temporarily do so. This system would also require significant coordination
and collaboration in order to be successful, though perhaps not as much internal cooperation as in
the arrangement suggested above.
There are many possibilities when it comes to the role of the swing producer, and each of
the systems suggested above represent a single point on a broad spectrum of opportunity. If the
primary producers of the oil market hope to implement a lasting solution to the problem of the
swing producer, then they must tailor their resolution to the circumstance in which the market finds
itself. Much of this will depend on the internal situation of OPEC exiting the discussion of the first
topic of this committee.
The way in which the position of the swing producer is decided will largely depend on the
condition of the producers in the market. It will be necessary, when addressing this topic as a
committee, to take into account the changes that have occurred in the market since the beginning of
the July 1986 Conference. These changes must play a role in informing the deliberation of the many
countries represented in this committee with regard to the future of the swing producer position.
Weighing both the power and the burden carried by the swing producer, it is hopeful that a
solution might be reached in which those who contribute to playing the role of the swing producer
25
OPEC PMUNC 2016
are neither overly controlling of the market nor needlessly resentful of the responsibility they bear to
the rest of the producers in the market.
Country Policy
Middle East
There exists ongoing and long-standing conflict among the OPEC members in the Middle
East. Aside from the current war between Iran and Iraq, the region has historically been tumultuous
and politically chaotic. There are many ideological conflicts in the area due to its rich religious
history. Furthermore, the political arena has witnessed many changes and conflicts in the past
century, and countries of the Middle East have often been used as pawns or proxies in greater
international conflicts. The Middle Eastern OPEC members might be capable of forming an internal
bloc were it not for the ongoing Iran-Iraq War that has played a role in further dividing the region.
Given the magnitude of the current crisis, these members may still find it in their best interests to
collaborate in spite of this conflict. The Middle East holds much of the oil reserves of OPEC, and
indeed the entire world, and in this way the region is extremely powerful and must be protective of
its power. If a challenger to Middle Eastern oil were to emerge within OPEC and assume the power
of the swing producer, the regional producers might lose their reigning influence in the oil market.
Central/South America
As a small producer, Ecuador will likely play a larger role in deliberation surrounding swing
production than in contributing to swing production itself. However, OPEC would be wise to
continue to court its smaller producers and entice them to remain members by heavily involving
them in decision making processes. Venezuela, a very large producer, will most probably be a
contender for contributing to swing production. The possibility of a Western-aligned producer
holding that much power in the market, however, might seem extremely unfavorable to a number of
the Arab OPEC members.
26
OPEC PMUNC 2016
Africa/Indonesia
As the OPEC members with fewer East-West political rivalries, the African members and
Indonesia are likely to be more neutral on the subject of who might participate in swing production
than the above regional members. That being said, any OPEC member would be remiss to see excess
power fall into the hands of another producer. It is doubtful that any one producer would be happy
to see the full power of the swing producer go to another member, regardless of whether their
political interests align. The process of coming to a reasonable solution to the problem of the swing
producer will involve a serious political balancing act. It will be necessary to weigh both the
reluctance of OPEC members to cede additional power to another and the ability of each member to
feasibly contribute to the role of swing producer. Regardless of the interests of regional blocs, in the
end the issue will come down to whether the organization can strike an effective balance of power.
Keywords
Competitive Market - A competitive market is one in which a large numbers of producers
compete with each other to satisfy the wants and needs of a large number of consumers. In a
competitive market no single producer, or group of producers, and no single consumer, or group of
consumers, can dictate how the market operates.54
Market Share - the percentage of an industry or market's total sales that is earned by a particular
company over a specified time period.55
Monopoly - A situation in which a single company owns all or nearly all of the market for a given
type of product or service. This would happen in the case that there is a barrier to entry into the
industry that allows the single company to operate without competition. The producer will often
produce a volume that is less than the amount that would maximize social welfare.56
"Economics Online." Competitive Markets. Accessed July 09, 2016.
"Market Share Definition | Investopedia." Investopedia. 2004. Accessed July 09, 2016.
56 "What Is a Monopoly? Definition and Meaning." InvestorWords.com. Accessed July 09, 2016.
54
55
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Oligopoly - Oligopoly is a market structure in which a small number of firms have the large
majority of market share. An oligopoly is similar to a monopoly, except that rather than one firm,
two or more firms dominate the market.57
Spare Capacity - a situation in which actual production is less than what is achievable or optimal
for a firm. This often means that the demand in the market for the product is below what the firm
could potentially supply to the market.58
Swing Producer - a supplier that has a large amount of spare capacity; so much so that they can
influence market prices by ratcheting their output up or down at will.59
Questions for Consideration
How much does your country produce?
How much spare capacity does your country have?
What other countries are in your bloc?
How much do the other countries in your bloc produce?
Who is the largest producer in your bloc?
What is your country's relationship like with the major producers in your bloc?
What is your country's relationship like with major producers outside of your bloc?
How many/what other blocs exist in the market?
What is your country's relationship like with members of other blocs?
What is your bloc's relationship like with other blocs?
What type of swing production structure will benefit your country the most as a producer?
How can your country work with other countries to negotiate a situation both within and
without your bloc in which the most beneficial structure for you is implemented?
"Oligopoly Definition | Investopedia." Investopedia. 2003. Accessed July 09, 2016.
"Excess Capacity Definition | Investopedia." Investopedia. 2006. Accessed July 09, 2016.
59 Tertzakian, Peter. "Defining the Swing Producer - ARC ENERGY IDEAS." ARC ENERGY
IDEAS. ARC Financial Corp, 2015.
57
58
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