2
$\begingroup$

If country discovers large oil reserves in its territory are there any benefits in joining OPEC?

The time period is late 70's just before Iranian revolution, the country is fictitious one in Sub-saharan Africa.

I'm trying understand what could newly independent country get from OPEC. Or its better to be outsider and maybe make more money by selling to countries nobody else wants to sell (Israel, South Africa) or grab share from other countries.

$\endgroup$
  • $\begingroup$ What is OPEC? $\endgroup$ – dot_Sp0T May 1 '17 at 19:54
  • 5
    $\begingroup$ @dot_Sp0T Organization of the Petroleum Exporting Countries, presumably. zitovav: it would have been nice to include that in your question, for those less familiar with worldly affairs. $\endgroup$ – Frostfyre May 1 '17 at 19:56
  • $\begingroup$ Phrased another way: If there were no benefits to joining OPEC, how did it get its members in the first place? I would hope the answer to your question is "yes," as it should be in any example of collective barganing. That being said, the benefits can be tremendously nuanced. $\endgroup$ – Cort Ammon - Reinstate Monica May 1 '17 at 19:56
  • $\begingroup$ There were two OPEC members in sub-saharan Africa in the 70's. $\endgroup$ – user25818 May 1 '17 at 21:20
  • 1
    $\begingroup$ What makes you think no one wants to sell to SA or Israel...money is money, right? $\endgroup$ – FreeElk May 1 '17 at 22:00
4
$\begingroup$

For historical (and, because of, also technological) reasons most of the oil-rich countries were everything-else-poor countries, and its oil was being extracted, exported and controlled by western companies. In the 70's, they realised that the whole global economy depended on oil, and they were basically giving it out for peanuts.

They started to think about nationalizing the production and raising prices by controlling oil production, but this was a tad more complicated to do than just saying. For one side, western companies directives were friends with western governments' members, and a move against a western company, be it British Petroleum or United Fruit Co could easily end with that western company headquarters' country engaging in war with your country with a petty aliby of convenience.

For the other side, a movement like that by a single country would be severely punished by said western countries, so only a coordinated move by several countries comprising a large percentage of the oil production worldwide - and with a serious intent of not backing under threats - could achieve its objectives. Thus, OPEC was born.

If your country finds its oil resources after the oil crisis of the 70's, it can bargain a decent agreement with western oil companies without resorting to join the OPEC. Just like we have some workers' rights thanks to the deaths of many workers and unionists of yore - and specially, thanks to fear of a communist revolution after 1918 - we don't need to join a union just to have some working rights, a country just discovering oil resources now could make a fair deal without resorting to a near-war event like the oil crisis was. If it was before, though, you have all chances of being scammed by any of the oil companies out there.

$\endgroup$
6
$\begingroup$

If you have a product you want to sell, the price you get is subject to the law of supply and demand. If supply is huge compared to demand, the price you get is lower than if supply is small compared to demand. If supply is huge someone will be willing to sell it at a lower price.

OPEC is a cartel: from Wikipedia

a group of formally independent producers whose goal is to increase their collective profits by means of price fixing, limiting supply, or other restrictive practices.

Rather than pumping all the oil they can and selling it for whatever they can in a market flooded by supply, they collude together to limit the amount of oil entering the market. By keeping supply low in the context of relatively fixed demand they can command higher prices and make more money.

The US is not a member of OPEC, I presume because most or all of the oil it pumps goes for domestic use. Small producers of oil are not members because they cannot produce enough to meaningfully increase supply and so move the price down.

The motivation to join OPEC would be how the new producer saw it to advance its economic interest: collude with other producers and keep prices high, or pump as much as it could, flood the market and get while the getting is good. I could imagine a government which was not interested in the long term but only in enriching its members might choose the latter strategy. A government with long view might perceive its interests aligned with other big oil producers and so join with them in protecting prices.

$\endgroup$
0
$\begingroup$

Or to put it another way, is it healthy to go against the local mafia, especially by competing against their "legitimate enterprises"?

When they can threaten to boycott all buyers who won't trade exclusively within their cartel, who do you think your buyers will back, you with maybe 0.2% of global production, or them with 99.8%? Just consider what happened during the 1973 oil crisis, and that was without their interests being directly threatened.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.