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The following points are covered in this doc:

History of formation of the OPEC Cartel and its member countries

The central objectives behind formation of the cartel

The functioning of OPEC

OPEC Conference and its functioning

The currency used by the petroleum industry and reasons behind using dollar and a

discussion about whether it can be changed to any other currency

The OPEC Fund For International Development

History and its members:

OPEC was founded in Baghdad, triggered by a 1960 law instituted by

American President Dwight Eisenhower that forced quotas on Venezuelan and

Persian Gulf oil imports in favor of the Canadian and Mexican oil industries.

Eisenhower cited reasons of national security and land access to energy supplies

at times of war. When this led to falling prices for oil in these regions, Venezuela's

president Romulo Betancourt reacted by seeking an alliance with oil producing

Arab nations as a preemptive strategy to maintain the continued autonomy and

profitability of Venezuela's oil resources

Thus the Organization of the Petroleum Exporting Countries (OPEC) was

formed and now it is a cartel of twelve developing countries. OPEC has

maintained its headquarters in Vienna since 1965 and hosts regular meetings

among the oil ministers of its Member Countries

Members: The five Founding Members were later joined by nine other Members: Qatar (1961);Indonesia (1962) suspended its membership from January 2009; Libya (1962); United Arab

Emirates (1967); Algeria (1969); Nigeria (1971); Ecuador (1973) suspended its membership from

December 1992-October 2007; Angola (2007) and Gabon (19751994).

Country RegionJoined

OPEC[25]

Population

(July 2008)[26]

Area (km)

[27]

Algeria Africa 1969 33,779,668 2,381,740

http://en.wikipedia.org/wiki/OPEC#cite_note-Who_are_OPEC_Member-24http://en.wikipedia.org/wiki/OPEC#cite_note-Who_are_OPEC_Member-24http://en.wikipedia.org/wiki/OPEC#cite_note-CIA_Population-25http://en.wikipedia.org/wiki/OPEC#cite_note-CIA_Population-25http://en.wikipedia.org/wiki/OPEC#cite_note-CIA_Population-25http://en.wikipedia.org/wiki/OPEC#cite_note-CIA_Area-26http://en.wikipedia.org/wiki/OPEC#cite_note-CIA_Area-26http://en.wikipedia.org/wiki/OPEC#cite_note-CIA_Area-26http://en.wikipedia.org/wiki/Algeriahttp://en.wikipedia.org/wiki/Algeriahttp://en.wikipedia.org/wiki/Algeriahttp://en.wikipedia.org/wiki/OPEC#cite_note-CIA_Area-26http://en.wikipedia.org/wiki/OPEC#cite_note-CIA_Population-25http://en.wikipedia.org/wiki/OPEC#cite_note-Who_are_OPEC_Member-24

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Country RegionJoined

OPEC[25]

Population

(July 2008)[26]

Area (km)

[27]

Angola Africa 2007 12,531,357 1,246,700

EcuadorSouth

America2007

[A 1] 13,927,650 283,560

Iran Middle East 1960[A 2] 75,875,224 1,648,000

Iraq Middle East 1960[A 2] 28,221,180 437,072

Kuwait Middle East 1960[A 2] 2,596,799 17,820

Libya Africa 1962 6,173,579 1,759,540

Nigeria Africa 1971 158,259,000 923,768

Qatar Middle East 1961 824,789 11,437

Saudi Arabia Middle East 1960[A 2]

28,146,656 2,149,690

United Arab Emirates Middle East 1967 4,621,399 83,600

VenezuelaSouth

America1960

[A 2] 26,414,816 912,050

Total 369,368,429 11,854,977 km

Headquarters: OPEC had its headquarters in Geneva, Switzerland, in the first five years of its

existence. This was moved to Vienna, Austria, on September 1, 1965.

http://en.wikipedia.org/wiki/OPEC#cite_note-Who_are_OPEC_Member-24http://en.wikipedia.org/wiki/OPEC#cite_note-Who_are_OPEC_Member-24http://en.wikipedia.org/wiki/OPEC#cite_note-CIA_Population-25http://en.wikipedia.org/wiki/OPEC#cite_note-CIA_Population-25http://en.wikipedia.org/wiki/OPEC#cite_note-CIA_Population-25http://en.wikipedia.org/wiki/OPEC#cite_note-CIA_Area-26http://en.wikipedia.org/wiki/OPEC#cite_note-CIA_Area-26http://en.wikipedia.org/wiki/OPEC#cite_note-CIA_Area-26http://en.wikipedia.org/wiki/Angolahttp://en.wikipedia.org/wiki/Angolahttp://en.wikipedia.org/wiki/Ecuadorhttp://en.wikipedia.org/wiki/Ecuadorhttp://en.wikipedia.org/wiki/OPEC#cite_note-Ecuador-27http://en.wikipedia.org/wiki/OPEC#cite_note-Ecuador-27http://en.wikipedia.org/wiki/Iranhttp://en.wikipedia.org/wiki/Iranhttp://en.wikipedia.org/wiki/OPEC#cite_note-Founder-28http://en.wikipedia.org/wiki/OPEC#cite_note-Founder-28http://en.wikipedia.org/wiki/Iraqhttp://en.wikipedia.org/wiki/Iraqhttp://en.wikipedia.org/wiki/OPEC#cite_note-Founder-28http://en.wikipedia.org/wiki/OPEC#cite_note-Founder-28http://en.wikipedia.org/wiki/Kuwaithttp://en.wikipedia.org/wiki/Kuwaithttp://en.wikipedia.org/wiki/OPEC#cite_note-Founder-28http://en.wikipedia.org/wiki/OPEC#cite_note-Founder-28http://en.wikipedia.org/wiki/Libyahttp://en.wikipedia.org/wiki/Libyahttp://en.wikipedia.org/wiki/Nigeriahttp://en.wikipedia.org/wiki/Nigeriahttp://en.wikipedia.org/wiki/Qatarhttp://en.wikipedia.org/wiki/Qatarhttp://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/OPEC#cite_note-Founder-28http://en.wikipedia.org/wiki/OPEC#cite_note-Founder-28http://en.wikipedia.org/wiki/United_Arab_Emirateshttp://en.wikipedia.org/wiki/United_Arab_Emirateshttp://en.wikipedia.org/wiki/Venezuelahttp://en.wikipedia.org/wiki/Venezuelahttp://en.wikipedia.org/wiki/OPEC#cite_note-Founder-28http://en.wikipedia.org/wiki/OPEC#cite_note-Founder-28http://en.wikipedia.org/wiki/OPEC#cite_note-Founder-28http://en.wikipedia.org/wiki/Venezuelahttp://en.wikipedia.org/wiki/United_Arab_Emirateshttp://en.wikipedia.org/wiki/OPEC#cite_note-Founder-28http://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/Qatarhttp://en.wikipedia.org/wiki/Nigeriahttp://en.wikipedia.org/wiki/Libyahttp://en.wikipedia.org/wiki/OPEC#cite_note-Founder-28http://en.wikipedia.org/wiki/Kuwaithttp://en.wikipedia.org/wiki/OPEC#cite_note-Founder-28http://en.wikipedia.org/wiki/Iraqhttp://en.wikipedia.org/wiki/OPEC#cite_note-Founder-28http://en.wikipedia.org/wiki/Iranhttp://en.wikipedia.org/wiki/OPEC#cite_note-Ecuador-27http://en.wikipedia.org/wiki/Ecuadorhttp://en.wikipedia.org/wiki/Angolahttp://en.wikipedia.org/wiki/OPEC#cite_note-CIA_Area-26http://en.wikipedia.org/wiki/OPEC#cite_note-CIA_Population-25http://en.wikipedia.org/wiki/OPEC#cite_note-Who_are_OPEC_Member-24

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OBJECTIVE:

OPEC's objective is to co-ordinate 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.

policies of the member countries and

to determine the best means for safeguarding their individual and

collective interests.

international oil markets, with a view to eliminating harmful and

unnecessary fluctuation; and

consuming nations and a fair return on capital to those investing in the

petroleum industry.

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Functioning of opec:

As stated in the objectives the OPEC countries work together to ensure

supply of petroleum to the consuming nations and strives to maintain stable

world oil prices by regulating supply according to the market demand.

Representatives of the OPEC member countries meet at the OPEC

Conference to co-ordinate and unify their petroleum policies in order to promote

stability and harmony in the oil market.

The Conference is the supreme authority

of the organisation. It consists of delegations headed by the minister of oil, mines

& energy of the member countries.

The conference generally meets twice a year

in March and September and in extraordinary sessions whenever required. It is

responsible for formulation and implementation of policies for the member

countries.

The OPEC Fund For International Development

TheOPEC Fund for International Development (OFID) is a multilateral development financeinstitution established in 1976 by the Member Countries of the Organization of the Petroleum

Exporting Countries (OPEC). Its objective is to reinforce financial cooperation between OPEC

Member Countries and other developing countries, by providing financial support to the latter for their

socio-economic development. The resources of OFID are also used to provide grants for food aid,

technical assistance, research and similar intellectual activities. One of the institution's central aims is

to advance South-South solidarity. [ OFID has been headquartered in Vienna, Austria since 1976. The

current Director-General of OFID is Mr. Suleiman Jasir Al-Herbish ofSaudi Arabia.

Means

The methods of OFID's funding include public sector loans for development projects and programs,balance of payments support and debt relief underthe Heavily Indebted Poor Countries(HIPC)

Initiative; trade financing; support to private enterprises; grants for technical assistance, food aid,

research and humanitarian relief work; and contributions to the resources of other development

organizations whose activities benefit developing countries

tResources

OFID's resources consist of voluntary contributions made by OPEC Member Countries and the

accumulated reserves derived from the institution's various operations. At the close of 2008,

contributions pledged by member countries totaled $3,435.0 million, out of which $2,463.15 million

was direct contributions to OFID.[

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Beneficiaries

All developing countries, with the exception of OPEC member countries themselves, are in principle

eligible for OFID assistance. The least developed countries, however, are accorded higher priority

and have consequently attracted the lion's share of OFID's resources. Today, 121 countries from the

developing world - Africa, Asia, Latin America, the Caribbean, the Middle East and Europe - havebenefited from OFID's assistance.

]

Operation

Areas of Operation

Agriculture & Agro-Industry

Education

Energy

Financial Sector

Health

Industry

Infrastructure

Manufacturing

Mining

Poverty Reduction

Private Sector

Public Sector

Rural Develop

Sanitation

Telecommunic

Textiles

Tourism

Trade

Transportation

Water Supply

The currency used by the petroleum industry and reasons behind using dollar and adiscussion about whether it can be changed to any other currency

OPEC sets their prices, as well as receives payments, in United States dollars. Between

1971 and 1973, when the United States dollar faced trouble and devalued twice, the

OPEC countries devised a formula to revise the nominal price of oil automatically. Since

then, the issue of dollar devaluation leading to the loss of purchasing power of OPEC has

been widely discussed (Allen, 1979). We have been witnessing a similar pattern of a

declining dollar since February 2002, when the dollar depreciated by 19.3 percent against

the Japanese yen, 28.8 percent against the euro, 18.6 percent against the UK pound, and

25.4 percent against the Swiss franc. Any movement in the value of the dollar against

other currencies will affect the real value of OPEC's export earnings. Because the United

States dollar serves as the denominator for pricing crude oil, one can argue that due to

differences in the individual country's trade direction and reserve composition, losses

resulting from the dollar movements are not equal (Dailami, 1982). For those members

who purchase a large share of its import needs from outside of the United States as well

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as for those that invest a large share of their reserves in United States dollar and dollar

denominated assets, this loss is more evident.

The choice of currency most favorable for oil pricing would be in realization of the

following conditions. First, the main objective of currency selection should be to

minimize the currency exposure, which translates to minimizing the gap between oil

revenues and import expenses. Selection of a currency should be such that maintains its

value over time vis--vis other major currencies. This implies a comparison of the price

of a barrel of oil in United States dollars with that of the euro. For this purpose, we used a

GDP weighted synthetic euro [2] exchange rate from DataStream until the emergence of

the euro on January 1, 1999. One can argue that the oil prices should be based on the

currency of the country that has the highest import from OPEC

ConclusionThe emergence and rise of the euro as a prominent trading currency has offered an

opportunity for OPEC to reconsider pricing of its crude oil in the new currency. The main

consideration in making such a policy change by the oil exporters is the ability to

maintain their purchasing power of a barrel of their oil exports in an era of persistent

dollar decline and to avoid uncertainty regarding their oil revenues in real terms.

While the majority of oil exporting countries trade with non-dollar areas, particularly

with European countries, switching to euro - based oil prices seems to be a realistic

possibility. However, for countries such as Venezuela, which trades mainly with the

United States, this strategy would be counterproductive. Therefore, such a shift in

strategy would not be Pareto optimal and would result in disadvantage for the countries

having United States as a major trading partner.

Moreover, such a policy would seem impossible to implement given the political

dynamics and the governance of OPEC. Within OPEC, any decision taken by the

ministerial conference has to be agreed upon unanimously. The fact that there will be losers in such a

policy shift would imply that these countries would categorically not

support such a decision and therefore status quo will remain

Quota system

OPEC sets production limits for its 11 members other than Iraq to try to ensure output

doesnt exceed global demand, though many flout their ceilings when crude prices are

high. Iraq hasnt taken part in an OPEC quota agreement since 1998.

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Proposed Formula for Allocations

In 1986, OPEC conducted an in-depth analysis of their system of allocatingquotas with the view to set up a durable formula, equitable to all members.They defined eight criteria that fall into two categories: oil related andsocio-economic. The factors considered were:

Reserves Production capacity Historical production share Domestic oil consumption Production costs Population Dependence on oil exports

External debt

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Quotas are still the rule in OPEC and haven't changed since January 2009.It is difficult to find out how these ceilings are ascertained.

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It is well known now that OPEC increased their so-called proven reservesby 300 Gb from 1986 to 1989 (which Sadad al-Husseini called speculativeresources in 2007) because of a fight for quotas in a low price environment.Despite that, quotas are now agreed upon in OPEC meetings without anyreference to reserves; the recent October increase of Iraq's reservesfollowed by Iran's reserves increase indicates that OPEC members are stillkeen to stay at the same rank. It is not surprising to find that the technicalremaining reserves are quite different. In its last estimate of provenreserves (on 6 December 2010), the OGJ did not accept Iran's and Iraq'supdated values, waiting for further discussions!

http://www.theoildrum.com/node/7363

http://www.opec.org/opec_web/static_files_project/media/downloads/data_graphs/ProductionLev

els.pdf

http://www.theoildrum.com/node/7363http://www.theoildrum.com/node/7363http://www.opec.org/opec_web/static_files_project/media/downloads/data_graphs/ProductionLevels.pdfhttp://www.opec.org/opec_web/static_files_project/media/downloads/data_graphs/ProductionLevels.pdfhttp://www.opec.org/opec_web/static_files_project/media/downloads/data_graphs/ProductionLevels.pdfhttp://www.opec.org/opec_web/static_files_project/media/downloads/data_graphs/ProductionLevels.pdfhttp://www.opec.org/opec_web/static_files_project/media/downloads/data_graphs/ProductionLevels.pdfhttp://www.theoildrum.com/node/7363