OPEC’s Role in Future Development:

Increased Investments for Domestic Economic Growth and Increased Aid for Poor Developing Countries

Tyson Vozza

June 6, 2003

EDGE

The world today is heavily reliant on oil, a finite resource that most scientists agree will only last another 50-80 years. Therefore, it is important for the world to seek alternative means of energy. In the meantime, the demand for oil will increase as the world continues to rely on this energy source but the supply will decrease, causing the price of oil to increase dramatically. Countries rich with oil reserves, namely OPEC member countries, will earn tremendous amounts of money and continue to gain importance on the world level as a result of the shortage of oil. These countries will be in a unique position with increased revenues, enabling then to invest in the future. Since the oil supply will eventually be depleted, they must allocate the bulk of the money to improve sectors of their own states such as transportation, education, healthcare, and agriculture. In addition, they need to modify government policies regarding trade and industry to insure the competitiveness of their economies. It is also important for these oil producing countries to allocate funds for investment in neighboring countries, thus promoting regional development. Moreover, OPEC countries should continue to supply aid to developing nations, investing in poorer countries through the OPEC Fund for International Development. I believe that this aid will remain a vital means of improving the public image of OPEC as well as a means of taking an active role in the future success of other developing countries. To maximize this effort, the OPEC Fund should work in cooperation with other aid organizations such as the World Bank, Japan Bank for International Cooperation (JBIC), and the United Nations Foundations.

Global oil production will probably reach its peak sometime during this decade. After the peak, the world’s production of crude oil will decline as the world eventually runs out of oil. There have been many false prophets predicting the end of the oil supply. Since 1900 several people have simply divided the known resources by the annual rate of production, concluding that the petroleum industry would die in ten years. Instead, the oil industry grew as more reserves were discovered. But in 1956, the geologist M. Kin Hubbert predicted that U.S. oil production would peak in the early 1970s. The actual peak year turned out to be 1970.[1] Because of Hubbert’s success at predicting the peak in U.S. oil production, several analysts have begun to apply Hubbert’s method to world oil production. One educated guess of ultimate world recovery, 1.8 trillion barrels, came from a 1997 country-by-country evaluation by Colin J. Campell, an independent oil-industry consultant. Analysts found the Gaussian curve that best fit the world production history and has 1.8 trillion barrels under the total curve. That curve reaches its peak production in the year 2003 and production will start to fall after this year. A few oil experts believe that Campell’s 1.8 trillion is too small. In one of his last paper, Hubbert used 2 trillion as his probable guess. Although a few exceedingly large estimates have been suggested, a reasonably generous upper guess is 2.1 trillion barrels. Fitting the world production history to a 2.1 trillion barrel Gaussian curve gives peak production at the end of the year 2009.[2] Even though there remains some uncertainty over the precise year of peak world oil production, most analysts would agree that the peak will occur sometime in the next decade, enabling the oil supply to last another 50-80 years.

The Organization of Petroleum Exporting Countries (OPEC) controls a majority of the world’s oil. It was formed at a meeting held in 1960 by five founder members. Today there are currently 11 OPEC member nations including Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela. According to the organization:

OPEC is an international group of oil-exporting developing nations that coordinates and unifies the petroleum policies of its member countries. It seeks to ensure the stabilization of oil prices in international oil markets, attempting to eliminate harmful and unnecessary fluctuations while securing a steady income for the oil-producing nations. It also supplies consuming nations with an efficient and regular supply of petroleum as well as a fair return on capital for those investing in the oil industry.[3]

These countries control the bulk of the world’s oil. At the end of 2001, total world proven crude oil reserves were estimated at 1,074,850 million barrels and 845,421 million barrels, or 78.7%, was in OPEC member countries.[4]

OPEC countries will continue to earn tremendous amounts of money from crude oil exports and petroleum refinement. In 2000, OPEC countries produced 19.8 million barrels of oil per day. Assuming a price of $28 per barrel, OPEC grossed over $202 billion from the sale of crude oil, which does not include money from refined petroleum products.[5] As the world oil market peaks and oil production begins to fall in line with Hubbert’s Peak, the demand will increase as the supply decreases, causing higher prices. According to the reference case of OPEC’s World Energy Model, total world oil demand in 2000 was 76 million barrels per day (b/d). As world economic growth continues, crude oil demand is estimated to rise to 90.6 million b/d in 2010 and 103.2 million b/d by 2020.[6] Assuming prices of $40 per barrel (a rate similar to those in the early 1980’s) for the five years following the oil market peak, OPEC countries will gross a total of nearly $1.5 trillion dollars. That number will continue to increase as oil prices continue to rise. Arab countries such as Saudi Arabia, Iran, Iraq, and Kuwait that export the bulk of the oil also have the largest proved reserves. For instance, Saudi Arabia, which has the greatest supply of oil, has reserves of approximately 262,697 million barrels. Without accounting for uncertainties such as future interest rates or increased prices, the value is near $10.5 trillion dollars.[7] As the price of oil increases because of the declining supply, OPEC countries will have growing financial resources, enabling them to make investments for the future.

OPEC member countries should use the majority of the money obtained from oil to invest in their own infrastructure and to strengthen their own economies. Since the supply of oil is finite, these countries must invest in other areas such as transportation, education, energy, telecommunications, agriculture, healthcare, banking, and capital-intensive industry to insure long term economic success. Even with their abundant supply of oil, the OPEC member countries cumulatively only have a gross domestic product (GDP) of less that 10% of the United States.[8] Investments in their own infrastructure will enable these developing oil abundant countries to strengthen their economies.

The economic performance of many of the OPEC countries during the past 50 years has been disappointing despite the advantage of great oil wealth. This is apparent by comparing gross domestic product estimates of countries in different regions. For instance, Saudi Arabia had a higher gross domestic product than Taiwan in the 1950s but today it is only about 50 percent of Taiwan’s. Middle Eastern countries have failed to develop links with the global economy through foreign investment and trade in services and goods other than oil. In addition, most of the governments in the Middle East have not reduced the interventionist role of the state in the economy. Both have led to poor economic performances. The main problem of the OPEC countries is the lack of economic liberation and poor education. Illiteracy is close to 40 percent in the region and there is low average enrollment in secondary schools.[9] Trade barriers and high tariffs are also part of the problem as protectionism has not proved to be an effective policy. It is believed that greater openness to trade and domestic economic reforms can reinforce each other to generate faster growth, lower unemployment, and high standards of living.

The Middle East is in the midst of a profound social and political transformation. Bernard Hoekman and Patrick Messerlin, who created a report about harnessing trade for development and growth in the Middle East write:

By 2010, practically every major country in the region will have undergone some form of political succession. On the economic front, many countries have already undergone significant changes. Economies in the region are more open to the world economy than they were two decades ago. Governments have been pursuing privatization programs and encouraging private sector development. Inflation has fallen and fiscal balances have improved.[10]

It is believed that increased trade will lead to large improvements in the economies. In November 2001, the World Trade Organization (WTO) met to assess trade and investment strategies for the Middle East. It concluded that tariff reduction is important for enhanced trade and economic growth. The average tariffs in the region are substantially higher than elsewhere in the world, thus reducing the competitiveness of these countries. In addition, attracting investment requires service sector reforms in both the public and private sectors. Increasing the quality and lowering the cost of service inputs can help manufacturing and agriculture confront global competition by enhancing competitiveness and creating alternative employment opportunities for workers. International agreements should be implemented to liberalize trade in goods and to pursue a service sector reform. Such agreements should include deals with major trading nations such as the European Union (EU) and the United States, as well as multilateral commitments made in the WTO.[11]

OPEC countries have an opportunity to learn from past mistakes in economic policy in an attempt to increase future economic growth. The governments of Iran, Nigeria, and Algeria substantially increased public spending as state revenues increased dramatically with the rise in the price of oil during the 1970s. These countries chose to borrow heavily to finance their development plan. High public expenditures and small agricultural sectors eventually led their economies to be characterized by inflation, continuous fiscal deficits, and balance-of-payments problems. Their currencies became overvalued as non-oil exports have failed to grow, causing gross national product to shrink and thus affect domestic industries. It is important to note that one oil abundant state, Indonesia, fared considerably better than the others with respect to their economy. The government had better control over its expenditures in the boom years, accruing less foreign debt. Moreover, it pursued a development strategy that was balanced in the areas of physical infra-structure, education, agricultural development, and capital-intensive industry. It also directed a higher proportion of spending toward rural areas.[12]

These oil producing countries should also allocate a proportion of the increased oil revenues to invest in neighboring countries. In this manner, OPEC countries can take an active role in enhancing regional development in the countries that are near them geographically. Saudi Arabia, Iran, Iraq, and Kuwait are in a location to supply regional investments in Arab nations, while Algeria, Libya, and Nigeria are able to play a role in African development. In addition, Indonesia is positioned to provide money for regional development in Southeast Asia, and Venezuela is located to work with Brazil and other Latin American countries. Talks between leaders to enhance regional development have already begun to take place. In January 2003, Venezuelan President Hugo Chavez met with Brazil’s new president Luiz da Silva to discuss the idea of increased cooperation among Latin American state-owned oil industries and to set up a company called Petro-America. Chavez stated, “It would become a sort of Latin American OPEC.”[13] The plan starts with Venezuela's PDVSA and Brazil's Petrobras, and could come to include Ecopetrol from Colombia, PetroEcuador from Ecuador, and PetroTrinidad from Trinidad and Tobago. Increased regional cooperation and investment will help to increase the economic stability of the OPEC countries and surrounding nations.

In general, OPEC countries are slowly improving their economies by transforming oil revenues into investments in other areas to promote long-term economic growth. Nevertheless, it remains important for these counties to continue to improve government policies and to increase domestic investments. I propose the following ideas to help ensure the economic success of these countries:

1. Increase government investment in sectors such as public transportation, telecommunications, healthcare, agriculture, and capital-intensive industry

2. Provide better public education to improve literacy rates thus leading to improved worker productivity

3. Decrease tariffs in an attempt to increase trade and promote competitiveness

4. Reduce interventionist role of the government thus strengthening the private sector which contributes to long-term sustained economic growth

5. Aim to accumulate less foreign debt since high interest payments can stifle economic growth

6. Offer funds for investments in neighboring countries to strengthen regional development among surrounding nations (e.g. Arab countries)

By implementing these principles, OPEC countries will be able to translate their oil revenues into increased economic success within their own countries. But at the same time, it remains important for these countries to continue to supply aid to poorer nations thus improving their public image and helping to foster world development.

OPEC aid efforts began amongst Arab countries and are generally referred to as “Arab Solidarity.” Before the accumulation of oil wealth, more fortunate Arab countries extended assistance in the form of educational and health services to their less fortunate neighbors. Several countries formed funds specifically to aid other Arab countries. The year 1974 marked an important development as the Kuwait Fund allowed not only Arab countries but all developing countries to be eligible to receive aid from their fund. In the same year, the Arab League created an assistance facility for African countries. Non-Arab OPEC countries soon started to supply financial aid, with both Iran and Venezuela establishing public investment funds which provided development aid on a large scale to developing countries.[14] Member countries of the Organization of Petroleum Exporting Countries, including traditional recipients such as Indonesia and Ecuador, joined forces in 1976 in the creation of the OPEC Fund for International Development.

The OPEC Fund for International Development (the Fund) is an inter-governmental development finance institution. The aims are

to promote cooperation between OPEC member countries and other developing countries as an expression of South-South solidarity as well as to help particularly the poorer, low-income countries in pursuit of their social and economic advancement.[15]

The Fund’s resources consist of voluntary contributions made by OPEC member countries, loan repayments, and the accumulated income derived from the Fund’s investment and loans. At the close of 2001, contributions pledged to the Fund by its member countries totaled $3.4 billion with some $2.9 billion paid-in. All developing countries, with the exception of OPEC member countries, are in principle eligible for Fund assistance. The least developed countries are accorded higher priority and have consequently attracted the greater share of the Fund’s resources. So far, 109 countries in Africa, Asia, Latin America, the Caribbean, the Middle East, and Europe have benefited from the Fund’s financial assistance.[16] The OPEC Fund provides assistance through public sector lending, private sector facility, and grant operations.

The Fund provides public sector lending to the world’s least developed countries (LDCs). According to the organization, these 49 nations have a combined population of over 600 million and make up the weakest and most vulnerable group in the world economy. The OPEC Fund targets LDCs since the people suffer from extreme poverty and the governments are limited in their economic, institutional, and human resources. Furthermore, these people have deteriorating living standards as the countries are forced to content with political unrest and external debt burdens. Recognizing the difficulties confronting LDCs, the OPEC Fund directed almost 52.7% of its total commitments in 2001 to these countries. Total project loans numbered 38 and amounted to $273.83 million. The loans were extended to finance operations in 33 developing countries, and helped support projects in the sectors of transportation, agriculture, education, health, energy, telecommunications, and water supply and sewerage, as well as operations of a multi-sectoral nature. The bulk of the lending went towards transportation with 37.5% of commitments and 27.2% were loans for education.[17]

The Fund’s Private Sector Facility (PSF) was established in 1998 and enables the Fund to channel support directly to the private sector in developing countries. The main objectives of private sector operations are to promote economic development by encouraging the growth of productive private enterprise and to support the development of local capital markets. Loans are made to financial institutions for on-lending to small, medium, and micro-enterprises. The Fund recognizes the complementary role of the public and private sectors in achieving economic advancement. It is believed that a strong private sector contributes to long-term economic growth, a necessary condition for sustained poverty reduction. In turn, economic growth increases the tax base that enables governments to provide increasing levels of basic social services. Moreover, private sector investment in infrastructure projects helps improve the quality and efficiency of services and allows for a reduction in public budgets, enabling governments to redirect greater resources to social spending.[18]

The OPEC Fund grant program provides support to a wide range of development schemes and activities that would not normally be financed through its loans. Fund grants are extended in the form of technical assistance for social causes, small-scale enterprises, research and studies, humanitarian aid, and/or emergency relief. In 2001, 37 grants worth a total of $5.2 million were approved by the Fund. Of these, 18 were extended for technical assistance, 11 supported research and similar activities, and eight helped finance emergency aid operations.[19]

The OPEC Fund needs to coordinate its activities with other institutions to maximize the impact of its aid effort. Prominent aid organizations include the World Bank, Japan Bank for International Cooperation (JBIC), and the United Nations Foundation. In general, these funds have larger financial resources and thus reach a broader group of people. The OPEC Fund could partner with these organizations in several projects throughout the year, thus promoting shared aid amongst the institutions and maximizing their global impact. In addition, joint relief projects would foster relationships between the developed countries as they aid developing countries. It is important to note that these organizations have many of the same aims and accomplish them in similar manners.

The World Bank is one of the United Nations’ specialized agencies and is made up of 184 member countries which are jointly responsible for contributing financially to the institution and making decisions regarding aid recipients. The World Bank primarily provides low-interest loans, interest-free credit, and grants to developing countries, since these countries generally cannot borrow money in international markets or can only do so at high interest rates. In addition to the direct contributions and loans from developed countries, these countries receive grants, interest-free loans, and technical assistance from the World Bank to enable them to provide basic services. In fiscal 2002, the International Development Association (IDA), which is the world’s largest source of concessional assistance, provided $8.1 billion in financing for 133 projects in 62 low-income countries.[20]

The JBIC is a government organization which includes a component called the Overseas Economic Cooperation Operations. This institution provides financial assistance in the form of long-term, low-interest funds for developing countries. The JBIC also provides loans to help with existing needs, to foster private sector investments, and development related research. These loans help establish socioeconomic infrastructure for the economic development of developing countries as well as economic stabilization. Development assistance has increased due to a growing demand for social development and environmental conservation in developing countries. As of March 31, 2002, the JBIC’s budget for Overseas Economic Cooperation Operations was approximately $6.4 billion.[21]

The United Nations Foundation is one of the most recently formed international aid organizations. It was created in 1997 as businessman and philanthropist Ted Turner made a gift of $1 billion in support of the United Nations’ efforts on global issues. It aims to promote a more peaceful, prosperous, and just world through the support of the UN and its Charter with an emphasis on the UN’s work on behalf of economic, social, environmental, and humanitarian causes. The Foundation strengthens the UN institution and encourages support by forging new partnerships between UN agencies, the private sector, and non-governmental organizations (NGO’s). In November 2001, the UN Foundation provided approximately $34 million in grants for the support of women and population, environment, children’s health, and peace, security, and human rights.[22]

International aid relief is an important means of helping developing countries. The OPEC countries will have increased oil revenues and thus will be able to provide more financial aid. I believe that it is vital for the OPEC Fund to continue granting aid for developing countries for the following:

1. Many of the poor developing countries have deteriorating standards of living, political unrest, and geophysical handicaps

2. The economic success of these countries is stifled by external debt burdens caused by high interest rates on loans

3. OPEC countries will have increased funds due to the increased demand and prices for petroleum

4. Cooperation among aid organizations will foster important relationships between the various countries of the world

Although it is important for OPEC countries to offer aid to poor developing countries, it is good to remember that these countries are still developing countries themselves. Therefore, they must first invest in their own infrastructure, thus promoting long-term economic growth and then offer aid to others.

It is apparent that the supply of oil will decrease in the years to come. Most analysts predict peak oil production to occur with the decade and the supply to last an additional 50-80 years. Meanwhile, the demand for oil will certainly increase as the supply decreases, causing prices to increase. OPEC countries, which own a majority of the world’s oil reserves, will benefit from the greater revenues from the sale of oil and experience a growing importance in the world economy. These nations will be able to use the bulk of this money to invest in their own states thus improving sectors such as transportation, education, healthcare, and agriculture. In addition, the role of interventionist government must be reduced leading to economic liberation and the privatization of many domestic industries. It is also important for these oil producing countries to allocate funds for investment in neighboring countries, thus promoting regional development. Nevertheless, OPEC countries should continue to supply aid to developing countries, investing in poorer countries through the OPEC Fund for International Development. I believe that this aid will remain a vital way for OPEC to take an active role in the future of other developing countries. To increase the success of this effort, the OPEC Fund should work in cooperation with other aid organizations such as the World Bank, Japan Bank for International Cooperation (JBIC), and the United Nations Foundations. Through the combination of investing in their own infrastructure and the supplying of foreign aid, these countries will ensure their well-being for many years to come.

Works Cited

Balfour-Paul, Glen. The End of Empire in the Middle East: Britain’s Relinquishment of Power in Her Last Three Arab Dependencies. Cambridge: Cambridge University Press, 1991.

“Chavez: Venezuela Will Resume Full Oil Production in 45 Days.” Fox News. 2 January 2003. < http://www.foxnews.com/story/0,2933,74458,00.html>

Deffeyes, Kenneth S. Hubbert’s Peak: The Impending World Oil Shortage. Princeton: Princeton University Press, 2001.

Fawzy, Samiha and Ahmed Galal Ed. Partners for Development: New Roles for Government and Private Sector in the Middle East and North Africa. Washington DC: The World Bank, 1999.

Hoekman, Bernard and Patrick Messerlin. Harnessing Trade for Development and Growth in the Middle East. New York: Council on Foreign Relations, 2002.

Hubbert’s Peak of Oil Production. 18 May 2003. <http://www.hubbertpeak.com/>

Japan Bank for International Cooperation. 24 May 2003. <http://www.jbic.go.jp/english/index.php>

Karl, Terry Lynn. The Paradox of Plenty: Oil Booms and Petro-States. Berkeley: University of California Press, 1997.

Organization of the Petroleum Exporting Countries. 18 May 2003. <http://www.opec.org>

Shihata, Ibrahim F.I. The OPEC Fund for International Development. New York: St. Martin’s Press, 1983.

The OPEC Fund for International Development. Annual Report 2001. Vienna: The OPEC Fund, 2001.

The World Bank. 22 May 2003. <http://www.worldbank.org>

United Nations Foundation. 23 May 2003. <http://www.unfoundation.org>

[1]Deffeyes, Kenneth S. Hubbert’s Peak: The Impending World Oil Shortage. Princeton: Princeton University Press, 2001: 1

[2]Deffeyes, Kenneth S. Hubbert’s Peak: The Impending World Oil Shortage. Princeton: Princeton University Press, 2001: 146

[3]http://www.opec.org/FAQs/AnswersAboutOPEC.htm

[4]http://www.opec.org/FAQs/AnswersAboutPrtroleumInd.htm

[6]http://www.opec.org/FAQs/AnswersAboutPrtroleumInd.htm

[7]http://www.opec.org/homepage/flash-shock/blank.htm

[9]Hoekman, Bernard and Patrick Messerlin. Harnessing Trade for Development and Growth in the Middle East. New York: Council on Foreign Relations, 2002: 3

[10]Hoekman, Bernard and Patrick Messerlin. Harnessing Trade for Development and Growth in the Middle East. New York: Council on Foreign Relations, 2002: 1

[11]Hoekman, Bernard and Patrick Messerlin. Harnessing Trade for Development and Growth in the Middle East. New York: Council on Foreign Relations, 2002: 6

[12]Karl, Terry Lynn. The Paradox of Plenty: Oil Booms and Petro-States. Berkeley: University of California Press, 1997: 191

[13]http://www.foxnews.com/story/0,2933,74458,00.html

[14]Shihata, Ibrahim F.I. The OPEC Fund for International Development. New York: St. Martin’s Press, 1983: 5

[15]The OPEC Fund for International Development. Annual Report 2001. Vienna: The OPEC Fund, 2001: 1

[16]The OPEC Fund for International Development. Annual Report 2001. Vienna: The OPEC Fund, 2001: 1

[17]The OPEC Fund for International Development. Annual Report 2001. Vienna: The OPEC Fund, 2001: 22

[18]The OPEC Fund for International Development. Annual Report 2001. Vienna: The OPEC Fund, 2001: 26

[19]The OPEC Fund for International Development. Annual Report 2001. Vienna: The OPEC Fund, 2001: 28

[20]http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/0,,contentMDK:20040558~menuPK:34559~pagePK:34542~piPK:36600,00.html?

[21]http://www.jbic.go.jp/english/profile/about/profile/index.php

[22]http://www.unfoundation.org/unf_action/grants/recipients_nov2001.htm