OPEC: A quick fire guide
OPEC have recently decided to make historic production cuts to its oil output by 1.2 million bpd from January 1st 2017; the company’s first production cut since 2008. The cuts have led to a rise in oil prices, rising 15 percent since the announcement, with Brent crude rising from $46 per barrel to $53.77 per barrel.
OPEC (Organization of the Petroleum Exporting Countries) is an intergovernmental organisation, created at the Baghdad Conference on September 10-14 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Over the years, other countries such as Qatar, Indonesia, Libya, UAE, Nigeria, Ecuador and Gabon all joined the organisation. For the first five years, the OPEC headquarters where located in Geneva, Switzerland before moving to Vienna, Austria in 1965. The organisation currently has 13 member countries.
OPEC’s aim is to coordinate and unify the petroleum policies of its member countries and ensure the stabilisation of oil markets in order to secure a regular supply of petroleum to consumers, a steady income to producers and a fair return for those who invest in the petroleum industry.
The formation of the industry occurred at a time of transition in the international and political landscape, with the birth of many new independent states in the developing world. OPEC became more prominent during the 1970’s, with the member countries taking control of their domestic petroleum industries and acquired a major say in the pricing of crude oil world markets.
It was during the 1980’s that, after reaching record levels early in the decade, prices began to drop, before crashing in 1986. OPEC’s share of the smaller oil market fell heavily and its total petrol revenue dropped, causing severe economic problems for many member countries. Towards the end of the decade prices began to rise, but still to a lower level than before, remaining this way throughout the 1990’s.
By 2008, prices had risen to record levels, before dropping again in the economic recession. OPEC became important in supporting the oil sector, becoming a part of global efforts to address the economic crisis.
The OPEC Secretariat is the executive part of OPEC, located in Vienna and serving as the headquarters of the organisation. Originally established in 1961 in Switzerland, it is responsible for the implementation of all resolutions passed by the conference and carries out all decisions made by the Board of Governors.
The Secretariat consists of the Secretary General, who is the organisations CEO, the office of the Secretary General, the Legal Office, the Research Division and the Support Services Division.
The Research Division includes Data Services, Petroleum Studies and Energy Studies departments. The Support Services Division includes Public Relations and Information, and Administration and IT services.
Read the December 2016 issue of Business Review Middle East magazine
Billionaire Kumar Birla Champions Regional Supply Chains
As the head of the Aditya Birla Group, a US$46bn firm that operates in 36 countries, Kumar Mangalam Birla is no stranger to splashy strategic moves. Yet his recent announcement that he no longer wants to acquire globally distributed supply chains stood out. While many companies have struggled to cope with shipping backlogs, his firm has chosen to pivot and focus on regional networks. Said Birla: ‘We wouldn’t look at a company or a business where you source in one corner of the world and sell in another’.
He cited protectionism, the pandemic, and the limited movement of products and people around the world as ABG’s primary causes of lost profits. And they aren’t alone. Over the past year, 900 of the U.S. and Europe’s biggest IT, defence, and financial services firms have lost an average of US$184mn apiece.
An Era of Global Disruption
Over the past few decades, low shipping rates and rapid delivery times have lulled multinational firms into a false sense of security. In the early 2000s, companies chose to take on significant global supply chain risks in exchange for increased profits. First, it made sense to manufacture higher-value goods, such as electronics, in low-cost regions throughout Southeast Asia, India, and Africa. Second, first-tier suppliers started to outsource the manufacturing of specific components to second-, third-, and even fourth-tiers—leaving supply chains with extremely limited visibility.
So when COVID-19 disruptions struck certain regions, companies were caught unprepared. Usually, these events come few and far between. But over the past ten years, we’ve seen a number of ‘black swan’ events that have thrown the supply chain industry into chaos. Here’s a quick history of the most significant events in recent years, thanks to the MIT Sloan Management Review:
- 2010. China creates export quotas for rare earth elements.
- 2011. The Tōhoku Earthquake hits East Japan; flooding sweeps throughout Thailand.
- 2016-present. Trade wars between the U.S. and China hurt suppliers.
- 2020-present. COVID-19 pandemic shuts down international shipping ports.
Now, Kumar Birla is one of many who want to re-evaluate how we run our supply chains. Though his company has acquired 40+ companies in the last quarter decade, Birla intends to build up local hubs rather than expand operations.
Why Pursue Regionalisation?
Combine Chinese economic dominance, global supply chain vulnerabilities, and major government policy shifts around the world, and you have a storm brewing on the horizon for big multinational firms. As Brookings noted, ‘the biggest risk for trading opportunities in the developing world is growing protectionism in more advanced economies, often dressed up as national security protection’.
Altogether, from the U.S. to the European Union, governments are trying to protect their domestic supply chains, secure adequate stockpiles of materials, and build world-class local networks. Consider Biden’s recent executive order, which seeks to bring semiconductor manufacturing back to home soil, or Japan’s bid to open more memory chip fabrication factories near Tokyo. The Aditya Birla Group intends to react in kind. Said Birla: ‘We’re looking at regionalism as a very big theme’.
Will Others Follow Suit?
In the post-pandemic economy, global businesses must decide whether to expand or contract. On one hand, the Alibaba Group’s Cainiao Smart Logistics Network recently launched a direct flight between Hong Kong, China, and Lagos, Nigeria. On the other, the Japanese government is desperate to make its chip manufacturing domestic. Indeed, as two supply chain strategies diverge in a post-pandemic world, the one businesses take may make all the difference.
Yet Birla is confident that regionalisation is the right call. According to his words at the Qatar Economic Forum, even necessary cross-border transactions should be smaller in scope. And as the Bloomberg Billionaires Index now lists his net wealth at US$10.4bn, up 52% from 2020, he may have the cash to test his theories out. ‘Regional hubs, regional presence, regional employment, catering to regional demand’, he stated. ‘We’re a global company rooted in local economics’.