ORGANIZATION OF EXPORTING COUNTRIES

Russo-Saudi Oil

BACKGROUND GUIDE Letter from the Dais

Dear Delegates, Welcome to SciMUNC XIV! With the course of events this past year, we want to thank each and every one of you for partaking in our conference! We are very excited to be your chairs for the Organization of Petroleum Exporting Countries (OPEC) committee! My name is Anthony Lino and I will be your chair for this year’s committee. Tis is my frst time chairing. I joined Model UN as a sophomore to complement the Krish Shah Speech class I was taking. Tis program, more than anything else, has taught me how to Secretary-General be truly thorough, and the confdence that comes with talking about a subject you know well. I genuinely believe in the program and hope that you learn from this committee. Outside of Model UN, I am a Boy Scout and participate in Science Research studying Byul Sak the Chikungunya virus. I am chairing this committee session because I am interested in Director-General the power plays that are associated with the oil industry and believe it is an integral part of understanding our world. Please pay attention to your research as I believe it can form a foundation for future committees and help you understand the politics of the world. I Omar Darwish look forward to the engaging discussion in this committee. USG of Administration My name is Arian Berisha and I am proud to announce that I will be cochairing our committee for this year’s SciMUNC. I am a Senior at Bronx Science. We hope that Vincent Harwood you all come with a drive to accomplish the goals you have seen governments fail to address and the enthusiasm to get tangible things done. But with all of this being said, Deputy-USG of Administration we cannot wait to see what you all have in store for us! Sincerely, Benjamin Raab Anthony Lino ([email protected]) USG of General Assemblies Arian Berisha ([email protected]) and Specialized Committees Organization of Petroleum Exporting Countries Karen Phua Deputy-USG of General Assemblies and Specialized Committees

Lars Zeana-Schliep USG of Crisis Committees

Rehan Yazdani Deputy-USG of Crisis Committees

Diane D. Steiker Faculty Advisor

75 West 205th Street Bronx, NY 10468 [email protected] www.scimun.com SciMUNC XIV | Page 1

Background

Oil Tey agreed to decrease their oil production in order to keep supply low and prices high and Over millions of years past enormous sums of use oil embargos to put political pressure on plankton have lived and died in the ocean. collective threats. Additionally, they formed While decomposing, they were buried and OPEC+, which is a more loose group that trapped under immense heat and pressure allows OPEC to cooperate with non-OPEC which gradually broke the complex organic nations. molecules in simple hydrocarbons. When extracted, these hydrocarbons form a mixture What is OPEC? with other material from the ground, which is called petroleum or crude oil. Tis mixture is OPEC is sorted into three categories: founding then refned into its components by distillation members, full members and associate members. and sold as consumable oil products. Oil with Full members are members of OPEC that can fewer impurities is considered ‘sweet’ and vote, as opposed to associate members, which requires less refning, making it more cannot. All resolutions of OPEC require the environmentally friendly. unanimous vote of all full members. Te founding members are the full members which Oil is used to cheaply make plastics, synthetic have remained since the frst OPEC conference. rubber, lubricants and to transport goods, Founding members include , , , which makes it essential for the function of and . Te non-founding modern economies. Additionally, Oil is not full members include , Angola, evenly distributed throughout the world; a Equatorial Guinea, Gabon, Congo, , couple nations have access to large reserves of , the Congo, and the Arab Emirates. oil, while most need to import oil. Tis OPEC+ includes all OPEC members and naturally results in a global oil trade. Te top Russia, Azerbaijan, Bahrain, Brunei, importers of oil are the EU, US, China, India, Kazakhstan, Malaysia, Mexico, Oman, South Japan and South Korea and the top exporters Sudan and Sudan. In order for any country to are Saudi Arabia, Russia, Iraq, the United Arab become a full or associate member they must Emirates and Canada. Te top oil importers are have interests in line with other OPEC nations also the top oil refners. and be a notable petroleum exporter, then have all founding nations and . of the full members Many of the top exporters of oil rely on its sale vote them in. Swing producers are the nations in order to fnance their government, but this is that shift oil production to maintain the price not sustainable under normal market of oil. Traditionally, this has been Saudi Arabia conditions. When the is high, it can due to it producing much more than the other support more expensive methods of oil OPEC members, which has made it OPEC’s de extraction, thereby gradually increasing the facto leader. supply and decreasing the price. Tis gradually causes the governments to lose their profts. Te Seven Sisters Terefore, in order to keep the oil industry proftable, several of these vulnerable countries In 1870, was started by John D. formed the Organization of Petroleum Rockefeller. Rockefeller was a genius at fnding Exporting Countries, or OPEC, to use ways to destroy business competition and soon collective action to keep the price of oil high. grew Standard Oil into a near complete Page 2 | Organization of Petroleum Exporting Countries monopoly. Tis and other large monopolies Venezuela 50-50 Proft Split became the target of the progressive movement and Standard Oil was eventually broken up into Despite the oil producing nations receiving very 33 large companies in 1890. Standard oil was little of the total profts, it was still a completely limited to the US, which resulted in them unprecedented amount of money. Additionally, being the world's largest consumer and the seven sisters worked under contracts that producer of oil. During WWII, oil was needed prevented the nations from halting the oil in previously unimaginable quantities. Te industry, and most even prevented the nation Allied powers won, in no small part, because from changing the tax rate. One exception to they could buy it from America or extract it this rule was Venezuela, which was in essentially from Iran. After the war, the US and Britain the same situation as the Middle Eastern began to search for foreign oil, which they nations, despite it being in Latin America. found throughout the . At the same Terefore, Venezuela, in 1943, pushed for a time, rapid occurred, which 50-50 Proft Split by increasing taxes. meant that America and Britain couldn't Intuitively you would think that the oil simply colonize these nations. Instead, the US companies would have a strong pushback, but and Britain backed large companies, most of there wasn't. Tis is mostly because it didn't whom were the remainders of the broken up actually decrease their profts. At the time, companies from standard oil. Te large oil America had a law that foreign taxes would be companies, which became known as the seven deducted from their income tax, which meant sisters, struck deals with the oil rich countries that Venezuela’s tax would not decrease profts. where these companies would rent the oil/buy Despite the corporate apathy, Venezuela feared the oil felds and perform the entire process of retaliation because of this move, which fnding, extracting, refning, transporting and motivated them to reach out to other oil rich marketing the oil. Tese companies were well countries to help them negotiate the same equipped to do this work because Rockefeller 50-50 proft agreement. Tese nations were had vertical integration standard oil, a trait that initially unresponsive, but Saudi Arabia soon was passed on to the resulting companies. Tese pushed for the same agreement. America, which companies would split their holding between was more concerned with maintaining a steady several of these countries, which gave them the supply of oil than the taxes, allowed the advantage during negotiations, since they royalties (which was how these nations received always had the option to reject that country's payment since they couldnt levy taxes) to be terms and invest in a diferent one. Te oil rich counted as a foreign taxes, so they could be nations needed the foreign entities because they deducted from the companies income tax, like were underdeveloped, which meant their Venezuela. Te companies agreed, and Saudi populace had neither the money nor knowledge Arabia also received a 50-50 proft split. Tis required to extract oil. Tis resulted in the oil led to most other oil nations to negotiate the rich nations having almost no control over their same agreement. oil and receiving less than a ffth of the profts. Most nations were placated, with the exception of Iran. Iranian nationalist saw the seven sisters as extensions of colonialism, so they successfully push to nationalize the industry in order to SciMUNC XIV | Page 3 attain full sovereignty. In response, Britain and retaliation similar to the Iranian coup. Tis the US attempted to negotiate deals between changed in 1960 when Venezuela proposed to the seven sisters and Iran, but were ultimately the other oil producing nations that they could unsuccessful. Iran still lacked the ability to collectively bargain. Te ensuing discussions led extract and sell oil by themselves, so the export to the formation of OPEC. of oil stopped. After two years without oil revenue, Irian was in economic trouble, which 1960s made the democratically elected Prime minister As OPEC expanded its membership and gained unpopular. Since nationalization is heavily more experience in the oil market, it gradually associated with communism and this was the began to monopolize oil production. Despite , this put Iran on America’s hit list. In this monopoly, the seven sisters held a 1953, America used the unpopularity of the monopsony since they were almost exclusively Prime minister to overthrow the government the crude oil buyer. Tis system resulted in oil and put the Shah (monarchy) in power. Te prices stagnating throughout the 60’s despite Shah was much more Americafriendly, so Iran the previous upward trend and OPEC's returned to the original 50- 50 proft split. infuence. However, OPEC was degrading the Falling Oil Prices seven sisters' infuence by working with smaller companies. Tis decreased their market share Despite the seven sister’s immense power, their throughout the 60s, gradually diminishing their iron grip slowly faded. Te most notable reason monopsony. In 1971, OPEC signed the Tehran behind that is the seven sisters began to agreement, which taxed the oil companies at a compete with each other. Tis was initiated by rate of 55%, thereby giving OPEC nations a the companies, but encouraged by the oil majority of the profts. Tis was a major nations, which began working with smaller oil turning point because it showed that OPEC companies. Additionally, the USSR began to was now the dominant power in oil, and become a signifcant oil exporter, which further resulted in the price of oil to fnally rise. loosened the grip of the seven sisters. Te way that money was distributed to the oil nations Yom-Kippur War also complicated this drop in oil prices. Te After WWI, there was a strong push for the way it worked was oil nations would receive creation of a Jewish state, a movement known profts based on the posted price of oil instead as Zionism. Tis resulted in mass migration of the actual oil price. Te was from Eastern Europe to the Eastern-most part entirely determined by the oil companies and banks of the shore of the mediterranean. was somewhat based on the price of oil within During the peace negotiations during WWII, the US. Tis caused the actual oil price to be this now poignant movement succeeded in slightly higher than the posted price, leaving creating the modern day Israel. However, this more profts for the oil companies. As the new nation was troubled for many complicated actual oil price became lower, they began reasons, which ultimately put it at odds with all lowering the posed price without warning the of its neighbors and supported by the united oil nations. Tis began to aggravate the oil states and democratic Europe. Tis led to nations in the late ffties, but they didn't give several . signifcant pushback because they feared Page 4 | Organization of Petroleum Exporting Countries

One of these wars was the Yom-Kippur war, seemingly minor droop, the oil prices doubled where Egypt and Syria launched a surprise and the nation began . Once prices attack on the Jewish holy day, Yom-Kippur. stabilized, they began to fall. Most nations, Despite their non-involvement, Iraq and Iran prompted by the high oil prices and the 1979 opposed Israel, so pressured the US and oil crisis, made great efort to decrease their European powers to stop supporting Israel reliance on oil. Tis caused the demand, and during the confict. Tey did this by pushing therefore price of oil to drop throughout the for an OPEC embargo on the US and Europe 80’s; this is known as the 1980’s oil glut. which occurred. Te embargo severely hurt the US economy, partially being to blame for a During the oil glut, OPEC attempted to that soon followed and led to maintain a high price of oil by continually intensive rationing. Te embargo outlasted the dropping production in the , war by several months, eventually ending when Saudi Arabia, with the other OPEC nations Israel withdrew all of its troops from the west refusing to decrease their production. Tis was side of the Suez Canal. Te embargo caused the partially caused by the Iran-, which US to attempt to reduce dependence on foreign began in 1980 and ended in 1986, and made oil by investing in technology that allowed the cooperation between competing OPEC nations US to extract oil from within its own borders, extremely difcult. Te war also caused oil use oil more efciently and replace it where production to drop, which made the oil market possible. Additionally, the US created the somewhat volatile, but Saudi Arabia was eager Strategic Petroleum Reserve, a national to increase production wherever either of these stockpile of oil to bufer the US in case of countries dropped theirs. Tis culminated in another oil embargo. 1986, when Saudi Arabia was no longer able to maintain oil prices, so began to increase production in 1986, which caused the price of oil to collapse again. Te embargo showed that OPEC had serious political power, which gave them the leverage 1986-2014 needed to substantially raise oil prices in the following years. Many OPEC nations used this Tis marked a low point for OPEC. Tey were political power to fully nationalize their oil unable to control the market due to outside industry, which gave them almost complete and competition and internal confict, causing oil direct control over their oil production. Tis prices to remain low following the 1986 oil resulted in massive profts for the OPEC crisis. Tis caused severe economic issues for all nations, oftentimes increasing government OPEC nations. However, this drop in revenues revenue by several times previous years. also directly contributed to the rise of oil prices in the early 2000s. Te low oil prices put most Despite the good fortune of OPEC, some of its smaller oil producers out of business and caused member states had personal conficts during the almost no investment into oil outside of 70’s. Most notably, Iran had a revolution in OPEC. At the same time, demand for oil 1979 which disposed of the US-back monarch, continued to grow because of economic and replacing him with a theocratic ruler. Tis population growth. Tis caused the oil prices to disrupted Iranian oil production, which caused rise, with OPEC as the largest producer. a 4% global drop in oil production. Despite the Additionally, the war on terror began following SciMUNC XIV | Page 5

September 11 attacks, causing many disruptions to the oil market, which were mitigated by OPEC intervention, further solidifying their position as the moderator of the oil prices. However, raising the price of oil inevitably results in greater competition, causing the US, Canada and many other countries to restart oil operations.

Te only major oil crisis came after the great recession. Since the global economy was weakened, the demand for oil shrank substantially, which forced the oil prices to fall despite OPEC intervention. Te oil price soon recovered, but demand soon began to waver as the rapid economic growth of developing countries like China and India soon receded. At the same time, the oil industry in non-OPEC nations continued to grow. OPEC cut supply to keep prices high, but this became increasingly difcult as the year continued. In 2014, infating the price of oil became too difcult, so OPEC decided to ease on demand restrictions and letting the price drop. Tis led to an oil glut that has continued into 2020. Page 6 | Organization of Petroleum Exporting Countries

Current Situation

OPEC+ Coronavirus

In response to the dramatic price drop in 2014, In response to the pandemic, most nations have non-OPEC nations became open to placed restrictions on travel and social contact. cooperation to keep the oil industry proftable. With these measures in efect, the demand for Tis led to the formation of OPEC+, which , jet-fuel and diesel have fallen, as includes the 13 members that are part of OPEC Goldman Sachs analysts note that the 19 - who of which are led by Saudi Arabia - and 10 million barrels a day plunge have left an other oil producing countries led by Russia. indelible efect on the oil economy. Sentiments Teir mission was to use their increased control of stability, while temporarily achieved through of the oil market to raise the price of oil. After discussions with G20 nations, has left bearish the drop price following Coronavirus, OPEC+ traders shocked in April, with the plunge in managed to rebalance the oil markets on April falling below 30% in a matter of 12, 2020 by cutting production by 9.7 million seconds. bpd. Te pressing issue that the group faces is fnding a way to deal with the added surplus of Price War oil from when demand fell in February to the In recent years, US shale has been on the rise, OPEC+ deal in May. With exceedingly large which has been a major threat to OPEC. Te quantities of crude oil being added to U.S. US has been unwilling to engage with OPEC, inventories already, the group will need to fnd causing them to reap the benefts of the infated a way around the logistical problems related to oil without having to cut production. Te storage and the rate at which oil is being sudden drop in oil prices has forced the issue. distributed. In the instance that the demand In order for OPEC to keep the price of oil rebound does not increase precipitously over afoat, they would need to massively decrease the next few months, price volatility will production while the US would make no continue to remain a threat. Saudi Arabia and adjustments. During the OPEC+ meeting in Russia will continue to monitor the oil market response to Coronavirus, Russia refused oil and take necessary action with other OPEC production cuts. In response, OPEC, and their members and partners if the situation calls for leader, Saudi Arabia massively increased change. Tere is a difcult assessment to be production, fooding the already oversaturated made as to whether or not the oil market will market with even more cheap oil. Ultimately, be able to recover in time before the onset of the situation that has unfolded has led to a fnancial bankruptcies and economic losses will general decrease in drilling activity to counter damage oil felds and future production. With the low prices and weak demand. During that this uncertainty in place, oil prices will period of time, global oil tanks will continue to continue to remain volatile and other fll to higher capacities for as long as planes are diplomatic eforts will be strained as countries grounded, and business continue tanking. In attempt to hedge their bets on the of chance the , the coronavirus’ impact has that their promised cuts will hold tangible left , and other oil-rich states, in a weight in the oil economy. tumultuous position, as job losses have become common. For instance, the U.S. shale industry became a victim as crude purchases were reduced and refneries forced to cut production; SciMUNC XIV | Page 7 oil began to trade at negative prices in certain Mexico under favorable treatment and the locations, with producers paying consumers to United States basing cuts on forecast estimates, purchase oil. While drillers grew into the deal itself will not begin to produce prominence in America, creating millions of signifcant results until lockdown measures are jobs, the debt accumulated through fracking uplifted. Although the 10 million bpd decrease created large amounts of debt. With workers will earmark future oil cuts, by how much laid of, companies have fled for bankruptcy to becomes a considerable question: as it stands, salvage any remaining hope for a return to the initial reduction will be marginalized to 7.6 normalcy. bpd by June and 5.6 million for the rest of 2021. Te deal’s delayed timing enabled Meeting and Responses OPEC+ members to continue pushing out Top global oil producers were able to draw large amounts of oil for roughly three weeks. consensus towards a historic deal that cuts oil Although OPEC+ remains, the reputation of production by about a 10th, ending the price the collective, in part due to extensive eforts to war that plagued the . With accommodate for Mexico, has taken a large hit. OPEC+ allies and other G20 nations involved Te issue has taken a turn, becoming a problem in a series of video conferences and calls, an of sustaining the eforts discussed earlier in agreement ensued which made headway April. August has shown falls in oil prices, with towards global recovery. Te countries have an increase of production by 1 million bpd. As pledged to cut nearly 10 million barrels a day Gulf Countries end their voluntary supply from the market. Brokering the deal involved curbs, OPEC needs to fnd a wage to manage sorting out the conficting interests between U.S. shale production if there is any way to Russia and Saudi Arabia, along with preserving create a permanent fx. the OPEC+ alliance. President Trump, who has Bloc Positions had a notable stance against OPEC+ and increasing oil prices, has found himself to be OPEC is unlike the UN because it is formed the person who brokered the deal. With entirely out of the self interest of the nations. reelection incentives in place, Trump Te organization may help the world along the participated in a triangulation between Putin way by stabilizing the economy and doing some and King Salaman to create a proposal that will charity work, but, in the end, everything comes doubly appease not only tensions between down to profts. Terefore, when preparing Russia and Saudi, but also Latin American your position, you should fgure out what nations in their uncommitted response to the would beneft your nation the most. initial proposal. To placate Mexico’s explicit refusal towards large output reduction, Trump Tis is a complex issue, with some factors ofered to cut production on behalf of the U.S. including the oil price your country can balance neighbor. Te forecast for the future, however, its budget on, how much oil your nation needs remains uncertain. Although Saudi Arabia has to sell at these prices, if the other areas of your measured its cuts from the same 11 million country's economy will beneft from a low price barrels a day as Russia has, Riyadh has not of oil, and how well your country can weather taken into account the historic excess of output economic hardship. Additionally, you need to recorded at 12.3 bpd (barrels per day). With fgure out how you can actually react to meet OPEC demands; not all nations have a Page 8 | Organization of Petroleum Exporting Countries nationalized oil industry, giving them somewhat limited control over their nations actions.

Lastly, you need to fgure out how OPEC will actually implement its rulings. Most OPEC nations have cheated on their obligations, which has traditionally forced Saudi Arabia, as the swing producer, to further decrease production to maintain prices. However, this is no longer a reasonable request considering OPEC+'s massive size and Saudi Arabia’s diminished market share. Tis problem is exacerbated by the inclusion of non-OPEC+ nations, such as the US, which have even less incentive to fulfl their obligations. Terefore, a way to enforce these new changes must be found. SciMUNC XIV | Page 9

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