OPEC stands for the Organization of the Petroleum Exporting Countries. As the organization's name suggests, OPEC consists of 12 of the world's largest oil-exporting countries who work together to coordinate international oil prices and policies. Formed in 1960, OPEC has invested billions of dollars in drilling platforms, pipelines, storage terminals, shipping,
Oil is the primary export for many of the countries that belong to OPEC, so it's in the best interest of members to make sure that prices and global energy demands remain stable. In this article, we'll break down OPEC and explore how the organization influences global oil prices.
What Countries Belong to OPEC?
OPEC was formed on Sept. 14, 1960 with five inaugural member countries: Iraq, Iran, Kuwait, Saudi Arabia, and Venezuela. OPEC membership is technically open to any country that is a substantial exporter of oil and that shares the ideals of the organization. At the time of writing, however, only ten additional member countries have joined OPEC since 1960: Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Libya, Nigeria, Qatar, Republic of the Congo, and the United Arab Emirates.
Gabon and Ecuador have both suspended their memberships in the past but are currently members of the organization. Indonesia announced a temporary suspension of its membership at the end of 2016 and has yet to rejoin. Indonesia announced a temporary suspension of its membership at the end of 2016. Qatar’s energy minister Sherida al Kaabi announced that Qatar will leave OPEC, effective January 1, 2019.
OPEC typically meets twice a year at its headquarters in Vienna, Austria. The organization's stated objectives are to:
- Coordinate and unify petroleum policies among member countries
- Secure fair and stable prices for petroleum producers
- Maintain an efficient, economic, and consistent supply of petroleum for consumers
- Ensure a fair return on capital to investors
Why Was OPEC Created?
OPEC was created to stabilize the economic landscape in the Middle East and manage the global market for energy products. Oil is the main marketable commodity and revenue generator for member nations. With most of the member countries' income tied to a single commodity — in other words, with all of their eggs in one basket — the quality of government programs such as education, healthcare, and infrastructure is heavily dependent on oil sales (also called, petrodollars).
Member countries assess energy market fundaments, analyze supply and demand scenarios, and then raise or lower oil production quotas. If members think that a price is too low, they can cut back on production in order to raise the price of oil. Alternatively, if the price of oil is too high (which can reduce both the short-term and long-term demand for oil, and also ripen conditions for alternative sources of fuel), then they can boost production.
The oil producers of OPEC invest billions of dollars in exploration and production activities such as drilling, pipelines, storage and transportation, refining, and staffing. These investments are typically made up front and successfully harvesting a new oil field takes time. Member countries may have to wait anywhere between three to 10 years before they start to see returns on their investment.
1970s: Oil Embargo and Western Response
During the 1970s, criticism of OPEC became more widespread, and the organization came to be viewed as a monopolistic cartel in many circles. The organization triggered high inflation and low fuel supplies around the world by imposing oil embargoes in 1973.
Member countries ceased providing oil to the United States, Western Europe and Japan for their support of Israel in its military conflict with Egypt, Iraq and Syria. The embargo resulted in drastically higher oil prices in the West and nervous investors pulled capital out of the U.S. markets, resulting in big losses at the New York Stock Exchange. Inflation ensued and gasoline rationing practices were enforced.
OPEC eventually restored oil production and exports to the West, however, the 1973 crisis had lingering negative effects on international relations. In response to the crisis, the West attempted to curtail its dependence on OPEC and stepped up efforts in offshore oil production, particularly in the Gulf of Mexico and the North Sea. In the 1980s, overproduction worldwide combined with reduced demand, resulting in a significant drop in oil prices.
2000s: Volatile Oil Prices
Over the years, billions of dollars in new investments and new discoveries in locations such as the Gulf of Mexico, the North Sea, and Russia have somewhat diminished OPEC's control over global oil prices. The extraction of petroleum from offshore drilling, advances in drilling technology, and the emergence of Russia as an oil exporter have brought fresh sources of crude oil to the global market.
The price of crude oil has been rather volatile in recent years. In 2016, OPEC members abandoned the quota system temporarily and oil prices crashed. Later that year, member countries agreed to cut production until the end of 2018 in order to regain control.
Many experts believe in the "peak oil" theory — that oil production has peaked worldwide — leading investment groups, companies, and governments to increase funding and the development of various means of alternative fuel sources, including wind, solar, nuclear, hydrogen, and coal. While OPEC has raked in hundreds of billions of dollars in oil profits in the 2000s (when the price of oil skyrocketed), member countries are seeing a lot of long-term risk to their rainmaking commodity investment and cash cow.
OPEC: Final Thoughts
OPEC's decisions over the years have had considerable influence on worldwide oil prices. However, it is also in OPEC's collective interest to ensure that prices remain "reasonable" to consumers. Otherwise, they merely provide massive incentives to the market to generate alternative products for energy-consuming masses. Oil is increasingly coming up against some heavy opposition, as the harmful effects that carbon dioxide is believed to have on the environment, particularly as a contributor to global warming, are providing added incentive for policymakers, institutions, and citizens to rapidly deploy non-oil sources of energy.