Crude oil is the most valuable commodity by trading turnover and one of the most widely used. In a world with many consumers and producers, a single country or organization can no longer "control" crude oil prices set in highly liquid global markets.
But that wasn't always the case. The Organization of the Petroleum Exporting Countries (OPEC) was created in 1960 to protect the interests of Mideast crude exporters in a market dominated--and fixed--by the U.S., at the time the world's largest consumer and producer.
Arab members of OPEC would demonstrate oil exporters' growing power in 1973 with a damaging oil embargo targeting the U.S. and other supporters of Israel in the West. The episode marked the peak of OPEC's leverage over the oil markets amid rapidly declining U.S. production.
The fortunes of OPEC and the U.S. have continued to fluctuate in the years since with oil booms and busts, and the resurgence of domestic U.S. output based on advances in hydraulic fracturing. The development of new energy production in the North Sea, Canadian oil sands and off the coasts of Africa, Australia and the Americas has limited the global sway of OPEC and U.S. producers alike, amid rapid consumption growth in China, India and other developing countries.
In this article, we explore the historical rivalry between OPEC and the U.S. and its evolution.
- OPEC and OPEC+ are groupings of oil exporting countries that use supply quotas in an effort to secure the highest long-term prices for their members
- Both groups set their supply targets by consensus, though Saudi Arabia plays an outsized role as the top exporter with most spare capacity.
- OPEC was formed to counter U.S. dominance of oil markets in the 1950s, and the 1973-1974 Arab oil embargo cemented its reputation as a U.S. rival.
- Global oil markets increasingly connecting Asian consumers with a broad group of OPEC and non-OPEC producers are too large and diverse to be dominated by a single country or group.
The U.S. was the world's leading producer and consumer of crude oil in 1960, the year OPEC was formed. While U.S. crude imports already totaled a million barrels per day, it was at prices set by the country's internationally dominant oil companies and backed by import quotas.
The U.S. adopted quotas limiting imports to 9% of domestic consumption in 1959. Five years earlier, a consortium of U.S. oil companies gained control of Iran's crude production after a Western-backed coup.
Strong U.S. consumption growth during the 1960s, coupled with decline in domestic crude output throughout the 1970s, increased the market power of oil exporters including OPEC. Images of long lines at gas stations in the U.S. during the 1973-1974 oil embargo cemented a view of OPEC as an adversary among Americans.
The energy conservation measures and exploration efforts prompted by high oil prices in the 1970s laid the seeds for the 1980s energy slump that followed.
As U.S. domestic output rebounded amid rapid development of shale resources starting in 2011, the rivalry with OPEC revived as a competition between producers. When Saudi Arabia raised output starting in 2014, depressing crude oil prices, it did so with the stated aim of reversing big recent gains in U.S. shale production.
A steady supply of legislative proposals in the U.S. Congress starting in 2000 sought to make OPEC subject to U.S. antitrust laws as a cartel. None have been enacted.
The Organization of the Petroleum Exporting Countries (OPEC) was formed in 1960 by developing country exporters to assert control over their domestic production and global supply. The five founding members were Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Following subsequent additions and a few departures, OPEC currently has these 13 members:
- Equatorial Guinea
- Saudi Arabia
- United Arab Emirates
Each member of the organization has one vote and all OPEC decisions on oil production require unanimous consent. (New members may be admitted with approval from three-quarters of the membership, including all founding countries.)
In practice, Saudia Arabia has historically enjoyed an outsized role in OPEC decision-making because it is by far the organization's top producer and exporter, with an even larger share of aggregate spare production capacity within the group. In 2021, Saudi Arabia accounted for 34% of OPEC's crude oil output, more than twice as much as Iraq, the second-largest producer in the organization. OPEC crude oil accounted for 28% of global petroleum liquids production in January 2022.
All OPEC members benefit from higher prices as a result of the supply quotas adopted by the organization, but each member also has an incentive to supply crude above its quota to maximize oil revenue. The scale of Saudi Arabia's production relative to that of other OPEC members gives those countries an additional incentive to supply as much crude as OPEC's dominant producer will tolerate. As a result, accusations of cheating on quotas have surfaced throughout the organization's history, challenging critics' claims it is an effective cartel.
How OPEC Works
By charter, each member country has one vote and oil supply agreements among members require unanimous consent. In practice, Saudi Arabia plays a dominant role by virtue of its status as OPEC's biggest producer and the country with most unused production capacity. Member states frequently supply more oil than their quotas specify.
In late 2016, OPEC agreed to coordinate crude oil supply with 10 non-OPEC countries under the OPEC+ umbrella. The non-OPEC members joining OPEC+ were Russia, Kazakhstan, Azerbaijan, Malaysia, Mexico, Bahrain, Brunei, Oman, Sudan, and South Sudan. OPEC+ supply agreements, like OPEC's, require consensus among members.
While Russia's crude oil production rivals Saudi Arabia's, it has much less spare production capacity. Following Russia's invasion of Ukraine in February 2022, Saudi Crown Prince Mohammed bin Salman reiterated Saudi Arabia's commitment to OPEC+.
OPEC vs. the United States—The Future
Every time gas prices rise, millions of U.S. motorists take notice. No other consumer product has prices so prominently displayed or frequently discussed. Since the 1970s, U.S. politicians have frequently blamed OPEC for energy price increases.
As a group of national producers often described as a cartel and concentrated in the Middle East, a region long perceived as hostile to U.S. interests, OPEC has been an easy target. In recent years, the group has sought to improve its image in the U.S., with limited results.
In the short term, OPEC and U.S. shale producers continue to compete for global market share. Unlike OPEC, U.S. companies are subject to antitrust provisions barring them from coordinating supply plans. Shale drilling incurs higher production costs than do the traditional vertical wells in Saudi oil fields. Shale resources also have steeper decline curves, meaning production from shale wells declines faster than from conventional ones.
The U.S. Energy Information Administration expects U.S. crude oil production to peak in 2030-2035, while OPEC production is expected to continue rising through 2050.
Much of the growth in energy consumption is expected to take place in developing Asian countries, where petroleum liquids demand is expected to grow 1.8% annually through 2050, three times as fast as in the U.S.
As OPEC ships more of its crude to Asia while U.S. production and consumption growth slow over time, the historic rivalry between the U.S. and OPEC could diminish. But it could flare anew subject to geopolitical risks including climate change and the future of the recently weakened U.S.-Saudi relationship.