What Is the Organization of the Petroleum Exporting Countries (OPEC)?

The Organization of the Petroleum Exporting Countries (OPEC) is a group consisting of 14 of the world’s major oil-exporting nations. OPEC was founded in 1960 to coordinate the petroleum policies of its members and to provide member states with technical and economic aid. OPEC is a cartel that aims to manage the supply of oil in an effort to set the price of oil on the world market, in order to avoid fluctuations that might affect the economies of both producing and purchasing countries. Countries that belong to OPEC include Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela (the five founders), plus the United Arab Republic, Libya, Algeria, Nigeria, and five other countries.

Key Takeaways

  • The Organization of the Petroleum Exporting Countries (OPEC) is a cartel consisting of 14 of the world’s major oil-exporting nations.
  • OPEC aims to regulate the supply of oil in order to set the price on the world market.
  • The arrival of fracking technology for natural gas in the U.S. has reduced OPEC’s ability to control the world market.
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Organization of Petroleum Exporting Countries

Understanding the Organization of the Petroleum Exporting Countries (OPEC)

OPEC, which describes itself as a permanent intergovernmental organization, was created in Baghdad in Sept. 1960 by its founding members: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. The headquarters of the organization are in Vienna, Austria, where the OPEC Secretariat, the executive organ, carries out OPEC’s day-to-day business.

The chief executive officer of OPEC is its secretary general. His Excellency Mohammad Sanusi Barkindo of Nigeria was appointed to the position for a three-year term of office on August 1, 2016, and was re-elected to another three-year term on July 2, 2019.

According to its statutes, OPEC membership is open to any country that is a substantial exporter of oil and shares the ideals of the organization. After the five founding members, OPEC added 11 additional member countries as of 2019. They are, in order of joining, Qatar (1961), Indonesia (1962), Libya (1962), the United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), Gabon (1975), Angola (2007), Equatorial Guinea (2017), and Congo (2018). However, Qatar terminated its membership on Jan. 1, 2019, and Indonesia suspended its membership on Nov. 30, 2016, so as of 2019 the organization consists of 14 states.

It is notable that some of the world’s largest oil producers, including Russia, China, and the United States, are not members of OPEC, which leaves them free to pursue their own objectives.

Some of the world’s greatest oil-producing countries, such as Russia, China, and the U.S., do not belong to OPEC.

How OPEC Works

The group has agreed to define OPEC’s mission thusly: “to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic, and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry.”

74.9%

The percentage of crude oil reserves held by OPEC countries in 2019.

OPEC’s influence on the market has been widely criticized. Because its member countries hold the vast majority of crude oil reserves (79.4%, according to the OPEC website), the organization has considerable power in these markets. As a cartel, OPEC members have a strong incentive to keep oil prices as high as possible while maintaining their shares of the global market.

The advent of new technology, especially fracking in the United States, has had a major effect on worldwide oil prices and has lessened OPEC’s influence on the markets. As a result, worldwide oil production has increased and prices have dropped significantly, leaving OPEC in a delicate position. As late as June 2016, OPEC decided to maintain high production levels, and consequently low prices, in an attempt to push higher-cost producers out of the market and regain market share. However, starting in January 2019, OPEC reduced output by 1.2 million barrels a day for six months due to a concern that an economic slowdown would create a supply glut, extending the agreement for an additional nine months in July 2019.