What Is the Organization of the Petroleum Exporting Countries (OPEC)?
The term Organization of the Petroleum Exporting Countries (OPEC) refers to a group of 13 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 Emirates, Libya, Algeria, Nigeria, and four other countries.
- The Organization of the Petroleum Exporting Countries is a cartel consisting of 13 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.
- The organization was established in 1960 by its founding members Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela.
- While OPEC does ensure that there is a steady supply of oil in the global market, it has come under fire for holding considerable power in the industry, which allows it to keep prices as high as possible.
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 September 1960 by 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 Aug. 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, as follows:
- Qatar (1961)
- Indonesia (1962)
- Libya (1962)
- United Arab Emirates (1967)
- Algeria (1969)
- Nigeria (1971)
- Ecuador (1973)
- Gabon (1975)
- Angola (2007)
- Equatorial Guinea (2017)
- Congo (2018)
Ecuador withdrew from the organization on Jan. 1, 2020. Qatar terminated its membership on Jan. 1, 2019, and Indonesia suspended its membership on Nov. 30, 2016, so as of 2020 the organization consists of 13 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.
According to the OPEC website, the group's mission is “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.”
The organization is committed to finding ways to ensure that oil prices are stabilized in the international market without any major fluctuations. Doing this helps keep the interests of member nations while ensuring they receive a regular stream of income from an uninterrupted supply of crude oil to other countries.
OPEC recognizes the founding nations as full members. Any country that wishes to join and whose application is accepted by the organization is also considered a full member. These countries must have significant crude petroleum exports. Membership to OPEC is only granted after receiving a vote from at least three-quarters of its full members. Associate memberships are also granted to countries under special conditions.
The percentage of crude oil reserves held by OPEC countries in 2019.
Oil prices and OPEC's role in the international petroleum market are subject to a number of different factors. 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 increased and prices dropped significantly, leaving OPEC in a delicate position.
OPEC decided to maintain high production levels and consequently low prices as of mid-2016, 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.
Demand for oil dropped during the global COVID-19 pandemic, which began in 2020. Producers had an overabundance in supply with no place to store it, as the world experienced lockdowns cutting down demand. This, along with a price war between Russia and Saudi Arabia, led to a drop in oil prices. As a result, the organization decided to cut production by 9.7 million barrels per day between May and July 2020. Oil prices continued to experience volatility, leading OPEC to adjust production levels to 7.2 million barrels per day as of January 2021.
OPEC faces considerable challenges from innovation and new, green technology. High oil prices are causing some oil-importing countries to look to unconventional—and cleaner—sources of energy. These alternatives, such as shale production as an alternative energy source, and hybrid and electric cars that reduce the dependence on petroleum products, continue to put pressure on the organization.
Advantages and Disadvantages of OPEC
There are several advantages of having a cartel like OPEC operating in the crude oil industry. First, it promotes cooperation among member nations, helping them achieve some degree of political hostilities. And because the organization's main goal is to stabilize oil production and prices, it is able to exert some influence over production from other nations.
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.
What does OPEC do exactly?
OPEC coordinates and consolidates the policies about petroleum production and output involving its member nations. It promises a stable oil market that offers petroleum supplies that are both efficient and economic.
What are the main goals of OPEC?
OPEC's main goal is to maintain oil prices at a profitable level for its members while keeping the market as free as possible from restrictions. The organization ensures its members receive a steady stream of income from an uninterrupted supply of oil.
What countries are in OPEC?
OPEC is made up of 13 member nations. The five founding members are Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela, while the other full members include Algeria, Angola, Congo, Equatorial Guinea, Gabon, Libya, Nigeria, and United Arab Emirates.
Is the U.S. part of OPEC?
The United States is not part of OPEC. This means that the country has control over its own production and supply without any interference from the organization.
Who left OPEC?
Countries that left OPEC include Ecuador, which withdrew from the organization in 2020, Qatar, which terminated its membership in 2019, and Indonesia, which suspended its membership in 2016.
The Bottom Line
OPEC is an organization that controls petroleum production, supplies, and prices in the global market. The group was established in 1960 and is made up of 13 different oil-producing companies. It holds considerable influence in the marketplace and is often criticized for inflation oil prices to the benefit of its members. But it isn't immune to challenges, notably geopolitical tensions, oversupply and drops in demand, and the adoption of new, green technologies.