Definition: OPEC stands for The Organization of Petroleum Exporting Countries. It is an organization of 12 oil-producing countries that effectively control the world's oil. OPEC members pump out 42% of the world's annual supply, controlling 61% of exports. These 12 countries hold 80% of the world's proven oil reserves. For these reasons, OPEC's decisions are critical to countries that depend on oil imports.
What Does OPEC Do?
OPEC states quite plainly that its goal is to manage the world's supply of oil. It does this to make sure its members get what they consider a good price for their oil. Since oil is a fairly uniform commodity, most of its consumers base their buying decisions on nothing other than price.
What's a good price? In the past, OPEC said it was around $70-$80 per barrel. If prices drop below that target, OPEC members agree to restrict supply to send prices higher. Without this agreement, individual oil-exporting countries would wind up increasing the supply to make more national revenue. By competing with each other, they would drive prices even lower. This would stimulate even more global demand, and OPEC countries would run out of their most precious resource that much faster. Instead, OPEC members agree to produce only enough to keep the price high for all members.
Furthermore, when prices are too much higher than $80 a barrel, then other countries have the incentive to drill more expensive oil fields. Sure enough, now that oil prices are closer to $100 a barrel, it's become cost effective for Canada to explore its shale oil fields. It's also made it profitable for the U.S. to use fracking to open up the Bakken oil fields for production. As a result, non-OPEC supply has increased.
OPEC's second goal is to reduce oil price volatility. That's because, at current prices and rates of production, OPEC countries have enough oil to last for 113 years. Furthermore, oil is expensive to produce. For maximum efficiency, oil extraction must run 24 hours a day, seven days a week. In addition, closing facilities could physically damage oil installations and even the fields themselves. Ocean drilling is especially difficult and expensive to shut down. Therefore, it's in OPEC's best interests to keep world prices stable.
For example, in June 2008, oil prices spiked to $143/barrel. OPEC responded by agreeing to produce a little more oil, which brought prices down. However, the global financial crisis brought oil prices down to $33.73/barrel in December. OPEC responded by reducing the supply, helping prices to again stabilize. A slight modification is usually enough to restore price stability.
OPEC also adjusts the world's oil supply in response to crises and shortages. For example, it replaced the oil lost during the Gulf Crisis in 1990. Several million barrels of oil per day were cut off when Saddam Hussein armies destroyed refineries in Kuwait. OPEC also increased production in 2011 during the crisis in Libya.
The Oil and Energy Ministers from the OPEC members meet twice a year, or more if needed, to coordinate their oil production policies. Each member country abides by an honor system, agreeing to only produce a certain amount. However, if a country winds up producing more, there really is no sanction or penalty. Furthermore, each country is responsible for reporting its own production. Therefore, there is room for "cheating." On the other hand, a country won't go too far over its quota, since it doesn't want to risk being kicked out of OPEC.
Despite its power, OPEC cannot completely control the price of oil. In some countries, additional taxes are imposed on gasoline and other oil-based end products to promote conservation. More importantly, oil prices are actually set by the oil futures market. Much of the oil price is determined by these commodities traders. For more on this, see Why Are Oil Prices So High?
OPEC MembersOPEC members are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE and Venezuela. Saudi Arabia alone produces enough oil to materially impact the world's supply. For this reason, it really has more authority and influence than the other countries. Here's a ranking of production by member:
- Saudi Arabia - 9.311 million barrels/day.
- Iran - 3.576 mb/d.
- Venezuela - 2.881 mb/d.
- Kuwait - 2.659 mb/d.
- Iraq - 2.653 mb/d.
- UAE - 2.565 mb/d.
- Nigeria - 1.975 mb/d.
- Angola - 1.618 mb/d.
- Algeria - 1.162 mb/d.
- Qatar - .734 mb/d.
- Ecuador - .5 mb/d.
- Libya - .489 mb/d. (Source: OPEC Annual Statistical Bulletin 2012)
In 1960, five OPEC countries formed an alliance to regulate the supply, and to some extent, the price of oil. These countries realized they had a non-renewable resource. If they competed with each other, the price of oil would be so low that they would run out sooner than if oil prices were higher.
This first meeting was held September 10-14 1960 in Baghdad, Iraq. The five founding members were Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. OPEC was registered with the UN on November 6, 1962. (Source:OPEC Brief History) Article updated May 15, 2013