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OPEC

The price of oil fluctuates as it is subject to recent events in the world that can affect its value or believed value. One global actor in particular changes the price of oil: OPEC (the Organisation of the Petroleum Exporting Countries). As OPEC has the power to adjust the price of oil, it has a significant influence on the global economy and is instrumental in finding solutions to oil-related supply (surplus or deficit) and demand (too much or too little of the amount of oil available) issues.

OPEC, oil prices 1861-2020, StudySmarterFig. 1 - Oil price fluctuation 1861-2020

OPEC meaning

The following is a definition for OPEC

OPEC stands for the Organisation of the Petroleum Exporting Countries. OPEC is an IGO (an intergovernmental organisation) formed of 13 oil-producing countries.

OPEC aims and agreements

The aim of the OPEC is to coordinate oil supply and demand to:

  • Secure a regular supply of oil (petroleum) to consumers.

  • Provide a steady income for producers.

  • Return a fair capital to investors of the petroleum industry.

The control of the oil market has led some to call OPEC a cartel as it controls the market. However, OPEC has agreed to try to increase efforts to have a global stabilised oil market.

Members of OPEC

The OPEC has five founding members that have full control of which countries can become full members. These are Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Other countries that have joined include Qatar, Indonesia, Libya, United Arab Emirates, Algeria, Nigeria, Ecuador, Angola, Gabon, Equatorial Guinea and Congo. Qatar, Indonesia and Ecuador have since left.

Saudi Arabia is considered the unofficial leader of OPEC as it is the largest and wealthiest producer of oil and has the ability to influence the prices due to the amounts they produce.

When is the OPEC meeting?

Full members have a say on issues made by the OPEC by operating under a one country, one vote method. There are also associate members who can attend at least biannual conferences (this means they meet twice a year) to set production quotas for each member. The conference is held in Vienna and led by the OPEC Secretary-General.

OPEC, OPEC countries on a world map, StudySmarterFig. 2 - Map of OPEC countries

What have been some of the problems in OPEC history?

Problems have arisen over the history of OPEC. This includes international company control and internal political instability.

Problems in OPEC history: Overcoming international multinational company control

Five founding members, consisting of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, set up OPEC in 1960 due to changes in local politics. These countries were decolonising to form new independent states, which provided a vast amount of economic opportunities. At the time, the international oil market was dominated by the Seven Sisters multinational companies (which were of mainly American origin but were also owned by former colonist countries such as the UK and the Netherlands.) It was hoped that member countries would take control of their domestic oil markets and be less under the influence of the United States as the growing hegemon. It is considered a turning point towards “regaining sovereignty over natural resources”.

Problems in OPEC history: Internal political instability

By the 1970s, several global events triggered the steep rise in oil prices, and membership of the OPEC grew to 13 countries. An oil glut and consumer shift away from oil hydrocarbons resulted in a fall in oil demand, causing economic instability in many member countries. Group production adjustment, which limited and divided production between countries, and a reference basket for pricing, which is a reference price for benchmarking oil across the world, restored prices in the 1980s. Increasing troubles in the Middle East in 1990-1 continued to raise prices. OPEC allowed for consumer-to-producer conversations. In combination with ISIS troubles in the region and internal competition between OPEC members to gain market share, this led to a short-lived drop in oil prices around 2013.

Problems in OPEC history: Sharpening of environmental focus

Environmental concerns about oil began to grow after the United Nations climate change conference called the 1992 Earth Summit. OPEC summits in the 2000s pushed for stable energy markets, sustainable development and the environment as guiding themes. All OPEC member countries signed the Paris Agreement on climate change in 2015, and OPEC has representation at the United Nations Framework Convention of Climate Change to exchange views.

Problems in OPEC history: Oil market stabilisation

Meanwhile, oil prices have continued to rise since the 2008 recession when oil was considered a high-value investment. Trade patterns continue to shift with global demand growing, especially in the development of China and the Asian region. The Declaration of Cooperation between OPEC and 10-non OPEC members in 2016 reduced inventory and supply and helped rebalance the market. This became the longer term Charter of Cooperation in 2019. The COVID-19 pandemic saw a huge drop in demand resulting in full oil storage inventories. As of 2022, the demand for oil has been growing.

Is OPEC a cartel? Arguments for and against

The modern-day definition of a cartel is a group of individual commodity suppliers aiming to dominate the market to maintain high prices and prevent competition.

OPEC is a cartel

Some events in OPEC’s history that point towards it being a cartel:

  • OPEC imposed an embargo on the United States for intervening in the 1973 Arabia-Israeli War.

  • The new restrictions created by the formation of OPEC in the 1970s led to a dramatic rise in oil prices resulting in massive wealth generation for the OPEC members.

  • Production targets for member states have resulted in lower oil production and increased prices, most markedly in 2008 and 2016.

  • Setting prices for crude oil: OPEC generates crude oil benchmarks that are important for a reference price for buyers and sellers, including investment markets.

Currently, 13 member countries of the OPEC control 81% of the world’s proven oil reserves and 44% of the global oil production.

Energy diplomacy is a term used to describe the interactions between producer and consumer countries to encourage energy security. It is a form of international relations and on the agenda of many countries’ foreign policy.

OPEC is not a cartel

  • Its history: it is worth bearing in mind that OPEC was set up against the original Seven Sisters grouping of multinational oil companies that previously controlled oil prices.

  • OPEC is not anti-competitive: non-OPEC energy suppliers still have market share.

  • OPEC has not broken any rules: OPEC does not have any disputes with the World Trade Organisation for breaking competition rules. In fact, member countries frequently break OPEC rules of individually discounting prices and exceeding production quotas to encourage consumers to purchase from them.

  • The NOPEC act (no oil-producing and exporting cartel act) is a 2007 proposed US Congress bill against OPEC which was rejected.

  • Energy diplomacy role: you can argue from reading the brief history of OPEC that OPEC instead stabilises prices against any major market fluctuations, allowing stability for producer and consumer countries.

  • OPEC is a group that allows for collaborative information reporting: OPEC has allowed for much higher quality and quantity of information given to the international oil market for decision-making. OPEC releases an annual ‘World Oil Outlook’ report on future oil supply and demand projections.

What is the challenge for OPEC?

The main issue for the future of OPEC is the potential for conflicts between member countries. OPEC member countries vary widely on oil export capacities, including production costs, reserves and geological features, and political circumstances. Oil reserves can become the reason for conflict, such as the Niger Delta conflict, ongoing since 2004. This is known as the natural resource curse.

Furthermore, there are recurring religion-related conflicts in the Middle East which is the oil-rich region of the world. Examples include the Six-Day War in 1967, Arab Spring (2010–2012) and the international embargo against Iran from 2012–2016.

Climate change and the impact of burning fossil fuels on the environment also pose issues for OPEC. However, OPEC has reported that its members are actually leaders in battling climate change and investing in climate change solutions such as carbon capture utilisation and storage.

OPEC - Key takeaways

  • OPEC (Organisation of the petroleum exporting countries) is an IGO formed of 13 oil-producing countries.

  • OPEC aims to secure a regular oil supply to consumers and provide a steady income for producers.

  • Saudi Arabia is considered a major influence on the group.

  • OPEC states that its focus has changed since its conception in 1960 after overcoming the cartel of the Seven Sisters oil companies to oil market price stabilisation and increasing environmental focus.

  • There is a debate if OPEC is a cartel.

  • Pro-cartel debate: the group controls much of the world’s oil supply and sets reference prices.

  • Anti-cartel debate: OPEC has not been in any trouble for any international competition rules, and the group itself are competing against each other.

  • OPEC is a classic example of energy diplomacy.

  • The future for OPEC depends on conflicts between member countries or other conflicts that may occur due to the natural resource curse.


References

  1. Fig. 1: Oil price fluctuation (https://commons.wikimedia.org/wiki/File:Graph_price_of_oil_1861_to_2020_WID_data.png) by Oceanflynn (https://commons.wikimedia.org/wiki/User:Oceanflynn) licensed by CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0/deed.en)

Frequently Asked Questions about OPEC

Saudi Arabia is considered the de facto leader of OPEC.

In 2020, a barrel of oil was $39.41 on average, with a high of $53.35 in January. Prices were lowered in response to the pandemic. By contrast, the average price for a barrel of oil in February 2022 was $93.54 and are expected to increase to over $100.00 per barrel.

OPEC imposed an embargo on the United States for intervening in the 1973 Arabia-Israeli War.

Qatar, Indonesia and Ecuador.

13 countries make up OPEC. This includes Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Libya, United Arab Emirates, Algeria, Nigeria, Angola, Gabon, Equatorial Guinea and Congo.

Final OPEC Quiz

Question

What is OPEC?

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Answer

OPEC (organisation of the petroleum exporting countries) is an IGO formed of 13 oil producing countries.

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Question

What are the aims of OPEC?

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Answer

The aim of OPEC is to secure a regular supply of oil to consumers and provide a steady income for producers.

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How many founding members does OPEC have?


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Answer

There are five founding members of OPEC. They are Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.

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Which country is considered the swing producer and de facto leader of OPEC?

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Answer

Saudi Arabia is considered the de facto leader of OPEC given its position as the swing producer.

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What is a swing producer?


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Swing producer is a term used to describe the largest and wealthiest producer of a commodity with the ability to influence the prices due to the amounts they produce.

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What triggered the formation of OPEC?


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Answer

The founding members were in the process of decolonisation to form new independent states and wanted to move from the oppression of the Seven Sisters multinational companies that were controlling the prices of the countries’ most valuable natural resource.

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What are the two current focuses of OPEC?


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The current focus for OPEC is oil market price stabilisation and increasing environmental focus.

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What is the reference basket for pricing for crude oil?


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Answer

Reference basket for pricing is a reference price for benchmarking oil across the world.

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What continued to raise oil prices despite OPEC action in 1990-1?


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Answer

Increasing tensions in the Middle East continued to scare investors which led to expensive oil in 1990-1.

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What was the United Nations event that triggered growing environmental concern within OPEC?


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Answer

Environmental concerns on oil began to grow after the United Nations climate change conference called the 1992 Earth Summit. Two countries withdrew participation in OPEC as a result.

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What is the 2019 Charter of Cooperation between OPEC and non-OPEC oil-producing members?


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Answer

The Charter of Cooperation between OPEC and 10-non OPEC members in 2019 reduced inventory and supply and helped rebalance the market.

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How did COVID-19 affect oil storage inventories?


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Answer

The COVID-19 pandemic gave rise to a huge drop in demand resulting in full oil storage inventories and temporary drop in oil prices until OPEC demanded members to reduce production.

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What is the definition of a cartel?

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Answer

A cartel is a group of individual commodities suppliers with an aim to dominate the market in order to maintain high prices and prevent competition.

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What is the NOPEC act?


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Answer

The NOPEC act (no oil producing and exporting cartel act) is a 2007 proposed US Congress bill against OPEC.

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What is the definition of energy diplomacy?


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Answer

Energy diplomacy is a term used to describe the interactions between producer and consumer countries to encourage energy security. It is a form of international relations and on the agendas of many countries' foreign policy.

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Question

What is the annual report that OPEC produces on the future of oil supply and demand?


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The annual report is called the World Oil Outlook.

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What is the natural resource curse?


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Answer

The natural resource curse is a term coined by economists to describe conflicts that occur due to the tensions over control of the profitable natural resource of that country.

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What is the ongoing conflict in the Middle East since 2004?


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Answer

There are many ongoing tensions in the Middle East but the Niger Delta conflict began in 2004.

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