The Organization of the Petroleum Exporting Countries (OPEC) comprises countries that have organized for the purpose of negotiating with oil companies on matters of petroleum production, prices, and future concession rights. Founded September 14, 1960 at a Baghdad conference, OPEC originally consisted of only five countries, but has since expanded to include several others. The members of OPEC, which constitute a cartel, agree on the quantity and the prices of the oil exported. The OPEC headquarters is situated in Vienna, Austria. With a coordinated effort among its member countries, OPEC seeks to regulate oil production, and thereby manage oil prices, primarily by setting quotas for its members. Member countries hold about 75% of the world's oil reserves, and supply about 40% of the world's oil.
Since worldwide oil sales are denominated in U.S. dollars, changes in the value of the dollar against other world currencies affect OPEC's decisions on how much oil to produce. For example, when the dollar falls relative to the other currencies, OPEC-member states receive smaller revenues in other currencies for their oil, causing substantial cuts in their purchasing power, because they continue to sell oil in the U.S. dollar. After the introduction of the euro, Iraq unilaterally decided it wanted to be paid for its oil in euros instead of US dollars. Some people argue that because this decision could have severely damaged the US economy, had it been followed by other OPEC members, it was one of the reasons that the US started the Gulf War.
OPEC decisions have a heavy influence on international oil prices. A good example of this influence is the 1973 energy crisis, in which OPEC refused to ship oil to western countries who had supported Israel in its conflict with Egypt, the Yom Kippur War. This refusal caused a fourfold increase in oil price, which lasted five months, starting on October 17, 1973, and ending on March 18, 1974. OPEC nations then agreed, on January 7, 1975, to raise crude oil prices by 10%.
Unlike many other cartels, OPEC has been successful at increasing the price of oil for extended periods. Much of OPEC's success can be attributed to Saudi Arabia's flexibility. It has tolerated cheating on the part of other cartel members, and cut its own production to compensate for other members having exceeded their production quotas. This actually gives them good leverage, because with most members at full production, Saudi Arabia is the only member with spare capacity, and the ability to increase supply, if needed.
The policy has been successful, causing the price of crude oil to rise to levels that had, at one time, been reached only by refined products. However, OPEC's ability to raise prices does have some limits. An increase in oil price decreases consumption, and could cause a net decrease in revenue. Furthermore, an extended rise in price could encourage systematic behavior change, such as alternative energy utilization, or increased conservation.
Leading up to the 1990-91 Gulf War, Iraqi President Saddam Hussein advocated that OPEC push world oil prices up, thereby helping Iraq, and other member states, service debts.
As of August 2004, OPEC has been communicating that its members have little excess pumping capacity, indicating that the cartel is losing influence over crude oil prices.
The 11 OPEC member nations:
The six major non-OPEC oil-producing nations are:
Petroleum industry writers/comentators
Books covering aspects of the subject
- OPEC http://www.opec.org/ website
Last updated: 02-06-2005 05:20:13
Last updated: 04-25-2005 03:06:01