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The Organization of the Petroleum Exporting Countries (OPEC) is a cartel made up of Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela; since 1965 its international headquarters have been in Vienna, Austria.

The principal aim of the Organization, according to its Statute, is "the coordination and unification of the petroleum policies of its member countries and the determination of the best means for safeguarding their interests, individually and collectively; devising ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations; giving due regard at all times to the interests of the producing nations and to the necessity of securing a steady income to the producing countries; an efficient, economic and regular supply of petroleum to consuming nations, and a fair return on their capital to those investing in the petroleum industry."

OPEC's influence on the market has not always been a stabilizing one, however. It alarmed the world and triggered high inflation across both the developing and developed world through its use of the oil weapon in the 1973 oil crisis. Its ability to control the price of oil has diminished greatly since its heyday, following the much-expanded development of the Gulf of Mexico, the North Sea, and the growing fluidity of the market. However, OPEC still has considerable impact on the price of oil. It is still commonly used as a textbook example of a cartel.

Membership

OPEC countries   Current member states   Former member states
Chart of Oil Trading Nations

The Organization now has 11 member states. They are listed below with their affiliation dates.

Africa
Middle East
South America
Southeast Asia
Former Members
  •  Gabon (Full member from 1975 to 1995)
  •  Ecuador (Full member from 1963 to 1993)

OPEC's official language is English, although the official language of a majority of OPEC member-states is Arabic, as seven current members are Arab states. Only one member nation (Nigeria) has English as an official language.

History

OPEC headquarters in Vienna

Venezuela was the first country to move towards the establishment of the Organization of the Petroleum Exporting Countries (OPEC) by approaching Iran, Iraq, Kuwait and Saudi Arabia, in 1949, and suggesting that they exchange views and explore avenues for regular and closer communications between them. In September 1960, the government of Iraq invited Iran, Kuwait, Saudi Arabia and Venezuela to meet in Baghdad, to discuss the reduction in price of crudes produced by their respective countries. As a result OPEC was founded to unify and coordinate members' petroleum policies. Original OPEC members include Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Between 1960 and 1975, the organization expanded to include Qatar (1961), Indonesia (1962), Libya (1962), the United Arab Emirates (1967), Algeria (1969), and Nigeria (1971). Ecuador and Gabon were members of OPEC, but Ecuador withdrew in December 1992, and Gabon followed suit in January 1995. Although Iraq remains a member of OPEC, Iraqi production has not been a part of any OPEC quota agreements since March 1998. EIA estimates that the current eleven OPEC members account for about 40% of world oil production, and about 2/3 of the world's proven oil reserves.

The Yom Kippur War

The persistence of the Arab-Israeli conflict finally triggered a response that transformed OPEC from a mere cartel into a formidable political force. After the Six Day War of 1967, the Arab members of OPEC formed a separate, overlapping group, the Organization of Arab Petroleum Exporting Countries, for the purpose of centering policy and exerting pressure on the West over its support of Israel. Egypt and Syria, though not major oil-exporting countries, joined the latter grouping to help articulate its objectives. Later, the Yom Kippur War of 1973 galvanized Arab opinion. Furious at the emergency re-supply effort that had enabled Israel to withstand Egyptian and Syrian forces, the Arab world imposed the 1973 oil embargo against the United States and Western Europe. In the 1970s, the great Western oil conglomerates suddenly faced a unified block of producers.

This Arab-Israeli conflict triggered a crisis already in the making. They consistently drew the oil away from non-Arab nations. The West could not continue to increase its energy use 5% annually, pay low oil prices, yet sell inflation-priced goods to the petroleum producers in the Third World. This was stressed by the Shah of Iran, whose nation was the world's second-largest exporter of oil, and the closest ally of the United States in the Middle East at the time. "Of course is going to rise," the Shah told the New York Times in 1973. "Certainly! And how...; You increased the price of wheat you sell us by 300%, and the same for sugar and cement...; You buy our crude oil and sell it back to us, redefined as petrochemicals, at a hundred times the price you've paid to us...; It's only fair that, from now on, you should pay more for oil. Let's say 10 times more."

Operations

OPEC's member countries hold about two-thirds of the world's oil reserves. In 2005, OPEC accounted for 41.7% of the world's oil production, compared with 23.8% by OECD members and 14.8% by the Former Soviet Union.

Since currently 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 decided it wanted to be paid for its oil in euros instead of US dollars.

OPEC decisions have considerable influence on international oil prices. For example, in the 1973 energy crisis OPEC refused to ship oil to western countries that had supported Israel in the Yom Kippur War or October War, which they fought against Egypt and Syria. This refusal caused a fourfold increase in the price of oil, 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%. At that time, OPEC nations — including many who had recently nationalized their oil industries — joined the call for a new international economic order to be initiated by coalitions of primary producers. Concluding the First OPEC Summit in Algiers they called for stable and just commodity prices, an international food and agriculture program, technology transfer from North to South, and the democratization of the economic system.

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. But the division of OPEC countries occasioned by the Iraq-Iran War and the Iraqi invasion of Kuwait marked a low point in the cohesion of OPEC. Once supply disruption fears that accompanied these conflicts dissipated, oil prices began to slide dramatically.

After oil prices slumped at around $10 a barrel, concerted diplomacy, sometimes attributed to Venezuela’s president Hugo Chávez, achieved a coordinated scaling back of oil production beginning in 1998. In 2000, Chávez hosted the first summit of heads of state of OPEC in 25 years. In August 2004, OPEC began communicating that its members had little excess pumping capacity, indicating that the cartel was losing influence over crude oil prices. Indonesia is reconsidering its membership having become a net importer and being unable to meet its production quota.

See also

Petroleum industry writers/commentators

Books covering aspects of the subject

Notes

  1. Chapter I, Article 2 of The Statute of the Organization of the Petroleum Exporting Countries (as amended)
  2. Quoted in Walter LaFeber, Russia, America, and the Cold War (New York, 2002), p. 292.

External links

Organization of the Petroleum Exporting Countries (OPEC)
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