A Complete Guide to the Organization of the Petroleum Exporting Countries (OPEC)
What is OPEC?
The Organization of the Petroleum Exporting Countries (OPEC) is a group of 13 of the world’s largest oil exporting countries. It was founded in 1960 by the Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela to coordinate oil policies and create a support system between countries.
OPEC members collectively control a significant portion of the world’s oil supply, which means they can effectively fix the price of oil and avoid any volatility that could negatively impact members’ economies.
Who is in OPEC?
The current 13 members of OPEC include:
- Iran (founder)
- Iraq (founder)
- Kuwait (founder)
- Saudi Arabia (founder)
- Venezuela (founder)
- Equatorial Guinea
- The United Arab Emirates
The organization distinguishes between founders and full members in terms of voting rights. To be accepted into OPEC, a country must have a substantial net export of crude oil, fundamentally similar interests to member countries, and must be accepted by a three-fourths majority of full members, including concurring votes of all Founding Members.
There is another category of OPEC members known as “associate member”, which is a net oil exporting country that does not qualify for full membership. They can still benefit from special conditions provided that their interests are aligned with the group.
What is the role of OPEC?
OPEC’s role is to coordinate and unify the oil policies of its member countries and establish ways to safeguard their interests – both as individual countries and as a collective entity.
OPEC achieves this by devising ways to stabilize oil prices in international markets to effectively eliminate fluctuations that could be detrimental to members. The organization intends to ensure a stable income for oil-producing countries and a steady supply of oil to consuming countries.
OPEC was also created to prevent the United States from dominating the oil market. Until 1960, the United States was the largest producer and consumer of oil, which meant that prices were usually set by the country’s oil companies. By joining forces, OPEC members could limit US interference in world markets and position themselves as a rival.
This was first seen during the 1973 oil embargo, which prevented exports to targeted countries and reduced oil production. As a result, the United States experienced a run on gas stations.
How does OPEC influence oil prices?
OPEC influences oil prices by increasing and decreasing production capacity. Oil prices are not only based on current supply and demand levels, but also on future production forecasts. By altering the amount of oil that will enter circulation, OPEC can keep the price of oil high – assuming demand remains constant – to maximize group profits.
There is a balance, however, because cutting oil supply too much would reduce the income of OPEC members.
Decisions on OPEC policies will be announced at its biannual sessions, when quotas are set for each of its 13 members. Oil prices tend to be volatile in the lead up to these announcements as markets price in expectations.
Keep an eye on the economic calendar for the next OPEC meeting.
The relationship between OPEC production and oil prices becomes particularly clear when looking at supply from Saudi Arabia, OPEC’s largest oil producer. In fact, many choose to use only Saudi Arabia as an indicator of global oil market liquidity.
The key factor in this relationship is spare production capacity, that is, the amount of oil production that can be increased in 30 days and maintained for another 90 days. Saudi Arabia has the largest spare capacity, keeping more than 1.5 to 2 million barrels per day on hand for market management.
OPEC’s total capacity provides a clear indication to markets of the organization’s ability to handle financial crises that could reduce oil supply. If OPEC’s spare capacity is low, it could worry the markets and lead to higher oil prices.
For example, from 2003 to 2008, OPEC’s capacity was only about 2 million barrels per day, or 3% of global supply. Supply concerns and OPEC members (such as Libya) threatening to cut oil production drove oil prices up from $25 a barrel in September 2003 to $147.02 in July 2008.
Unexpected changes in production can also have a significant effect on oil prices. These can occur for a number of reasons, such as:
- The reluctance of an OPEC member to meet its objectives
- Disruptions to supply chains caused by strikes
- Geopolitical events and global crises
That’s why it’s important to keep up to date with all OPEC news.
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Does OPEC control the world’s oil reserves?
OPEC controls about 79.4% of oil reserves according to its website. It is also said to collectively produce 40% of the world’s crude oil and account for 60% of internationally traded oil.
But with the advent of other technologies, such as hydraulic fracturing, OPEC’s power in the world market has diminished. The five biggest oil producers in 2020 were the United States, Saudi Arabia, Russia, Canada and China – only one of which is a member of OPEC. Collectively, these non-OPEC countries control more than 40% of the world’s oil supply.
However, American companies are subject to antitrust provisions, which means that, unlike OPEC, they cannot participate in coordinated supply programs. This prevents the United States from having the same power in international markets as OPEC.
Difference Between OPEC and Non-OPEC Countries
The OPEC countries are the members of the non-governmental organization, while the non-OPEC members are production centers not included in the agreement. Major production centers include North America, regions of the former Soviet Union and countries bordering the North Sea.
In 2016, OPEC agreed to coordinate crude oil supply with 10 non-OPEC countries under what became OPEC+. OPEC+ members are Russia, Kazakhstan, Azerbaijan, Malaysia, Mexico, Bahrain, Brunei, Oman, Sudan and South Sudan.