Organization of the Petroleum Exporting Countries OPEC

what is the organization known as opec?

Jaffe and Morse write that rising fossil fuel costs coupled with government subsidies for renewables have spurred investments in the sector. In the United States, Biden has called for massive investments in clean energy production. And as climate change concerns take center stage in the coming years, OPEC could take a hit. Others were spurred by differences in opinion over strategy and target prices for the cartel.

That continued the policy OPEC formed on November 30, 2016, when it agreed to cut production by 1.2 million barrels per day (mbpd). Russia, not an OPEC member, voluntarily agreed to cut production. OPEC claims that its members collectively own about four-fifths of the world’s proven petroleum reserves, while they account for two-fifths of world oil production. Members differ in a variety of ways, including the size of oil reserves, geography, religion, and economic and political interests. Some members, such as Kuwait, Saudi Arabia, and the United Arab Emirates, have very large per capita oil reserves; they also are relatively strong financially and thus have considerable flexibility in adjusting their production. Saudi Arabia, which has the second largest reserves and a relatively small (but fast-growing) population, has traditionally played a dominant role in determining overall production and prices.

what is the organization known as opec?

Every U.S. president since Nixon has advocated for energy independence, though economists continue to debate the merits of such a goal. Proponents say that less reliance on OPEC oil reduces the trade deficit and makes the U.S. economy more resilient in the face of oil price swings. Some say that at the very least it will allow the United States to shift its focus away from the Middle East. It wants to make sure its members get a reasonable price for their oil.

The shale revolution appears to have taken the group by surprise. In 2015, OPEC reacted to the hydraulic fracturing movement by driving prices down, assuming that shale production would no longer be economically viable. But new technologies have allowed American producers to tap into previously trapped oil at decreasing cost, leading the United States to become the world’s largest oil producer in recent years. Production fell in 2020, as measures to contain the COVID-19 pandemic reduced oil demand, but it has since rebounded.

Organization of the Petroleum Exporting Countries (OPEC)

For countries that export petroleum at relatively low volume, their limited negotiating power as OPEC members would not necessarily justify the burdens imposed by OPEC production quotas and membership costs. The OPEC Special Fund was conceived in Algiers, Algeria, in March 1975, and was formally established the following January. Current OPEC members are[ref] Algeria, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, the Republic of the Congo, Saudi Arabia, the United Arab Emirates and Venezuela. Without OPEC, individual oil-exporting countries would pump as much as possible to maximize national revenue. By competing with each other, they would drive prices even lower. OPEC countries would run out of their most precious resource that much faster.

Late that year, Egypt and Syria launched a surprise attack against Israel, and the United States responded with a $2.2 billion military aid package to the Israelis. Led by the Arab oil ministers, OPEC retaliated with an embargo against the United States and a few other allies of Israel and began to cut production. President Richard Nixon instituted price controls on gasoline, which exacerbated the situation and led to long lines at the pump. Secretary of State Henry Kissinger hurriedly began to negotiate an end to the war and to OPEC’s embargo. In 1960, five OPEC countries allied to regulate the supply and price of oil.

  1. If Riyadh continues to pursue a more assertive foreign policy, it could be a challenge for the cartel to remain cohesive.
  2. OPEC countries supply about two-fifths of the world’s oil consumption and possess about two-thirds of the world’s proven oil reserves.
  3. In the 1980s, OPEC conferences were typically characterized by disagreements between so-called price doves, who pushed for higher output and lower prices, versus price hawks, typically from member states with large populations and strained budgets.
  4. When prices are higher than $80 a barrel, other countries have the incentive to drill more expensive oil fields.
  5. In recent years, several challenges to OPEC’s influence have come to the fore, including divisions within its membership, the emergence of the United States as a major oil exporter, and the global shift to cleaner energy sources.

Each country is responsible for reporting its own production. In this scenario, there is room for “cheating.” A country won’t go too far over its quota though unless it wants to risk being kicked out of OPEC. On July 2, 2019, the participating countries endorsed a three-year charter of cooperation, an agreement to promote continued ministerial and technical dialogue. Together, they produce almost half the world’s oil output.

OPEC’s third goal is to become the world’s oil supply swing producer. This would involve responding to shortages or surpluses by increasing or decreasing supply as needed—effectually achieving its first two goals of controlling price stability and volatility. 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’s armies destroyed refineries in Kuwait. OPEC also increased production in 2011 during the crisis in Libya.

OPEC Member Countries

OPEC’s founding members not only set out to negotiate higher global posted prices for oil but also pursued greater control over their own resources through the nationalization of international oil company concessions. In recent years, several challenges to OPEC’s influence have come to the fore, including divisions within its membership, the emergence of the United States as a major oil exporter, and the global shift to cleaner energy sources. The bloc has adapted by forming the so-called OPEC+ coalition with Russia and other countries, but disruptions caused by the COVID-19 pandemic have undermined those efforts. In 2022, Russia’s war in Ukraine and the resulting surge in global oil prices refocused attention on OPEC. Indeed, friction between Russia and Saudi Arabia came to a head at the onset of the pandemic in 2020. Saudi Arabia pushed for OPEC+ members to reduce production at a meeting in Vienna in early March.

Combined, the group controls close to forty percent of world oil production. This dominant market position has at times allowed OPEC to act as a cartel, coordinating production levels among members to manipulate global oil prices. As a result, U.S. presidents from Gerald Ford to Donald Trump have railed against the oil cartel as a threat to the U.S. economy. OPEC’s influence on the market has been widely criticized.

production dispute

OPEC members coordinate policies on oil prices, production, and related matters at semiannual and special meetings of the OPEC Conference. The Board of Governors, which is responsible for managing the organization, convening the Conference, and drawing up the annual budget, contains representatives appointed by each member country; its chair is elected to a one-year term by the Conference. OPEC also possesses a Secretariat, headed by a secretary-general appointed by the Conference for a three-year term; the Secretariat includes research and energy-studies divisions. Ecuador suspended its OPEC membership from 1992 until 2007 and then withdrew in 2020. Indonesia suspended its membership beginning in 2009 and briefly rejoined in 2016 before suspending its membership again that year. Qatar, during a prolonged blockade implemented by other OPEC countries, terminated its membership in January 2019 to focus on natural gas production.

Because its member countries hold the vast majority of crude oil reserves, the organization has considerable power in these markets. As a cartel, OPEC members have a strong incentive to keep oil prices as high as possible while maintaining their shares of the global market. OPEC was established in 1960 by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela; its membership has expanded and contracted over the years.

1980: Special Fund, now the OPEC Fund for International Development

It is headquartered in Vienna, Austria, where the OPEC Secretariat, the executive organ, carries out OPEC’s day-to-day business. OPEC was established in Baghdad in September 1960 by founding members Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela, and now has 13 member countries. It responded to a sudden drop in the U.S. dollar’s value after President Nixon abandoned the gold standard.

OPEC in a Changing World

Since oil is a somewhat uniform commodity, most consumers base their buying decisions on nothing other than price. OPEC has traditionally said it was between $70 and $80 per barrel. If prices drop below that target, OPEC members agree to restrict supply to push prices higher. Countries that left OPEC include Ecuador, which withdrew from the organization in 2020, Qatar, which terminated its membership in 2019, and Indonesia, which suspended its membership in 2016.

Venezuela, on the other hand, has the largest reserves but produces only a fraction of what Saudi Arabia produces. Vast reserves of U.S. shale oil have not completely insulated American consumers from OPEC-induced price swings. Changes in U.S. production levels are the result of dozens of private energy companies’ independent decisions, and it can take months before consumers feel any adjustments. That means when there are sudden changes in market conditions, OPEC can gain substantial, if brief, market power to influence prices. To counter this, OPEC partnered with Russia and several other major exporters to coordinate production and stabilize prices.

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