The Organization of the Petroleum Exporting Countries (OPEC or OPEP in several other languages) is an intergovernmental organization of 15 nations, founded in 1960 in Baghdad by the first five members (Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela), and headquartered since 1965 in Vienna, Austria. As of 2018, the 15 countries accounted for an estimated 44 percent of global oil production and 81.5 percent of the world’s “proven” oil reserves, giving OPEC a major influence on global oil prices that were previously determined by the American-dominated so-called “Seven Sisters” grouping of multinational oil companies.
The stated mission of the organization is to “coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets, in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry.” The organization is also a significant provider of information about the international oil market.
The formation of OPEC marked a turning point toward national sovereignty over natural resources, and OPEC decisions have come to play a prominent role in the global oil market and international relations. The effect can be particularly strong when wars or civil disorders lead to extended interruptions in supply. In the 1970s, restrictions in oil production led to a dramatic rise in oil prices and in the revenue and wealth of OPEC, with long-lasting and far-reaching consequences for the global economy.
In the 1980s, OPEC began setting production targets for its member nations; generally, when the targets are reduced, oil prices increase. This has occurred most recently from the organization’s 2008 and 2016 decisions to trim oversupply. Economists often cite OPEC as a textbook example of a cartel that cooperates to reduce market competition, but one whose consultations are protected by the doctrine of state immunity under international law.
As of June 2018, OPEC has 15 member countries: six in the Middle East, seven in Africa, and two in South America. The current OPEC members are: Algeria, Ecuador, Angola, Equatorial Guinea, Gabon, Iraq, Iran, Kuwait, Libya, Nigeria, Qatar, the Republic of the Congo, Saudi Arabia (the de facto leader), United Arab Emirates, and Venezuela. Indonesia is a former member.
According to the U.S. Energy Information Administration (EIA), OPEC’s combined rate of oil production (including gas condensate) represented 44 percent of the world’s total in 2016, and OPEC accounted for 81.5 percent of the world’s “proven” oil reserves, including 48 percent from just the six Middle Eastern members.
Approval of a new member country requires agreement by three-quarters of OPEC’s existing members(includes founding members also), including all five of the founders. In October 2015, Sudan formally submitted an application to join, but it is not yet a member.
Since the 1980s, representatives from Russia, Oman, Norway, Mexico, Egypt, and other oil-exporting nations have attended many OPEC meetings as observers. This arrangement serves as an informal mechanism for coordinating policies.
The OPEC Conference is the supreme authority of the organization, and consists of delegations normally headed by the oil ministers of member countries. The chief executive of the organization is the OPEC Secretary General. The Conference ordinarily meets at the Vienna headquarters, at least twice a year and in additional extraordinary sessions when necessary. It generally operates on the principles of unanimity and “one member, one vote”, with each country paying an equal membership fee into the annual budget.
However, since Saudi Arabia is by far the largest and most-profitable oil exporter in the world, with enough capacity to function as the traditional swing producer to balance the global market, it serves as “OPEC’s de facto leader.”
At various times, OPEC members have displayed apparent anti-competitive cartel behaviour through the organization’s agreements about oil production and price levels. In fact, economists often cite OPEC as a textbook example of a cartel that cooperates to reduce market competition.
OPEC members strongly prefer to describe their organization as a modest force for market stabilization, rather than a powerful anti-competitive cartel. In its defence, the organization was founded as a counterweight against the previous “Seven Sisters” cartel of multinational oil companies, and non-OPEC energy suppliers have maintained enough market share for a substantial degree of worldwide competition. Moreover, because of an economic “prisoner’s dilemma” that encourages each member nation individually to discount its price and exceed its production quota, widespread cheating within OPEC often erodes its ability to influence global oil prices through collective action.
OPEC often has difficulty agreeing on policy decisions because its member countries differ widely in their oil export capacities, production costs, reserves, geological features, population, economic development, budgetary situations, and political circumstances. Indeed, over the course of market cycles, oil reserves can themselves become a source of serious conflict, instability and imbalances, in what economists call the “natural resource curse”. A further complication is that religion linked conflicts in the middle east are recurring features of the geopolitical landscape for this oil-rich region.
Although events such as these can temporarily disrupt oil supplies and elevate prices, the frequent disputes and instabilities tend to limit OPEC’s long-term cohesion and effectiveness.