OPEC: the story on HearLore

The Seven Sisters Counterweight

Before OPEC existed, multinational oil firms controlled all operations within exporting countries. These dominant Anglo-American oil firms formed what became known as the Seven Sisters. Five of them were headquartered in the US following the breakup of John D. Rockefeller's original Standard Oil monopoly. States were coerced militarily when they acted contrary to interests of the Seven Sisters and their governments. In 1953, the US and UK sponsored a coup against Mohammad Mosaddegh after his government nationalized Iran's oil production. States were also coerced economically when multinational oil companies slowed down oil production in one non-compliant state and ramped up oil production elsewhere. Coordination among oil-producing states within OPEC made it easier for them to nationalize oil production without fear of punishment by Western governments and firms. The organizational logic that underpins OPEC is that it is in collective interest of its members to limit world oil supply in order to reap higher prices. However, main problem within OPEC is that it is individually rational for members to cheat on commitments and produce as much oil as possible. Political scientist Jeff Colgan has argued that OPEC has since the 1980s largely failed to achieve goals like limits on world oil supply or stabilized prices. He finds that members have cheated on 96% of their commitments over period 1982, 2009. To extent member states comply with commitments, it is because commitments reflect what they would do even if OPEC did not exist. One large reason for frequent cheating is that OPEC does not punish members for noncompliance with commitments. OPEC members strongly prefer to describe organization as modest force for market stabilization rather than powerful anti-competitive cartel. In defense, organization was founded as counterweight against previous Seven Sisters cartel of multinational oil companies. Non-OPEC energy suppliers maintained enough market share for substantial degree of worldwide competition. Because of economic prisoner's dilemma encouraging each member nation individually to discount price and exceed production quota, widespread cheating within OPEC often erodes ability to influence global oil prices through collective action. Political scientist Jeff Colgan challenged notion that OPEC is a cartel by pointing to endemic cheating in organization. He stated: A cartel needs to set tough goals and meet them; OPEC sets easy goals and fails to meet even those. OPEC has not been involved in any disputes related to competition rules of World Trade Organization despite objectives, actions and principles diverging considerably. Key US District Court decision held that OPEC consultations are protected as governmental acts of state by Foreign Sovereign Immunities Act. These are therefore beyond legal reach of US competition law governing commercial acts. Despite popular sentiment against OPEC, legislative proposals to limit organization sovereign immunity like NOPEC Act have so far been unsuccessful.

Oil Embargoes And Price Shocks

The oil market was tight in early 1970s which reduced risks for OPEC members in nationalizing their oil production. One major fear for OPEC members was that nationalization would cause steep decline in price of oil. This prompted wave of nationalizations in countries such as Libya, Algeria, Iraq, Nigeria, Saudi Arabia and Venezuela. With greater control over oil production decisions and amid high oil prices, OPEC members unilaterally raised oil prices in 1973. This prompted the 1973 oil crisis. In October 1973, Organisation of Arab Petroleum Exporting Countries declared significant production cuts and an oil embargo against United States and other industrialized nations supporting Israel in Yom Kippur War. Previous embargo attempt largely ineffective in response to Six-Day War in 1967. However, in 1973 result was sharp rise in oil prices and OPEC revenues from US$3/bbl to US$12/bbl. Emergency period of energy rationing intensified by panic reactions, declining trend in US oil production, currency devaluations and lengthy UK coal-miners dispute. For time, UK imposed emergency three-day workweek. Seven European nations banned non-essential Sunday driving. US gas stations limited amount of petrol dispensed, closed on Sundays and restricted days when petrol could be purchased based on number plate numbers. Even after embargo ended in March 1974 following intense diplomatic activity, prices continued to rise. World experienced global economic recession with unemployment and inflation surging simultaneously. Steep declines occurred in stock and bond prices along with major shifts in trade balances and petrodollar flows. Dramatic end came to post-WWII economic boom. The 1973, 1974 oil embargo had lasting effects on United States and other industrialized nations which established International Energy Agency in response. National emergency stockpiles designed to withstand months of future supply disruptions were created. Oil conservation efforts included lower speed limits on highways, smaller and more energy-efficient cars and appliances, year-round daylight saving time, reduced usage of heating and air-conditioning, better building insulation, increased support of mass transit and greater emphasis on coal, natural gas, ethanol, nuclear and other alternative energy sources. These long-term efforts became effective enough that US oil consumption rose only 11 percent during 1980, 2014 while real GDP rose 150 percent. But in 1970s OPEC nations demonstrated convincingly that their oil could be used as both political and economic weapon against other nations at least in short term. The Algerian president Houari Boumédiène expressed hope for developing countries in speech at UN's sixth Special Session in April 1974.

Internal Cheating And Quota Disputes

OPEC often has difficulty agreeing on policy decisions because member countries differ widely in oil export capacities, production costs, reserves, geological features, population, economic development, budgetary situations and political circumstances. Indeed over course of market cycles, oil reserves can themselves become source of serious conflict, instability and imbalances in what economists call natural resource curse. Further complication is religion-linked conflicts in Middle East recurring features of geopolitical landscape for this oil-rich region. Internationally important conflicts in OPEC history included Six-Day War (1967), Yom Kippur War (1973), hostage siege directed by Palestinian militants (1975), Iranian Revolution (1979), Iran, Iraq War (1980, 1988), Iraqi occupation of Kuwait (1990, 1991), September 11 attacks (2001), American occupation of Iraq (2003, 2011), conflict in Niger Delta (2004, present), Arab Spring (2010, 2012), Libyan crisis (2011, present) and international Embargo against Iran (2012, 2016). Although events like these can temporarily disrupt oil supplies and elevate prices, frequent disputes and instabilities tend to limit OPEC long-term cohesion and effectiveness. In response to wave of oil nationalizations and high prices of 1970s, industrial nations took steps to reduce dependence on OPEC oil especially after prices reached new peaks approaching US$40/bbl in 1979, 1980 when Iranian Revolution and Iran, Iraq War disrupted regional stability and oil supplies. Electric utilities worldwide switched from oil to coal, natural gas or nuclear power. National governments initiated multibillion-dollar research programs to develop alternatives to oil. Commercial exploration developed major non-OPEC oilfields in Siberia, Alaska, North Sea and Gulf of Mexico. By 1986 daily worldwide demand for oil dropped by 5 million barrels while non-OPEC production rose even larger amount. OPEC market share sank from approximately 50 percent in 1979 to less than 30 percent in 1985. Result was six-year decline in price of oil culminating by plunging more than half in 1986 alone. To combat falling revenue from oil sales, in 1982 Saudi Arabia pressed OPEC for audited national production quotas attempt to limit output and boost prices. When other OPEC nations failed to comply, Saudi Arabia first slashed own production from 10 million barrels daily in 1979, 1981 to just one-third that level in 1985. When even this proved ineffective, Saudi Arabia reversed course and flooded market with cheap oil causing prices fall below US$10/bbl and higher-cost producers become unprofitable. These strategic measures by Saudi Arabia to regulate oil prices had profound economic repercussions. As swing producer in period, Kingdom faced significant economic strain. Revenues dramatically decreased from $119 billion in 1981 to $26 billion by 1985 leading to substantial budget deficits and doubling debt reaching 100% Gross Domestic Product. Faced increasing economic hardship which ultimately contributed collapse Soviet bloc in 1989 free-riding oil exporters finally began limit production shore up prices based on painstakingly negotiated national quotas balancing oil-related and economic criteria since 1986.

OPEC Plus And Non-OPEC Alliances

As OPEC members grew weary multi-year supply contest diminishing returns shrinking financial reserves organization finally attempted first production cut since 2008. Despite many political obstacles September 2016 decision trim approximately one million barrels per day codified new quota agreement November 2016 OPEC conference. Agreement exempted disruption-ridden members Libya and Nigeria covered first half 2017 alongside promised reductions Russia and ten other non-members offset expected increases US shale sector Libya Nigeria spare capacity surging late-2016 OPEC production before cuts took effect. Indonesia announced another temporary suspension membership rather than accepting organization requested five-percent production cut. Prices fluctuated around US$50/bbl May 2017 OPEC decided extend new quotas through March 2018 world waiting see how oil inventory glut might fully siphoned off then. Longtime oil analyst Daniel Yergin described relationship between OPEC and shale as mutual coexistence both sides learning live with prices lower they would like. These production cut deals non-OPEC countries generally referred to as OPEC+. In December 2017 Russia and OPEC agreed extend production cut 1.8 mbpd until end 2018. Qatar announced withdraw from OPEC effective the 1st of January 2019 according New York Times strategic response Qatar diplomatic crisis involving Saudi Arabia UAE Bahrain Egypt. On the 29th of June 2019 Russia again agreed Saudi Arabia extend six nine months original production cuts 2018. In October 2019 Ecuador announced withdraw from OPEC the 1st of January 2020 due financial problems facing country. In December 2019 OPEC Russia agreed one deepest output cuts so far prevent oversupply deal lasting first three months 2020. In early March 2020 OPEC officials presented ultimatum Russia cut production 1.5% world supply. Russia foresaw continuing cuts American shale oil production increased rejected demand ending three-year partnership OPEC major non-OPEC providers. Another factor weakening global demand resulting COVID-19 pandemic. This also resulted OPEC plus failing extend agreement cutting 2.1 million barrels per day set expire end March. Saudi Arabia absorbed disproportionate amount cuts convince Russia stay agreement notified buyers the 7th of March raise output discount oil April. Prompted Brent crude price crash more than 30% before slight recovery widespread turmoil financial markets. Several pundits saw this as Saudi-Russian price war game chicken cause other side blink first. Saudi Arabia had March 2020 $500 billion foreign exchange reserves while time Russia's reserves were $580 billion. Debt-to-GDP ratio Saudis 25% Russian ratio 15%. Another remarked Saudis produce oil low price US$3 per barrel whereas Russia needs US$30 per barrel cover production costs. To Russia price war more than just regaining market share oil analyst claims assaulting Western economy especially America. In order ward off oil exporters price war making shale oil production uneconomical US may protect crude oil market passing NOPEC bill. Meanwhile Saudi Arabia represented Energy Minister Prince Abdulaziz bin Salman maintains conciliatory stance towards US shale industry. He clarified harming sector never intention stating made clear not radar or intention create any type damage industry they rise again ashes thrive prosper. Also noted Saudi Arabia looking forward time US producers thrive once again market higher oil demand. In April 2020 OPEC group other oil producers including Russia agreed extend production cuts until end July. Cartel allies agreed cut oil production May June 9.7 million barrels day equal around 10% global output effort prop up prices previously fallen record lows.

Membership Fluctuations And Withdrawals

In the 1990s, OPEC lost its two newest members who had joined mid-1970s. Ecuador withdrew December 1992 because unwilling pay annual US$2 million membership fee felt needed produce more oil allowed under OPEC quota though rejoined October 2007. Similar concerns prompted Gabon suspend membership January 1995; rejoined July 2016. Iraq remained member OPEC since organization founding but Iraqi production part OPEC quota agreements 1998 to 2016 due country's daunting political difficulties. Lower demand triggered 1997, 1998 Asian financial crisis saw price oil fall back 1986 levels. After oil slumped around US$10/bbl joint diplomacy achieved gradual slowing oil production OPEC Mexico Norway. After prices slumped again Nov. 2001 OPEC Norway Mexico Russia Oman Angola agreed cut production the 1st of January 2002 six months. OPEC contributed 1.5 million barrels day approximately 2 mbpd cuts announced. In May 2008 Indonesia announced leave OPEC when membership expired end year having become net importer oil unable meet production quota. Statement released OPEC the 10th of September 2008 confirmed Indonesia withdrawal noting OPEC regretfully accepted wish Indonesia suspend full membership organization recorded hope country position rejoin not-too-distant future. Qatar left OPEC the 1st of January 2019 after joining organization 1961 focus natural gas production world largest exporter form liquified natural gas LNG. In November 2023 Nigeria Angola biggest oil producers Sub-Saharan Africa expressed discontent OPEC quotas according blocked efforts ramp up oil production boost foreign reserves. December 2023 Angola announced leaving OPEC disagreed organization production quotas scheme. As of January 2024, OPEC has 12 member countries: five Middle East West Asia, six Africa one South America. According U.S. Energy Information Administration EIA OPEC combined rate oil production including gas condensate represented 44% world total 2016 OPEC accounted 81.5% world proven oil reserves. Subsequent reports 2022 indicate OPEC member countries then responsible about 38% total world crude production. Also estimated these countries hold 79.5% globe proven reserves Middle East alone accounting 67.2% OPEC reserves. Approval new member country requires agreement three-quarters OPEC existing members including all five founders. October 2015 Sudan formally submitted application join yet member.

Common questions

When and where did the Organization of Petroleum Exporting Countries begin its life?

The Organization of Petroleum Exporting Countries began its life in Baghdad on the 14th of September 1960. Five nations gathered to sign a pact that would change global energy history: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.

Why was OPEC founded as a counterweight to multinational oil companies?

OPEC was founded as a counterweight to previous Seven Sisters cartel of multinational oil companies because these dominant Anglo-American firms controlled all operations within exporting countries before OPEC existed. Oil-exporting countries eventually formed OPEC as a response to unilateral price cuts by multinational oil companies and to secure better prices for their crude oil.

Where is the headquarters of the Organization of Petroleum Exporting Countries located today?

The organization chose Geneva, Switzerland initially but moved to Vienna, Austria on the 1st of September 1965 after Switzerland declined to extend diplomatic privileges. Austria offered attractive terms to attract international organizations like OPEC while Switzerland attempted to reduce its foreign population.

What major event caused the 1973 oil crisis involving OPEC members?

In October 1973, Organisation of Arab Petroleum Exporting Countries declared significant production cuts and an oil embargo against United States and other industrialized nations supporting Israel in Yom Kippur War. This resulted in a sharp rise in oil prices from US$3/bbl to US$12/bbl and triggered global economic recession with unemployment and inflation surging simultaneously.

How many member countries does OPEC have as of January 2024?

As of January 2024, OPEC has 12 member countries consisting of five Middle East West Asia, six Africa one South America. According U.S. Energy Information Administration EIA OPEC combined rate oil production including gas condensate represented 44% world total 2016.

OPEC.