Organization of the Petroleum Exporting Countries (OPEC)

History

     (from OPEC's website) The Organization of the Petroleum Exporting Countries (OPEC) is a

permanent, intergovernmental Organization, created at the Baghdad Conference on September

10–14, 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The five Founding Members

were later joined by: Qatar (1961) ; Indonesia (1962) ; Libya (1962); United Arab Emirates

(1967); Algeria (1969); Nigeria (1971); Ecuador (1973) ; Angola (2007); Gabon (1975) ;

Equatorial Guinea (2017); and Congo (2018). 

(from Britannica)

     When OPEC was formed in 1960, its main goal was to prevent its concessionaires—the

world’s largest oil producers, refiners, and marketers—from lowering the price of oil, which they

had always specified, or “posted.” OPEC members sought to gain greater control over oil prices

by coordinating their production and export policies, though each member retained ultimate

control over its own policy. OPEC managed to prevent price reductions during the 1960s.

     During the 1970s the primary goal of OPEC members was to secure complete sovereignty

over their petroleum resources. Accordingly, several OPEC members nationalized their oil

reserves and altered their contracts with major oil companies.

     In October 1973, OPEC raised oil prices by 70 percent. In December, two months after the

Yom Kippur War (see Arab-Israeli wars), prices were raised by an additional 130 percent, and

the organization’s Arab members, which had formed OAPEC (Organization of Arab Petroleum

Exporting Countries) in 1968, curtailed production and placed an embargo on oil shipments to

the United States and the Netherlands, the main supporters of Israel during the war. The result

throughout the West was severe oil shortages and spiraling inflation (see oil crisis). As OPEC
continued to raise prices through the rest of the decade (prices increased 10-fold from 1973 to

1980), its political and economic power grew. Flush with petrodollars, many OPEC members

began large-scale domestic economic and social development programs and invested heavily

overseas, particularly in the United States and Europe. OPEC also established an international

fund to aid developing countries.

In response to other oil-importing countries finding alternative sources of oil and energy such as

coal, natural gas, and nuclear power (e.g., in Norway, the United Kingdom, and Mexico), OPEC

members—particularly Saudi Arabia and Kuwait—reduced their production levels in the early

1980s in what proved to be a futile effort to defend their posted prices.

Production and prices continued to fall in the 1980s. Although the brunt of the production cuts

were borne by Saudi Arabia, whose oil revenues shrank by some four-fifths by 1986, the

revenues of all producers, including non-OPEC countries, fell by some two-thirds in the same

period as the price of oil dropped to less than $10 per barrel. The decline in revenues and the

ruinous Iran-Iraq War (1980–88), which pitted two OPEC members against each other,

undermined the unity of the organization and precipitated a major policy shift by Saudi Arabia,

which decided that it no longer would defend the price of oil but would defend its market share

instead. Following Saudi Arabia’s lead, other OPEC members soon decided to maintain

production quotas. Saudi Arabia’s influence within OPEC also was evident during the Persian

Gulf War (1990–91)—which resulted from the invasion of one OPEC member (Kuwait) by

another (Iraq)—when the kingdom agreed to increase production to stabilize prices and

minimize any disruption in the international oil market.

During the 1990s OPEC continued to emphasize production quotas. Oil prices, which collapsed

at the end of the decade, began to increase again in the early 21st century, owing to greater
unity among OPEC members and better cooperation with nonmembers (such as Mexico,

Norway, Oman, and Russia), increased tensions in the Middle East, and a political crisis in

Venezuela. Having reached record levels by 2008, prices collapsed again amid the global

financial crisis and the Great Recession. Meanwhile, international efforts to reduce the burning

of fossil fuels (which has contributed significantly to global warming; see greenhouse effect)

made it likely that the world demand for oil would inevitably decline. In response, OPEC

attempted to develop a coherent environmental policy. The power of OPEC has waxed and

waned since its creation in 1960 and is likely to continue to do so for as long as oil remains a

viable energy resource.

Albert L. Danielsen

The Editors of Encyclopaedia Britannica

Background

      Organization of the Petroleum Exporting Countries—OPEC's objective is to coordinate and

unify petroleum policies among Member Countries, in order to secure fair and stable prices for

petroleum producers; an efficient, economic and regular supply of petroleum to consuming

nations; and a fair return on capital to those investing in the industry. OPEC had its

headquarters in Geneva, Switzerland, in the first five years of its existence and was later moved

to Vienna, Austria, on September 1, 1965 where the OPEC Secretariat, the executive organ, carries

out OPEC’s day-to-day business.

Membership

BRITANNICA

https://www.britannica.com/topic/OPEC
OPEC

MULTINATIONAL ORGANIZATION

WRITTEN BY: Albert L. Danielsen

LAST UPDATED: Mar 26, 2020 See Article History

     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. (Danielsen, 2020)

    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. 

     The influence of individual OPEC members on the organization and on the oil market usually

depends on their levels of reserves and production. Saudi Arabia, which controls about one-

third of OPEC’s total oil reserves, plays a leading role in the organization. Other important

members are Iran, Iraq, Kuwait, and the United Arab Emirates, whose combined reserves are

significantly greater than those of Saudi Arabia. Kuwait, which has a very small population, has

shown a willingness to cut production relative to the size of its reserves, whereas Iran and Iraq,
both with large and growing populations, have generally produced at high levels relative to

reserves. Revolutions and wars have impaired the ability of some OPEC members to maintain

high levels of production.

•••

BY KIMBERLY AMADEO

Updated July 10, 2019

The Organization of Petroleum Exporting Countries is an organization of 14 oil-producing

countries. In 2018, it exported 25 million barrels of crude oil a day. That's 54% of the total world

exports of 46 mbd. OPEC members hold 82% of the world's proven oil reserves. OPEC's

decisions have a significant impact on future oil prices.

The Oil and Energy Ministers from the OPEC members meet at least twice a year to coordinate

their oil production policies. Each member country abides by an honor system in which

everyone agrees to produce a certain amount. If a nation winds up producing more, there is no

sanction or penalty. 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.

Despite its power, OPEC cannot completely control the price of oil. In some countries, additional

taxes are imposed on gasoline and other oil-based end products to promote conservation. Oil

prices are also set by the oil futures market. Much of the oil price is determined by commodities

traders. That's the underlying reason why oil prices are so high.

Recent Decisions
On December 7, 2018, OPEC agreed to cut 1.2 million barrels per day. Members would cut

800,000 bpd. Allies would cut 400,000 bpd. Its goal is to return prices to $70 a barrel by early

fall 2019. In November, average global oil prices had dropped to $65 bpd. Commodities traders

had bid prices down. They believed higher U.S. supplies would flood the market with supply at

the same time slowing global growth would cut into demand.

On July 1, 2019, members agreed to maintain the cuts until the first quarter of 2020.

On November 30, 2017, OPEC agreed to continue withholding 2% of global oil supply. That

continued the policy OPEC formed on November 30, 2016, when it agreed to cut production by

1.2 million barrels. As of January 2017, it would produce 32.5 mbd. That's still above its average

2015 level of 32.32 mbpd. The agreement exempted Nigeria and Libya. It gave Iraq its first

quotas since the 1990s. Russia, not an OPEC member, voluntarily agreed to cut production. 

The cut came a year after OPEC had raised its production quota to 31.5 mbpd on December 4,

2015. OPEC was struggling to maintain market share. Its share fell from 44.5% in 2012 to

41.8% in 2014. Its share fell because of a 16% increase in U.S. shale oil production. As the oil

supply rose, prices fell from $108.54 in April 2012 to $34.72 in December 2015. That was one of

the biggest drops in oil price history.

OPEC waited to cut oil production because it didn't want to see its market share drop further. It

produces oil more cheaply than its U.S. competition. The cartel toughed it out until many of the

shale companies went bankrupt. That created a boom and bust in shale oil. 

OPEC's Three Goals

price for their oil. Since oil is a somewhat uniform commodity, most consumers base their

buying decisions on nothing other than price. What's the right price? OPEC has traditionally said

it was between $70 and $80 per barrel. At those prices, OPEC countries have enough oil to last

113 years. If prices drop below that target, OPEC members agree to restrict supply to push

prices higher.

But Iran wants a lower target for prices of $60 a barrel. It believes a lower price will drive out

U.S. shale oil producers who need a higher margin. Iran's break-even price is just over $50 a

barrel.

Saudi Arabia needs $70 a barrel to break even. That price includes exploration and

administrative costs. Saudi Arabia's flagship oil company, Aramco, can pump the oil at $2 to

$20 a barrel. Saudi Arabia has cash reserves to allow it to operate at lower prices. But it is a

hardship the country prefers to avoid. Like other OPEC members, it relies on petrodollars for

government revenues.

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. That would

stimulate even more global demand. OPEC countries would run out of their most precious

resource that much faster. Instead, OPEC members agree to produce only enough to keep the

price high for all members.

When prices are higher than $80 a barrel, other countries have the incentive to drill more

expensive oil fields. Sure enough, once oil prices got closer to $100 a barrel, it became cost-
effective for Canada to explore its shale oil fields. U.S. companies used fracking to open up the

Bakken oil fields for production. As a result, non-OPEC supply increased.

OPEC's second goal is to reduce oil price volatility. For maximum efficiency, oil extraction must

run 24 hours a day, seven days a week. Closing facilities could physically damage oil

installations and even the fields themselves. Ocean drilling is difficult and expensive to shut

down. It is then in OPEC's best interests to keep world prices stable. A slight modification in

production is often enough to restore price stability.

For example, in June 2008, oil prices hit an all-time high of $143 per barrel. OPEC responded

by agreeing to produce a little more oil. This move brought prices down. But the global financial

crisis sent oil prices plummeting to $33.73 per barrel in December. OPEC responded by

reducing the supply. Its move helped prices to again stabilize. 

OPEC's third goal is to adjust the world's oil supply in response to shortages. 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 Members

OPEC has 13 active members. Saudi Arabia is by far the largest producer, contributing almost

one-third of total OPEC oil production. It is the only member that produces enough on its own

materially impact the world's supply. For this reason, it has more authority and influence than

other countries. 
Qatar left in January 2019 to focus on natural gas instead of oil. Qatar's departure means the

country is aligning itself more with the United States than with Saudi Arabia.  U.S. officials

stopped Saudi Arabia from invading Qatar in 2017. That same year the Saudis and the United

Arab Emirates imposed an embargo on Qatar due to border disputes.

Indonesia joined in 1962 but left in 2009. It rejoined in January 2016 but left after the OPEC

conference in November 2016. It did not want to cut oil production.

History

In 1960, five OPEC countries allied to regulate the supply and price of oil. These countries

realized they had a nonrenewable resource. If they competed with each other, the price of oil

would drop too far. They would run out of the finite commodity sooner than they would if oil

prices were higher.

OPEC held its first meeting on September 10-14, 1960, in Baghdad, Iraq. The five founding

members were Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. OPEC registered with the

United Nations on November 6, 1962. 

OPEC didn't flex its muscle until the 1973 oil embargo. It responded to a sudden drop in the

U.S. dollar's value after President Nixon abandoned the gold standard. Since oil contracts are

priced in dollars, the revenues of oil exporters fell when the dollar fell. In response to the

embargo, the United States created the Strategic Petroleum Reserve.

Non-OPEC Oil-Producing Countries 

Many non-OPEC members also voluntarily adjust their oil production in response to OPEC's

decisions. In the 1990s, they increased production to take advantage of OPEC's restraints. That
resulted in low oil prices and profits for everyone. These cooperating non-OPEC members are

Mexico, Norway, Oman, and Russia.

Oil shale producers did not learn that lesson. They kept pumping oil, sending prices plummeting

in 2014. As a result, many went below their break-even price of $65 a barrel. OPEC did not step

in to lower its production. Instead, it allowed prices to fall to maintain its own market share. The

break-even price is much lower for most of its members. But U.S. producers got more efficient. 

OPEC-Russia Oil Alliance

OPEC is forming a partnership with a 10-country oil alliance led by Russia. Iran opposes the

deal because then Saudi Arabia and Russia will dominate the organization. Russia is the

world's second-largest oil exporter after Saudi Arabia.

On July 2, 2019, the countries signed a three-year charter of cooperation. It would set

production levels among all 24 members. Together, they produce almost half the world's oil

output.

OPEC would continue its regular meetings but the Russia-led group would also attend. Iran

would prefer that the two groups only meet when there is a crisis.

( photo or map of opec members,etc)

positive and negative effects of supported by experiences of countries in  organizations

Role of OPEC in the Current  Global Crisis (COVID-19 Pandemic)

Conclusion

Recommendations

REFERENCES

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Amadeo, K., OPEC and its Goals, Members, and History. [online] thebalance.com. Available at
<https://www.thebalance.com/what-is-opec-its-members-and-history-3305872>
[Accessed 7 May 2020].

Danielsen, A., OPEC Multinational Organization. [online] Britannica.com. Available at