Meet OPEC, Manager of Oil Wealth

OPEC stands for the Organization of the Petroleum Exporting Countries. As the name suggests, OPEC is made up of 13 of the world's largest oil-exporting countries that work together to coordinate international oil prices and policies. Formed in 1960, OPEC has invested billions of dollars in drilling platforms, pipelines, storage terminals, and shipping.

Oil is the primary export for many of the organization's member nations, so it's in their best interests to make sure that prices and global energy demand remain stable. But just how role does OPEC play in all of this? Keep reading to learn more about OPEC and its history, and explore how the organization influences global oil prices.

OPEC: A Brief History

Thirteen nations belong to the Organization of the Petroleum Exporting Countries. The organization was formed at the Baghdad Conference on Sept. 14, 1960, through the joint cooperation of Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Eight other nations joined and remain with OPEC, including Algeria, Angola, Equatorial Guinea, Gabon, Libya, Nigeria, the Republic of the Congo, and the United Arab Emirates.

Other countries joined the organization since it was first established but either suspended or terminated their membership. Gabon suspended its membership in the past but is currently a member of the organization. Ecuador joined in 1973, suspended its membership in 1992, rejoined in 2007, then withdrew in 2020. Indonesia announced a temporary suspension of its membership at the end of 2016 and has yet to rejoin. Qatar’s energy minister Sherida al Kaabi announced Qatar's termination of its OPEC membership as of Jan. 1, 2019. 

OPEC typically meets twice a year at its headquarters in Vienna, Austria. The organization's stated objectives are to:

• Coordinate and unify petroleum policies among member countries
• Secure fair and stable prices for petroleum producers
• Maintain an efficient, economic, and consistent supply of petroleum for consumers
• Ensure a fair return on capital for investors

Why Was OPEC Created?

OPEC was created to stabilize the economic landscape in the Middle East and to manage the global market for energy products. Oil is the main marketable commodity and revenue generator for member nations. With most of the member countries' income tied to a single commodity—in other words, with all of their eggs in one basket—the quality of government programs such as education, health care, and infrastructure is heavily dependent on oil sales or petrodollars.

Member countries assess energy market fundaments, analyze supply and demand scenarios, and then raise or lower oil production quotas. If members think a price is too low, they can cut back on production in order to raise the price of oil. Alternatively, if the price of oil is too high (which can reduce both the short-term and long-term demand for oil, and also ripen conditions for alternative sources of fuel), they can then boost production to lower the price.

Roughly 40% of the world's crude oil comes from OPEC member nations and their exports account for nearly 60% of globally-traded petroleum. These producers invest billions of dollars in exploration and production activities such as drilling, pipelines, storage and transportation, refining, and staffing. While these investments are typically made upfront, it takes time to successfully harvest a new oil field. In fact, member countries may have to wait anywhere between three to 10 years before they start to see returns on their investment.

The 1970s: Oil Embargo

Criticism of OPEC became more widespread during the 1970s and the organization came to be viewed as a monopolistic cartel in many circles. The organization triggered high inflation and low fuel supplies around the world by imposing oil embargoes in 1973.

Member countries ceased providing oil to the United States, Western Europe, and Japan for their support of Israel in its military conflict with Egypt, Iraq, and Syria. Arab member nations also included the Netherlands, Portugal, and South Africa in the embargo. The move resulted in drastically higher oil prices in the West, leaving nervous investors to pull their capital out of the U.S. markets. This resulted in big losses at the New York Stock Exchange (NYSE). Inflation ensued and gasoline rationing practices were enforced.

OPEC eventually restored oil production and exports to the West. Despite this, the 1973 crisis had lingering negative effects on international relations. In response to the crisis, the West attempted to curtail its dependence on OPEC, stepping up efforts in offshore oil production, particularly in the Gulf of Mexico and the North Sea. In the 1980s, worldwide overproduction and reduced demand led to a significant drop in oil prices.

The 2000s to 2010s: Volatile Oil Prices

Over the years, billions of dollars in new investments and discoveries in locations such as the Gulf of Mexico, the North Sea, and Russia have somewhat diminished OPEC's control over global oil prices. The extraction of petroleum from offshore drilling, advances in drilling technology, and the emergence of Russia as an oil exporter brought fresh sources of crude oil to the global market.

The price of crude oil began to experience volatility beginning in the early 2000s, due largely to speculation and other market forces. After reaching record levels in 2008, crude oil prices plunged during the financial crisis. Member nations worked together to help boost the struggling industry.

In 2016, OPEC members abandoned the quota system temporarily and oil prices crashed. Later that year, member countries agreed to cut production until the end of 2018 in order to regain control.

Many experts believe in the peak oil theory. This theory, which states that oil production has peaked worldwide, is leading investment groups, companies, and governments to increase funding and the development of various means of alternative fuel sources, including wind, solar, nuclear, hydrogen, and coal. While OPEC has raked in hundreds of billions of dollars in oil profits in the 2000s (when the price of oil skyrocketed), member countries are seeing a lot of long-term risk to their rainmaking commodity investment and cash cow.

OPEC Forecast

The COVID-19 outbreak put a great strain on the global economy, including the oil and gas industry. Prices dropped after news of the virus spread, seeing modest gains after the early stages of the pandemic. According to the World Bank, energy prices are poised to stabilize in 2021 back to the level they were before the outbreak.

The cutback in demand for crude oil is also weighing on the 13-member organization. The group only exported 25.1 million barrels per day for the month of November 2020, a drop of 2.4 million barrels per day averaged over the second quarter of that year. As a result, OPEC cut its forecast for demand by 1 million barrels a day for the first quarter of 2021.

The Bottom Line

OPEC's decisions over the years have had considerable influence on worldwide oil prices. However, it is also in OPEC's collective interest to ensure that prices remain reasonable to consumers. Otherwise, they merely provide massive incentives to the market to generate alternative products for energy-consuming masses. Oil is increasingly coming up against some heavy opposition, as the harmful effects that carbon dioxide is believed to have on the environment, particularly as a contributor to global warming. This is providing an incentive for policymakers, institutions, and citizens to rapidly deploy non-oil sources of energy.