Organization of the Petroleum Exporting Countries (OPEC)

The Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental organization or cartel of 13 countries. Founded on 14 September 1960 in Baghdad by the first five members (Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela), it has since 1965 been headquartered in Vienna, Austria, although Austria is not an OPEC member state. As of September 2018, the 13 member 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 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.” 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. 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.

OPEC+ Members

In addition to formal OPEC members, 10 additional oil exporting countries, led by Russia, form the OPEC+ cartel, which since 2016 cooperate in fixing the global crude oil prices by agreeing to production quotas that keep global production below demand/consumption. OPEC+ countries are criticized as encouraging unnecessary excess capital investment in the global oil sector instead of promoting cheaper oil production at lower capital investment.

Observers

Since the 1980s, representatives from Egypt, Mexico, Norway, Oman, Russia, and other oil-exporting nations have attended many OPEC meetings as observers. This arrangement serves as an informal mechanism for coordinating policies.

Vienna Group

A number of non-OPEC member countries also participate in the organisation’s initiatives such as voluntary supply cuts in order to further bind policy objectives between OPEC and non-OPEC members. This loose grouping of countries includes: Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan and South Sudan.

Leadership and decision-making

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”.

Conflicts

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. Internationally important conflicts in OPEC’s history have included the Six-Day War (1967), Yom Kippur War (1973), a hostage siege directed by Palestinian militants (1975), the Iranian Revolution (1979), Iran–Iraq War (1980–1988), Iraqi occupation of Kuwait (1990–1991), September 11 attacks by mostly Saudi hijackers (2001), American occupation of Iraq (2003–2011), Conflict in the Niger Delta (2004–present), Arab Spring (2010–2012), Libyan Crisis (2011–present), and international Embargo against Iran (2012–2016). 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.

OPEC’s Mission

According to the OPEC website, the group’s mission 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 committed to finding ways to ensure that oil prices are stabilized in the international market without any major fluctuations. Doing this helps keep the interests of member nations while ensuring they receive a regular stream of income from an uninterrupted supply of crude oil to other countries.

OPEC recognizes the founding nations as full members. Any country that wishes to join and whose application is accepted by the organization is also considered a full member. These countries must have significant crude petroleum exports. Membership to OPEC is only granted after receiving a vote from at least three-quarters of its full members. Associate memberships are also granted to countries under special conditions.