Explainer: What is Opec?

The second of OPEC’s goals is to reduce oil price volatility, in the hope of making the production and supply of oil as profitable as possible for OPEC members. It also helps to stave off competition from the growing American fracking industry, as well as from non-OPEC and non-OPEC-affiliated countries. In fact, the U.S. has already surpassed Saudi production and recently overtook Russia to become the world’s largest oil producer for the first time since the 1970s. And OPEC accounts for 60% of total petroleum traded internationally, according to the U.S. OPEC data also show that it has over 80% of the world’s proven oil reserves. OPEC production averaged 32.9 million barrels per day in October 2018, accounting for about 40% of global output vs. 50% in the 1970s.

1. In his book The Prize, Yergin writes that for the first time “sovereignty and national survival and not merely the price of oil” were at stake.
2. OPEC members with relatively high breakeven prices, such as Algeria, are also more exposed to sustained low oil prices than Russia or Saudi Arabia, which both have low breakeven prices and significant foreign exchange reserves.
3. The second of OPEC’s goals is to reduce oil price volatility, in the hope of making the production and supply of oil as profitable as possible for OPEC members.
4. Still, oil prices are set by global markets, meaning OPEC will remain relevant in a post-shale revolution world.
5. The organization ensures its members receive a steady stream of income from an uninterrupted supply of oil.

Those who argue that OPEC is not a cartel emphasize the sovereignty of each member country, the inherent problems of coordinating price and production policies, and the tendency of countries to renege on prior agreements at ministerial meetings. Those who claim that OPEC is a cartel argue that production costs in the Persian Gulf are generally less than 10 percent of the price charged and that prices would decline toward those costs in the absence of coordination by OPEC. OPEC produced an estimated 28.7 million b/d of crude oil in 2022, which was 38% of total world oil production that year.

Saudi Arabia has announced it will be cutting its production of crude oil by a million barrels a day to try to boost prices. In 1960, five pivot reversal strategy OPEC countries allied to regulate the supply and price of oil. If they competed with each other, the price of oil would drop too far.

International cartel

During the 1990s OPEC continued to emphasize production quotas. 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.

Find out about OPEC meetings

Exploration and reserves, storage, imports and exports, production, prices, sales. This means that the country has control over its own production and supply without any interference from the organization. Some of the world’s greatest oil-producing countries, such as Russia, China, and the U.S., do not belong to OPEC. OPEC is the Organisation of the Petroleum Exporting Countries. It was founded in 1960 by Saudi Arabia, Venezuela, Iraq, Iran and Kuwait. The other countries that have joined OPEC since are Libya, the United Arab Emirates, Algeria, Nigeria, Ecuador, Gabon, Angola, Equatorial Guinea and the Republic of the Congo – bringing OPEC’s membership to 14, as of January 2019.

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. Leading the charge are U.S. shale producers like Diamondback Energy (FANG), Continental Resources (CLR) and EOG Resources (EOG). Oil majors like Exxon Mobil (XOM) and Chevron (CVX) have also expanded their shale operations in the U.S., while curtailing operations in Libya and other Middle Eastern locations due to security risks. High prices can encourage oil consumers to reduce dependence on oil by developing local sources and shifting to alternative energy.

Closing facilities could physically damage oil installations and even the fields themselves. 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. Ecuador suspended its OPEC membership from 1992 until 2007 and then withdrew in 2020. Indonesia suspended its membership beginning in 2009 and briefly rejoined in 2016 before suspending its membership again that year.

Crude oil benchmarks

Because OPEC has been beset by numerous conflicts throughout its history, some experts have concluded that it is not a cartel—or at least not an effective one—and that it has little, if any, influence over the amount of oil https://traderoom.info/ produced or its price. Other experts believe that OPEC is an effective cartel, though it has not been equally effective at all times. The debate largely centres on semantics and the definition of what constitutes a cartel.

It is a project that Exxon, Shell, and Total likely would not have pursued if they did not expect OPEC to keep oil prices stable over the long term. For the past few years, OPEC has been working with nonmembers like Russia to coordinate production to help support oil prices. Bahrain, which was first GCC country to strike oil, is not part of Opec as its reserves matured quickly and production remains low. Oman, which also has one of the region’s highest break-even points for oil production, is also not a member. However, both countries take part in controlling their output as part of the broader Opec+ alliance.

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. These cooperating non-OPEC members are Mexico, Norway, Oman, and Russia. This website is using a security service to protect itself from online attacks.

In Oct. 1973 a group led by the Arab majority of OPEC, as well as non-members Egypt and Syria, declared a steep cut in oil output and an oil embargo against the U.S. and other nations that supported Israel in the Yom Kippur War. This led to a sharp increase in oil prices, from $3 to $12 per barrel, causing panic and a period of energy rationing. The decolonisation movement in the region, as well as the nationalisation of companies, notably starting with Iran, led to the need for an organisation that would represent the interests of sovereign producers.

Organization of the Petroleum Exporting Countries (OPEC)

National security adviser Jake Sullivan said in a statement that OPEC’s current plans would “not fully offset previous production cuts,” that were made during the pandemic. The shale revolution that began in earnest last decade has unleashed a flood of oil on world markets, threatening OPEC’s influence. But Qatar said in December it plans to leave OPEC to focus on natural gas development, though analysts saw the move as motivated by its political dispute with Saudi Arabia and other Persian Gulf members. On August 11, 2021, the White House urged OPEC to boost oil productions for Covid-19 economic recovery. However, OPEC members are notorious for cheating on their quotas as there is no way to punish violators.

In response, Riyadh initiated a price war by ramping up production—a strategy it has employed successfully in the past—to force Moscow back to the table, Jaffe explains. 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 per day (mbpd). Russia, not an OPEC member, voluntarily agreed to cut production. Collectively, OPEC is the largest producer and exporter of crude oil and petroleum products in the world. Roughly 40% of the world’s oil production and 60% of the world’s petroleum market come from the group’s member countries and they accounted for more than 80% of the world’s proven oil reserves in 2021.