Oil 101 – What is OPEC?

Welcome to Oil 101.

Let’s talk about OPEC.  So What is OPEC?

Beginning in the 1950s, numerous shifts occurred that transferred control over oil and gas production and pricing from “Big Oil” and oil-consuming countries to oil-producing countries.

The governments of many oil-producing nations, particularly in the Middle East and South America, saw the big Integrated Oil Companies (IOCs) operating there as instruments of the governments of their countries of origin, usually the U.S. or European countries.

For both economical and geopolitical reasons, the leaders of the producing countries began asserting their authority for control of their countries’ oil and gas resources and associated wealth.

To signify their newfound authority, in 1960 the governments of Venezuela, Saudi Arabia, Kuwait, Iraq, and Iran founded the Organization of the Petroleum Exporting Countries, or OPEC, for the purpose of negotiating with major oil companies on matters of oil production, oil prices, and future concession rights.

OPEC had little impact during its first decade of existence.  However, the tide turned in the early 1970s with the confluence of rising energy demand, re-negotiation of terms of business in Libya by Qaddafi, and the fourth Arab-Israeli war.

Today, OPEC represents a considerable political and economical force.  According to their estimates, 81% of the oil reserves in the world belong to their members.

Saudi Arabia has the majority of OPEC reserves, followed closely by Iran and Venezuela.  

OPEC as an organization is based in Vienna, Austria and was created primarily in response to the efforts of Western oil companies to drive oil prices down. OPEC allows oil-producing countries to manage their income by coordinating policies and prices.  Although, the recent development of unconventional and deepwater oil and gas reserves outside of OPEC has diminished their ability to control global supply.

The caveat with OPEC participation is that the member countries cannot set individual production quotas. This can be troublesome, because political interests and economic considerations vary widely from country to country.

The U.S. historically has seen OPEC as a threat to its supply of cheap energy, as the cartel was able to set high world market oil prices at its pleasure.  Additionally, the current U.S. policy of lowering dependence on OPEC-dominated Middle East oil can present diplomatic problems with those countries tied to the U.S. interests.

Today, members of OPEC are: Algeria, Angola, Ecuador, Iran, Iraq, Indonesia, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela. Although this list does change from time to time.