OPEC Membership, Organization, History, & Facts
They believed higher U.S. supplies would flood the market with supply at the same time slowing global growth would cut into demand. There are several advantages of having a cartel like OPEC operating in the crude oil industry. First, it promotes cooperation among member nations, helping them alleviate some degree of political hostilities. And because the organization’s main goal is to stabilize oil production and prices, it is able to exert some influence over production from other nations.
The Organization of the Petroleum Exporting Countries describes itself as a permanent intergovernmental organization. The organization is designed to “coordinate and unify the petroleum policies of its Member Countries and what is a bear market and how does it impact you ensure the stabilization of oil markets.” This ensures that there is a steady supply for consumers and regular income for petroleum producers. For example, in July 2008, oil prices hit an all-time high of $143 per barrel.
Meanwhile, it will maintain additional production capacity to increase supplies when needed to prevent prices from rising too high and damaging demand. OPEC waited to cut oil production because it didn’t want to see its market share drop further. The cartel toughed it out until many of the shale companies went bankrupt. In December 2016, OPEC formed an alliance with other oil-exporting nations that were not a part of the organization, creating an entity that is commonly referred to as OPEC+, or OPEC Plus. Prominent members of OPEC+ include Russia, Mexico, and Kazakhstan. Working in coordination with additional oil-exporting countries makes the organization even more influential when it comes to international energy prices and the global economy.
- Having said this, it’s no surprise that any moves the group makes have a big impact on global energy prices.
- OPEC faces considerable challenges from innovation and new, green technology.
- OPEC’s third goal is to become the world’s oil supply swing producer.
- Oil prices and OPEC’s role in the international petroleum market are subject to a number of different factors.
Members admitted afterward include Qatar (1961), Indonesia (1962), Libya (1962), Abu Dhabi (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), Equatorial Guinea (2017), and the Republic of the Congo (2018). The United Arab Emirates—which includes Abu Dhabi (the largest of the emirates), Dubai, ʿAjmān, Sharjah, Umm al-Qaywayn, Raʾs al-Khaymah, https://www.topforexnews.org/brokers/fxdd-reviews-and-user-ratings/ and Al-Fujayrah—assumed Abu Dhabi’s membership in the 1970s. Gabon, which had joined in 1975, withdrew in January 1995 but rejoined in 2016. This means that the country has control over its own production and supply without any interference from the organization. In 1976, OPEC established the OPEC Fund for International Development.
OPEC summary
Demand is dictated by consumers, businesses, and governments based on their needs for energy. Having said this, it’s no surprise that any moves the group makes have a big impact on global energy prices. Oil prices can drop significantly if they decide to supply more oil to the market. On the other hand, if OPEC member countries decide to cut production and curb supplies, prices are highly likely to shoot up.
Example of how OPEC influences the oil market
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. 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.
They would run out of the finite commodity sooner than they would if oil prices were higher. OPEC’s third goal is to become the world’s oil supply swing producer. This would involve responding to shortages or surpluses by increasing or decreasing supply as needed—effectually achieving its first two goals of controlling price stability and volatility.
Saudi Arabia, which has the second largest reserves and a relatively small (but fast-growing) population, has traditionally played a dominant role in determining overall production and prices. Venezuela, on the other hand, has the largest reserves but produces only a fraction of what Saudi Arabia produces. OPEC decided to maintain high production levels and consequently low prices as of mid-2016, in an attempt to push higher-cost producers out of the market and regain market share. However, starting in January 2019, OPEC reduced output by 1.2 million barrels a day for six months due to a concern that an economic slowdown would create a supply glut, extending the agreement for an additional nine months in July 2019. The organization is committed to finding ways to ensure that oil prices are stabilized in the international market without any major fluctuations.
Spare capacity
OPEC members will adjust their oil supplies based on market conditions and economic goals. OPEC’s influence on the market has been widely criticized. Because its member countries hold the vast majority of crude oil reserves, the organization has considerable power in these markets. As a cartel, OPEC members have a strong incentive to keep oil prices as high as possible while maintaining their shares of the global market.
Russia is the world’s second-largest oil exporter after Saudi Arabia. It wants to make sure its members get a reasonable price for https://www.day-trading.info/understanding-interest-rates-inflation-and-bonds/ their oil. Since oil is a somewhat uniform commodity, most consumers base their buying decisions on nothing other than price.
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.
This, along with a price war between Russia and Saudi Arabia, led to a drop in oil prices. As a result, the organization decided to cut production by 9.7 million barrels per day between May and July 2020. Oil prices continued to experience volatility, leading OPEC to adjust production levels to 7.2 million barrels per day as of January 2021. The term Organization of the Petroleum Exporting Countries (OPEC) refers to a group of 13 of the world’s major oil-exporting nations. OPEC was founded in 1960 to coordinate the petroleum policies of its members and to provide member states with technical and economic aid. OPEC is a cartel that aims to manage the supply of oil in an effort to set the price of oil on the world market, in order to avoid fluctuations that might affect the economies of both producing and purchasing countries.
OPEC’s headquarters, first located in Geneva, was moved to Vienna in 1965. OPEC members coordinate policies on oil prices, production, and related matters at semiannual and special meetings of the OPEC 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. This group was established in 2016—a time when the economy was seeing significantly low oil prices. The purpose was to help bring stability to the global market.