Organization of Petroleum Exporting Countries

Organization of Petroleum Exporting Countries (OPEC)

A cartel of oil-producing countries.

Organization of Petroleum Exporting Countries

An international organization founded in 1960 whose members collaborate on the production and exportation of oil. Members meet several times a year to discuss oil prices and ways to bring them to an optimal level for members. OPEC has a great influence over the world's oil supply as the organization sets production quotas for member nations. Cutting production tends to result in higher oil prices while raising production tends to lower them. Many of OPEC's member nations are heavily reliant on oil to fund their economies and, as a result, tend to prefer high prices. On the other hand, other members (though the groups overlap) suffer high inflation rates when oil prices are too high. As a result, there is often tension between so-called "price hawks" and other members. See also: Brent blend.

Organization of Petroleum Exporting Countries (OPEC)

an organization established in 1960 with a head office in Vienna to look after the oil interests of its 13 member countries: Saudi Arabia, Kuwait, Iran, Iraq, Venezuela, Qatar, Indonesia, Libya, Abu Dhabi, Algeria, Nigeria, Ecuador and Gabon.

Ecuador withdrew in 1992 and Gabon in 1995. See CARTEL.

Organization of Petroleum Exporting Countries (OPEC)

an organization established in 1960 with a head office in Vienna to look after the oil interests of five countries: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. By 1973, a further eight countries had joined the OPEC ranks: Qatar, Indonesia, Libya, Abu Dhabi, Algeria, Nigeria, Ecuador and Gabon. Ecuador withdrew in 1992 and Gabon in 1995.

In 1973 OPEC used its power to wrest the initiative in administering oil prices away from the American oil corporations, and the price of oil quadrupled from $2.5 (American dollars) a barrel to over $11.50 a barrel. The effect of this was to produce balance-of-payments deficits in most oil-consuming countries and with it a period of protracted world recession. As the recession bit, oil revenues began to fall, to which OPEC responded by increasing prices sharply again in 1979 from under $15 a barrel to around $28 a barrel.

OPEC is often cited as an example of a successful producers’ CARTEL. In a ‘classical’ cartel market, supply is deliberately restrained in order to force prices up by allocating production QUOTAS to each member. Interestingly, in OPEC's case, because of political difficulties, formal quotas were not introduced until 1982, but these had limited success because of ‘cheating’. The main reason it has been able to successfully increase prices in the past has been that the demand for oil is highly price inelastic. Recently, however, OPEC has been under pressure for two reasons:

1. the total demand for oil has fallen, partly as a result of the world recession but also because its high price has made it economical to substitute alternative forms of energy (coal, in particular) so that oil is now less price inelastic than formerly;
2. the increased profitability of oil production has led to a high rate of investment in new oil fields (the North Sea, in particular), and this has weakened the control of OPEC over world supplies. In 2001 OPEC accounted for around 40% of world oil production, compared to over 75% in the 1970s. Apart from a substantial rise in oil prices at the time of the Gulf War in 1991, oil prices remained depressed in the 1990s, falling to under $10 a barrel in 1997. The introduction of stronger production quotas in 1999, however, led to a sharp increase in oil prices to over $30 a barrel, and rising demand led to further price increases over the period 2000–05 (currently $54 a barrel as at April 2005).