TheStreet

There's a pretty good chance you've heard of OPEC. Even if you haven't, this energy group (some would argue cartel) has a surprising degree of impact on your day-to-day life.

Here's how.

What Is OPEC?

OPEC stands for the Organization of the Petroleum Exporting Countries. It is an international business group with members among the world's chief oil producing nations. Collectively, OPEC's 14 member states produce 43.53% of the world's crude oil supply and control approximately 81.9% of global crude oil reserves.

The stated mission of OPEC is "to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry."

With two-fifths of the world's crude oil production controlled by member nations, OPEC is a dominant force in the energy market. The organization has historically claimed near-unilateral influence over the price of oil. In recent years, however, that influence has waned with the introduction of natural gas, hydraulic fracturing and other nontraditional methods of energy production.

Saudi Arabia is generally seen as OPEC's de facto leader, the "first among equals" as some have put it. This is because the nation produces approximately one third of the organization's total output.

Operation and Membership of OPEC

OPEC was founded in 1960 by the governments of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. They made up the first five members of the consortium.

It is headquartered in Vienna and currently has fourteen member states. They are:

  • Algeria: Admitted 1969
  • Angola: Admitted 2007
  • Congo: Admitted 2018
  • Ecuador: Admitted 1973
  • Equatorial Guinea: Admitted 2017
  • Gabon: Admitted 1975
  • Iran: Admitted 1960
  • Iraq: Admitted 1960
  • Kuwait: Admitted 1960
  • Libya: Admitted 1962
  • Nigeria: Admitted 1971
  • Saudi Arabia: Admitted 1960
  • United Arab Emirates: Admitted 1967
  • Venezuela: Admitted 1960

Indonesia participated in OPEC from 1962 - 2016, withdrawing due to falling oil production. Qatar participated in OPEC from 1961 - 2019, withdrawing due to a planned pivot to natural gas production.

While not members, in the past nations such as Egypt, Russia, Norway and Oman have had unofficial "observer" status at OPEC's biannual meetings. This is sometimes known as OPEC+.

The chief action that OPEC takes is deciding to either increase or decrease oil production by member states through production quotas. This has a substantial and direct influence on the global price of oil due to OPEC's market size. The organization must vote unanimously on any change to production.

Decline of OPEC Market Share

While OPEC remains a significant figure, its influence has been diminished by the expansion of alternative energy sources, natural gas and non-traditional production methods.

On its website, OPEC advertises its share of global crude oil production. This is entirely accurate and matches the figures shown in this article. However modern fuel production involves not only wells of crude oil but also natural gas, biofuels and all other forms of petroleum liquids. OPEC produces considerably fewer of these resources.

For example, the consortium produces only 21.3% of the world's natural gas.

When accounting for all forms of petroleum fuel, OPEC's share of total global oil production drops to between 33% - 40% (depending on the source).

The U.S. is the world's single largest producer of oil overall, supplying 16% of the market. In 2019 Texas alone is anticipated to produce more oil than most OPEC member states. This is particularly due to a boom in both shale-based extraction and the use of natural gas.

After the U.S., Saudi Arabia produces 12% of the world market, followed by Russia with 11%. All other individual nations produce 5% or less of the world's total oil supply.

This has by no means eliminated OPEC's influence on the market. It still supplies a significant plurality of the world's oil production and is the world's largest market actor. However, the expansion of production around the world has certainly lessened the organization's power to influence global oil output and prices.

What Is the Purpose of OPEC?

As noted above, the stated purpose of OPEC is to ensure stability in the oil market, as well as profits for producers and a reliable supply for consumers.

The organization argues that OPEC's dominance allows member nations to protect the market and their own national interests, particularly given the size and organized tactics of global oil companies.

This was particularly true when OPEC was first formed. In the 1960s and early 1970s, seven companies controlled 85% of the world's oil reserves. Those companies have since merged until only four of the original "Seven Sisters" remain.

However, the same period which saw consolidation among private oil companies also led to an explosion in national oil companies. While the remaining private oil companies are still among the most profitable firms in the world, their state sponsored competition has entirely caught up.

Criticism of OPEC

According to the OECD (the Organization for Economic Cooperation and Development), OPEC is a "cartel." By this, the UN group means that it is:

[A] formal agreement among firms in an oligopolistic industry… Cartel in this broad sense is synonymous with "explicit" forms of collusion. Cartels are formed for the mutual benefit of member firms. The theory of "cooperative" oligopoly provides the basis for analyzing the formation and the economic effects of cartels. Generally speaking, cartels or cartel behavior [sic] attempts to emulate that of monopoly by restricting industry output, raising or fixing prices in order to earn higher profits.

There is considerable evidence to, if not to conclusively prove the OECD's theory, at least support it. In practice, it is rare (if ever) that an industry organization like OPEC leads to lower market prices. Typically, consortiums of this sort tend to set prices higher than individual members would charge otherwise, and research by the International Association for Energy Economics has found that this is the case with OPEC as well.

Then there is the organization's willingness to step in as a political actor. In 1973 it staged an oil embargo against the U.S. as retaliation for American support of Israel in the Yom Kippur War. Further production cuts in the 1970s led to spiraling oil prices around the world and member-state oil revenues rising from $23 billion in 1972 to $140 billion by 1977.

Others have pointed out that even as a cartel, OPEC typically functions poorly. After crashing the global oil market to member states' profit in the 1970s, the Washington Post writes, "OPEC perpetuates the myth that it regularly manages the world oil market." However, even though the almost sole reason for OPEC's existence is to set production quotas, member states cheat on those targets "a staggering 96% of the time."