The purpose was to help bring stability to the global market. Together, OPEC+ nations boast 90% of the world’s oil reserves. The Organization of Petroleum Exporting Countries (OPEC) is an organization of 13 oil-producing https://www.forex-world.net/ countries. In 2019, 79.1% of the world’s oil reserves were located in OPEC-member countries. OPEC’s decisions have a significant impact on future oil prices, so it’s important to learn how it works.
- Production fell in 2020, as measures to contain the COVID-19 pandemic reduced oil demand, but it has since rebounded.
- OPEC’s third goal is to become the world’s oil supply swing producer.
- Policy decisions are taken by consensus at its Vienna headquarters.
- Accordingly, several OPEC members nationalized their oil reserves and altered their contracts with major oil companies.
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. For example, it replaced the oil lost during the Gulf Crisis in 1990. Several million barrels of oil per day were cut off when Saddam Hussein’s armies destroyed refineries in Kuwait. OPEC also increased production in 2011 during the crisis in Libya.
OPEC’s Three Goals
In response, OPEC members—particularly Saudi Arabia and Kuwait—reduced their production levels in the early 1980s in what proved to be a futile effort to defend their posted prices. OPEC’s worst-ever crisis, according to energy expert Daniel H. Yergin, was Iraq’s 1990 invasion of Kuwait. 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. The invasion removed four million barrels of oil from the world market and caused prices to jump.
When prices are higher than $80 a barrel, other countries have the incentive to drill more expensive oil fields. Sure enough, once oil prices got closer to $100 a barrel, it became cost-effective for Canada to explore its shale oil fields. U.S. companies used fracking to open up the Bakken oil fields for production. In 2022, Russia’s invasion of Ukraine and harsh sanctions imposed by the West in response have caused global oil prices to surge and renewed attention on OPEC’s role.
High oil prices are causing some oil-importing countries to look to unconventional—and cleaner—sources of energy. These alternatives, such as shale production as an alternative energy source, and hybrid and electric cars that reduce the dependence on petroleum products, continue to put pressure on the organization. As a result, many went below their break-even price of $65 a barrel. Instead, it allowed prices to fall to maintain its own market share. The break-even price is much lower for most of its members. Many non-OPEC members also voluntarily adjust their oil production in response to OPEC’s decisions.
The shale revolution appears to have taken the group by surprise. In 2015, OPEC reacted to the hydraulic fracturing movement by driving prices down, assuming that shale production would no longer be economically viable. But new technologies have allowed American producers to tap into previously trapped oil at decreasing cost, leading the United States to become the world’s largest oil producer in recent years. Production fell in 2020, as measures to contain the COVID-19 pandemic reduced oil demand, but it has since rebounded.
Non-OPEC Oil-Producing Countries
Saudi Arabia is by far the largest producer, contributing almost one-third of total OPEC oil production. It is the only member that produces enough on its own materially impact the world’s supply. For this reason, it has more authority and influence than other countries. Squabbles among OPEC members have occasionally metastasized into conflicts.
Since oil contracts are priced in dollars, the revenues of oil exporters fell when the dollar fell. In response to the embargo, the United States created the Strategic Petroleum Reserve. OPEC’s Annual Statistical Bulletin contains over a hundred pages of tables, charts, and graphs on all things oil and gas. Approval of a new member country requires agreement by three-quarters of https://www.forexbox.info/ OPEC’s existing members, including all five of the founders.[10] In October 2015, Sudan formally submitted an application to join,[165] but it is not yet a member. On July 1, 2019, members agreed to maintain the cuts until the first quarter of 2020. CNBC lays out all of President Trump’s tweets about OPEC in 2018 and his growing frustration with the cartel’s price manipulation.
1980: oil crisis and 1980s oil glut
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. OPEC claims that its members collectively own about four-fifths of the world’s proven petroleum reserves, while they account for two-fifths of world oil production. Members differ in a variety of ways, including the size of oil reserves, geography, religion, and economic and political interests. Some members, such as Kuwait, Saudi Arabia, and the United Arab Emirates, have very large per capita oil reserves; they also are relatively strong financially and thus have considerable flexibility in adjusting their production. 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.
2020: production cut and OPEC+
Other member states feared that Iraq would soon invade Saudi Arabia and leapt into action, rather than remain neutral as they had during the Iran-Iraq War. As a military coalition came together, most of OPEC’s remaining members increased production to compensate for lost output from Kuwaiti and Iraqi oil fields. Member states coordinate policies on oil prices and production levels at regular and emergency meetings around the world, often at OPEC’s Vienna headquarters.
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. 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 ensure the stabilization of oil markets.” This ensures that there is a steady supply for consumers and regular income for petroleum producers.
OPEC’s founding members not only set out to negotiate higher global posted prices for oil but also pursued greater control over their own resources through the nationalization of international oil company concessions. In recent years, several challenges to OPEC’s influence have come to the fore, including divisions within its membership, the emergence of the United States as a major oil exporter, and the global shift to cleaner energy sources. The bloc has adapted by forming the so-called OPEC+ coalition with Russia and other countries, but disruptions caused by the COVID-19 pandemic have undermined those efforts. In 2022, Russia’s war in Ukraine and the resulting surge in global oil prices refocused attention on OPEC. Indeed, friction between Russia and Saudi Arabia came to a head at the onset of the pandemic in 2020. Saudi Arabia pushed for OPEC+ members to reduce production at a meeting in Vienna in early March.
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. Those who argue that OPEC is not a cartel emphasize the sovereignty of each member country, the inherent problems of coordinating price and https://www.currency-trading.org/ 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.
Angola, which became a member in 2007, announced its withdrawal in 2023. Many Republican lawmakers, and some Democrats, have therefore called for the United States to ramp up drilling. Still, analysts say that U.S. shale production, which collapsed during the pandemic-induced price slump, will take months to significantly increase.