Organization of Petroleum Exporting Countries

Questions on this topic? Just ask!

Before the Organization of Petroleum Exporting Countries (OPEC) was established in 1960, international oil companies with concessions in the Middle Eastern oil countries controlled crude-oil prices and thus the amounts paid to the oil-producing countries; when the price of oil fell because supply exceeded demand, payments to the oil countries dropped as well. OPEC was organized as a voluntary intergovernmental organization whose basic aims are to coordinate and unify the petroleum policies of its member countries and to safeguard their interests. OPEC links countries whose main source of export earnings is petroleum.

To achieve their aims OPEC countries use various means, such as setting crude-oil prices according to world demand, imposing an overall production ceiling, and allocating production quotas. OPEC has also sometimes used oil as a political tool.

OPEC was established in Baghdad, Iraq, in September 1960. The organization was formed by five founding members: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. In the 1960s five more countries became members: Qatar (1961), Indonesia (1962), Libya (1962), Abu Dhabi (1967), and Algeria (1969). In 1974 the United Arab Emirates, of which Abu Dhabi is the dominant member, took Abu Dhabi's place. The membership was raised to thirteen with the admission of Nigeria (1971), Ecuador (1973), and Gabon (1975). Two countries withdrew in the 1990s: Ecuador (1992) and Gabon (1996).

OPEC's headquarters are in Vienna, Austria. The organizational structure includes several bodies. The Conference, which consists of high-ranking representatives of the member countries, is OPEC's "supreme authority." Meeting at least twice a year, the Conference formulates general policies for OPEC, decides on new members, considers and approves the budget, and appoints the secretary-general.

The OPEC secretariat is directed by the board of governors and run by the secretary-general and by various bodies, including the Ministerial Monitoring Committee and the Economic Commission. The main functions of the secretariat include (1) collecting information and studying and reviewing all matters of common interest relating to the petroleum industry; (2) making studies and preparing proposals whenever requested by the board of governors; and (3) implementing the decisions taken by the Conference.

The board of governors directs the management of OPEC's affairs. It is charged with implementing the decisions of the Conference and drawing up the annual budget. The Ministerial Monitoring Committee ensures the stability of the world petroleum market by monitoring price evolution and preparing long-term strategies. The Committee is normally convened four times a year.

Estimates of OPEC's oil and gas resources are made at regular intervals. At the end of the 1990s OPEC-member countries controlled unique oil and gas reserves. OPEC countries possess more than 75 percent of the world's known reserves of crude petroleum and about 44 percent of the world's known resources of natural gas. OPEC produces about 40 percent of the world's crude oil and about 14 percent of the world's natural gas. OPEC's oil exports represent about 60 percent of all oil traded internationally. Eighty-five percent of OPEC's total oil and 79 percent of its total gas reserves are concentrated in Asian OPEC countries (that is, OPEC member countries other than Venezuela, Libya, Nigeria, and Algeria).

The main producers are the Asian countries in the Persian Gulf region, which are especially rich in oil: Iran, Saudi Arabia, and Kuwait together contain more than 40 percent of the world's oil reserves. Saudi Arabia and Iran could probably sustain current production levels into the second half of the twenty-first century; current production levels in Iraq, the United Arab Emirates, and Kuwait may be sustainable into the twenty-second century.

The first OPEC Conference was held in Baghdad in September 1960. The conference agreed to limit annual growth in output to secure adequate prices in 1965. The tax levied by OPEC members on the income of the petroleum companies was raised to 55 percent in 1970. In 1973 the Arab oil-exporting nations imposed an embargo on the United States and the Netherlands and increased prices to America's Western European allies because of their support of Israel in the Yom Kippur War. As a result, the price of crude oil quadrupled from $3 in October 1973 to $12 per barrel in January 1974. The Arab nations lifted the embargo in March 1974, after a proposal for an Israeli withdrawal from captured Syrian territory.

The OPEC Fund for International Development was created in 1976. The main goal of this financial institution is to help low-income countries in pursuit of their social and economic advancement. All developing countries, with the exception of OPEC member states, are in principle eligible for assistance.

The Iranian Revolution and the Iran-Iraq War led to another increase in crude oil prices, which more than doubled from $14 in 1978 to $35 per barrel in 1981. In 1982, for the first time in OPEC's history, the member countries agreed to defend the Organization's price structure by imposing an overall production ceiling of 18 million barrels per day. During the first half of 1986 petroleum prices dropped to below $10 per barrel, probably because some OPEC members ignored the production ceiling.

In August 1990 Iraq invaded Kuwait. After the United Nations imposed an international embargo on petroleum exports from both countries, the price of crude oil instantly increased to $25 per barrel. During the 1990s the price continued to fluctuate and reached its lowest level of $9.90 per barrel in February 1999. Following an OPEC agreement from 23 March 1999 to cut oil production by 1.7 million barrels per day, the price of crude oil rebounded sharply. During 1999, 2000, and the first eight months of 2001 they were high, especially in late 2000 when the price of crude oil was above $30 per barrel. Prices fell sharply in late September and October 2001, due to economic recession in the United States and some other countries.

Different political and economic forces are shaping the future of OPEC. In the global context the demand for oil will continue to rise, unless a cheap alternative source of energy is discovered. Thus OPEC could maintain or even increase its role on the world oil market, especially taking into consideration the lack of major oil finds in the last twenty years. From the other side, OPEC member nations often pursue their own interests, and compliance with OPEC decisions is limited to circumstances when the interests of all member nations converge.

Ahrari, Mohammed E. (1986) OPEC: The Failing Giant. Lexington, KY: University Press of Kentucky.

Al-Chalabi, Fadhil J. (1980) OPEC and the International Oil Industry: A Changing Structure. Oxford: Oxford University Press.

Allen, Loring. (1979) OPEC Oil. Cambridge, MA: Oelgeschlager, Gunn, and Hain.

Lukman, Rilwanu. (1995) "Political and Economic Issues Affecting Capacity Expansion: The OPEC Point of View." OPEC Bulletin (June): 14–16.

This is the complete article, containing 1,117 words (approx. 4 pages at 300 words per page).