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What is OPEC? How does it affect oil prices


What is OPEC and How It Affects Oil Prices

In this article we will look at OPEC and its activities. We will look at when, by whom and why OPEC was created. We will also try to analyse how it can influence world oil prices.

What is OPEC?

The term OPEC (Organization of the Petroleum Exporting Countries) refers to a group of 13 of the world's largest oil-exporting countries. The organisation was founded in 1960 to coordinate the petroleum policies of its member countries and to organise technical and economic cooperation among them. It is headquartered in Vienna, where the executive body, the OPEC Secretariat, manages the day-to-day operations of OPEC.

This alliance was formed in response to the Seven Sisters alliance, which included major international oil corporations such as British Petroleum, Exxon, Mobil, Royal Dutch Shell, Gulf Oil, Texaco and Chevron. They adversely affected the development of oil-producing countries whose natural resources were actively used.

According to OPEC's charter, the organisation's mission is to coordinate and unify the oil policies of its member countries and stabilise the oil market to ensure an efficient and uninterrupted supply of black gold. One of the basic principles guiding its work is: oil for consumers, stable income for producers and a fair return on capital for those who invest in the oil industry.

The history of OPEC

OPEC was created at the Baghdad Conference in September 1960 by officials from countries such as Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. In the 1960s, Qatar, Indonesia, Libya, the United Arab Emirates and Algeria joined. In the 1970s, Nigeria, Ecuador, Gabon and Angola joined the list.

In December 2016, OPEC formed an alliance with 10 other oil-exporting countries: Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan and Sudan. The new format is called OPEC+.

The membership of the Organisation of Petroleum Exporting Countries has changed several times over its history. As of January 2023, 13 countries are members, including Saudi Arabia, the United Arab Emirates, Venezuela, Nigeria, Libya, Kuwait, Iraq, Iran, Gabon, Algeria, Angola, Congo and Equatorial Guinea.

Separately, some of the largest oil-producing countries are not OPEC members - the US, Canada and China, for example.

How OPEC affects the price of oil

Cartel members produce about 40% of the world's oil and their exports account for about 60% of global trade in the black gold. OPEC estimates that its member countries accounted for more than 80% of the world's proven oil reserves in 2021.

Distribution of the world's proven oil reserves in 2021
Distribution of the world's proven oil reserves in 2021

Members meet regularly to agree how much crude oil to collectively sell on world markets. Each member country is assigned its own production quota to which it must adhere.

In case of sharp price fluctuations, OPEC can regulate quotas and, through them, the world's oil supply. If the price of the resource falls, it reduces production - this reduces supply and prices rise. If the cost of oil rises excessively, the cartel can increase production to bring prices down slightly.

For example, during the economic crisis of 2020 caused by the COVID-19 pandemic, oil became very cheap: futures went from $50 per barrel at one point to even below 0. To stabilise prices, the OPEC+ participants decided to substantially reduce the volume of oil produced by cutting quotas. The supply level fell, quotations started to rise gradually and by the end of the year returned to the area of $50 per barrel. The price tag then reached $100/bbl.

WTI oil price movement chart in 2020
WTI oil price movement chart in 2020

Criticism of OPEC

Criticism of OPEC dates back to the 1970s, when the organisation was perceived as a monopoly. In 1973, member countries from the Middle East banned oil sales to the US, Portugal, the Netherlands and South Africa for supporting Israel in the Arab-Israeli conflict. As a result, the price of a barrel of oil quadrupled by 1974, with a negative impact on end-users: fuel shortages and the cost of petrol skyrocketed. The embargo hit the US and other economies hard.

In response, Western countries tried to reduce their dependence on OPEC by stepping up efforts to produce oil offshore in the Gulf of Mexico and the North Sea. Subsequently, global oversupply and lower demand led to a significant drop in the price of black gold.

Still some countries periodically accuse the cartel of collusion, through which they believe it manipulates the price of oil by interfering with market pricing.

The US has drafted a bill, NOPEC (No Oil Producing and Exporting Cartels), which would allow US courts to punish association members and their partners for manipulating production volumes. But the project is still just a draft.

The future of OPEC

The world economy needs stability and predictability when it comes to oil prices and production and export volumes. Therefore, OPEC is likely to retain its position as a price regulator in the short term. In the context of the current energy crisis and expected growth in demand for black gold in the coming years, the cartel's position looks quite stable.

It is worth noting, however, that in the long term there are factors that could reduce the impact of the organisation's decisions on the global economy. These could include an increase in the supply of cheap shale oil by non-alliance countries and an increase in the use of renewable energy sources.


The world market for oil and oil products plays an important role in the development of individual countries and the global economy. Established in 1960, the Organisation of the Black Gold Exporting Countries has over the years firmly established itself as the main regulator of oil prices in the world markets.

In the coming years, this alliance is likely to retain its leading position, but in the longer term it may face some challenges. We are talking about the growth of shale oil production worldwide and the desire of many countries to switch to green energy.

The post What is OPEC and How It Affects Oil Prices appeared first at R Blog - RoboForex.



By: Victor Gryazin
Title: What is OPEC and How It Affects Oil Prices
Sourced From: blog.roboforex.com/blog/2023/01/20/what-is-opec-and-how-it-affects-oil-prices/
Published Date: Fri, 20 Jan 2023 12:57:48 +0000

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