Also known as The Organization of the Petroleum Exporting Countries, OPEC is an organization formed in 1960 that comprises members from the Middle East, Africa and South America. The primary objective of the organization is coordinating petroleum policies among member countries. By creating common ground on policies, OPEC hopes to ensure fair petroleum prices for producers, a regular supply for consuming countries, and a fair return on investment for those investing in petroleum. By coordinating policies OPEC has greater influence over energy markets, sometimes to the detriment of non-member countries.
Why Was OPEC Formed?
The inspiration behind OPEC was for five petroleum-rich developing nations – Iran, Iraq, Kuwait, Saudi Arabia and Venezuela – to regain control over the petroleum market during the 1960s. At the time, the market was dominated by a group of multinational, Anglo-American companies known as the “Seven Sisters”. Some of these companies include petroleum giants like Chevron, Shell, and BP.
The founding member countries mentioned above created OPEC at the Baghdad Conference in 1960. Over the years, the number of participating countries has increased while some countries have terminated their memberships. Examples of countries who joined OPEC over time include Nigeria, Republic of Congo, Gabon, and Libya. Some that have left include Ecuador, Indonesia and Qatar.
How OPEC Works
OPEC member countries dominate a robust chunk of the crude oil market. The member states are said to produce around 40% of the world’s oil and 80% of crude oil reserves are in member countries.
Members of OPEC meet regularly to decide how much crude oil to sell on global markets. The decisions OPEC makes affect global crude oil prices.
In terms of the structure, OPEC is made up of three main parts, which include the Conference, Board of Governors, and Secretariat. Here is a brief description of how each functions.
- Conference: The conference comprises delegates from member countries and each only has one vote. They are the ‘supreme authority’ and hold the most power making decisions about policies, membership, and leadership.
- Board of Governors: This arm of the organization is responsible for OPEC’s budget and nominates governors who can serve for two years.
- Secretariat: The secretariat is led by a secretary general who serves a three-year term. The secretariat implements the policies set by the Conference and Board of Governors. They’re also in charge of the OPEC headquarters operations and conduct research.
OPEC +
In 2016, OPEC + was established because of declining crude oil prices driven by increases in U.S. shale oil output. OPEC established a Declaration of Cooperation with 10 oil-producing countries that weren’t existing members. At the time, Russia, the world’s third largest oil producer, joined OPEC +. The focus of their meetings over the past years has been to stabilize oil prices through different strategies such as cutting or increasing production.
OPEC Challenges
OPEC is impacted by current affairs like wars and natural disasters. For instance, the COVID-19 pandemic and Russia’s war with Ukraine are both examples of events that have impacted oil prices. With COVID, global lockdowns led to lower demand for oil, and prices plummeted. OPEC reduced production in a bid to stabilize prices.
There are also predictions that the demand for oil will eventually decline as other forms of energy emerge and become competitive. Examples include natural gas and other cleaner energy sources.
