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Is OPEC Misunderstood?

The Organization of Petroleum Exporting Countries (OPEC) is one of the strongest cartels in the history of the world thanks to the fact they control nearly 50% of the world’s oil.  That being said, it’s also one of the most misunderstood groups in the world as well.

What Is OPEC?

OPEC was founded in 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela with the intention to “coordinate and unify the petroleum policies of Member Countries and ensure the stabilization of oil prices in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital to those investing in the petroleum industry.”

Essentially, OPEC understands that its members have something that the rest of the world wants - oil - and it wants to make sure that each member sets its oil policies in such a way that they are paid fair market value for their resources. 

However, after learning from previous oil shortages, OPEC has also come to realize that in order to sustain a healthy world wide economy, it must attempt to produce as much oil as possible as cheaply as possible.

Who Is In OPEC?

OPEC’s members consist of the following countries:

• Algeria
• Indonesia
• Iran
• Iraq
• Kuwait
• Libya
• Nigeria
• Qatar
• Saudi Arabia
• United Arab Emirates
• Venezuela

As of 2005, these 11 countries combined to produce 41.7% of the oil consumed around the world, and hold over 2/3rds of the world’s oil reserves.

Why Do Many People Look Unfavorably Upon OPEC?

The biggest reason why many Westerners look unfavorably upon OPEC is because of the oil shortages of the 1970’s, one of which wasn’t actually the organization’s fault.

The first shortage came about in 1973 when OPEC members, specifically the Arab members, imposed an oil embargo on the Western world, specifically the United States.  This embargo came about for two reasons:

1. The West’s support of Israel during the Yom Kippur War.
2. The belief that the West was using cheap oil to produce cheap goods and services that were being sold back to developing countries at an incredible markup.

This embargo lasted only five months, but caused the price of oil to increase 400%, going from $3 per barrel to over $12 per barrel.  Thanks to the newly created shortage, gas prices skyrocketed and for the first time since World War II, the United States government began to ration the amount of oil available for public consumption.

The second shortage came about during the Iranian Revolution in 1979 when Ayatollah Khomeini seized control of Iran.  During this time Iran drastically reduced its oil exports, which coupled with the geopolitical tension the revolution caused, forced an already unstable oil market to shoot through the roof.

In OPEC’s defense, because of Iran’s decision to cut oil production, many members of OPEC actually increased their oil production, even though it ultimately didn’t help bring down world wide prices.

For the second time in less than five years, the United States was forced to ration oil and gasoline.  And, thanks to the fact the price of oil had increased over 1,000% in the span of six years, a world wide economic recession certainly didn’t make OPEC many friends.

Where Is OPEC Headed?

Despite losing much of it’s price setting power, as illustrated by the price of oil continuing to decline despite statements from OPEC that it would consider cutting oil production in order to protect $60 per barrel, the organization is still one of the most notorious and closely scrutinized organizations in the world.

But, with world wide demand for oil expected to increase twofold over the next decade, OPEC’s return to “oil pricing power” seems almost eminent.

Couple the increase in demand with an unstable Iranian government, continued war in the Middle East and Venezuelan President Hugo Chavez’s dislike of America, and there’s really no telling where OPEC, and the price of the oil it controls, will go in the future.

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