OPEC

The Organization of Petroleum Exporting Countries (OPEC) is an intergovernmental organization, established in 1960, that focuses on the interests and income of oil exporting countries. OPEC is a forum for negotiating petroleum policies, specifically production levels, of its member countries in order to keep prices at highly profitable levels. As of 2007, OPEC consists of twelve member nations: Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Algeria, Angola, Indonesia, Libya, Nigeria, Qatar, and the United Arab Emirates. Policy formulation, implementation, and membership decisions are based on unanimous consent at the OPEC conference, which includes representatives from each member country.

OPEC sets production quotas for all member countries. Many countries quietly deviate from their quotas, at least at times, and Iraq has publicly not followed its quota since March 1998.[i]

"OPEC member countries produce about 40 percent of the world's crude oil and 15 percent of its natural gas. However, OPEC's oil exports represent about 55 percent of oil traded internationally."[ii] Additionally, OPEC member countries contain about four-fifths of the world's proven oil reserves. These reserves are particularly notable not only in terms of volume, but also because they are "more accessible and cheaper to exploit than those in non-OPEC areas."[iii]

OPEC monitors the world oil market using an OPEC "reference price" based on the average price of a basket of various oil streams. Substantial price fluctuations can trigger revisions in OPEC production levels. However, in recent years, market prices have increased without equivalent adjustments in production levels.

One reason OPEC is reluctant to increase production despite record high prices is the steady devaluation of the dollar in 2007 and early 2008. To maintain a constant real price of oil " the actual value to producers and consumers " the nominal price must increase to compensate for the declining purchasing power of each dollar paid for a barrel of crude oil. Furthermore, many factors other than supply, such as economic conditions in key markets, affect the price of oil. OPEC members have generally denied President Bush's requests to increase production, because they fear that an economic slowdown among consumer economies (perhaps caused by problems in the financial sector) will reduce demand in the near term.

Because the majority of OPEC production lies in the Persian Gulf region, OPEC might struggle to supply global markets after a disruption in the Strait of Hormuz, despite OPEC members' relatively easy access to low-cost oil fields.

[i] Energy Information Administration, Country Analysis Briefs: OPEC (March 7, 2006). Online. Available: http://www.eia.doe.gov/emeu/cabs/opec.html. Accessed: March 2, 2008.

[ii] Organization of Petroleum Exporting Countries, What is OPEC? (October 2007), p. 13. Online. Available: http://www.opec.org/library/what%20is%20OPEC/WhatisOPEC.pdf. Accessed: February 13, 2008.

[iii] Organization of Petroleum Exporting Countries, What is OPEC? (October 2007), p. 21. Online. Available: http://www.opec.org/library/what%20is%20OPEC/WhatisOPEC.pdf. Accessed: February 13, 2008.

This page last modified in August 2008