OPEC (Organization of Petroleum Exporting Countries)

OPEC (Organization of Petroleum Exporting Countries)


The Organization of Petroleum Exporting Countries (OPEC) is a coalition of eleven nations that controls over fifty percent of the world's oil and natural gas exports. OPEC members are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela. OPEC strives to protect the economic interests of participating countries while maintaining a stable petroleum market by establishing production quotas for its member states.

Large Western oil companies controlled and profited from oil production in the Middle East and Africa in the first half of the twentieth century. The oil companies angered the leaders of these oil-rich countries by retaining 65 percent of the profits. OPEC was established in 1960 in order for the oil producing countries to maintain a larger percentage of oil-derived profits.

Although OPEC represented its members in negotiations with the large oil companies, the organization exercised little control over the world oil market until 1973. With inflation spiraling around the world and with increasing oil demands in the United States and Europe, OPEC realized that the stage was set for a major power grab.

Inflation led the Richard M. Nixon administration to place price controls on oil products in March 1973, resulting in increased demand. Faced with oil shortages because of increased demand, Nixon tapped U.S. oil reserves. By autumn 1973, the U.S. had nearly drained its reserves. The United States had become more dependent on oil imports than ever before.

The Yom Kippur War began in October 1973, with the United States and Western Europe supporting Israel over Egyptian and Syrian forces. OPEC, comprised primarily of Middle Eastern countries sympathetic to Egypt and Syria, made a move to seize increased control of the world oil market. OPEC imposed an oil embargo against the United States and increased oil prices in Europe. The price of crude oil doubled in a matter of days, from three U.S. dollars per barrel to over five dollars per barrel. In January 1974, prices reached 11.75 dollars per barrel.

The oil embargo of 1973–1974 inconvenienced frustrated Americans, who had to modify their lifestyles to accommodate the steep increase in oil prices. The White House encouraged Americans to conserve energy by driving less, carpooling, and turning down thermostats. The Nixon administration responded by extending Daylight Savings Time in the United States, encouraging companies to trim work hours, and pushing Congress to approve construction of the Alaskan Pipeline.

The energy crisis that resulted from the OPEC embargo fueled a worldwide recession. The Dow-Jones lost 45 percent over the next two years. Oil shortages led to long lines at gasoline pumps. When OPEC finally lifted the oil embargo against the U.S. in March 1974, it had established itself as one of the most powerful economic forces in the world.

OPEC's strategy backfired, however, when public and political opinion in the United States and Europe was inflamed. The United States increased its oil production with the completion of the Alaskan Pipeline in 1977. Large American and European oil companies also sought to regain some of their lost influence by increasing oil exploration in non-OPEC countries and offshore. As a result, much of the power that OPEC had wielded over world energy markets was eroding.

For the first several years of the 2000s, OPEC sought a stable oil market by maintaining an average price of $22 to $28 per barrel of crude oil; exerting price controls had become more difficult and less profitable for members. An example of OPEC's increasing ineffectiveness occurred in 2001, when crude oil prices fell by one-third. During the same year, OPEC cut its oil production by over twenty percent.

OPEC has experienced periods of waning effectiveness in the past, but these periods were usually the result of internal disagreements. OPEC's more recent problems stem from the rise of large, non-OPEC oil producing states, such as Russia, Norway, Mexico, Oman, and Angola. In order for OPEC to remain a viable power, it needs the cooperation of these states. Russia, Norway, and Mexico have tended to follow OPEC's lead, but continued support from these states is questionable. Russia has already indicated that it will proceed independently for the fore-seeable future.

Many OPEC members have expressed an unwillingness to limit their oil production and profits if non-OPEC countries continue pumping at full capacity and flooding the market with cheap oil. If OPEC cannot hold sway over these emerging oil-producing states, then the primary reason for the existence of OPEC may eventually be in question.



Organization of Petroleum Exporting Countries (OPEC). < http://www.opec.org > (May 2003).


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