OPEC

The Organization of the Petroleum Exporting Countries is an organization enabling the co-operation of leading oil-producing and oil-dependent countries in order to collectively influence the global oil market and maximize profit. It was founded on 14 September 1960 in Baghdad by the first five members: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The organization, which currently comprises 12 member countries, accounted for 38 percent of global oil production, according to a 2022 report. Additionally, it is estimated that 79.5 percent of the world's proven oil reserves are located within OPEC nations, with the Middle East alone accounting for 67.2 percent of OPEC's total reserves.
In a series of steps in the 1960s and 1970s, OPEC restructured the global system of oil production in favor of oil-producing states and away from an oligopoly of dominant Anglo-American oil firms. In the 1970s, restrictions in oil production led to a dramatic rise in oil prices with long-lasting and far-reaching consequences for the global economy. Since the 1980s, OPEC has had a limited impact on world oil-supply and oil-price stability, as there is frequent cheating by members on their commitments to one another, and as member commitments reflect what they would do even in the absence of OPEC.
The formation of OPEC marked a turning point toward national sovereignty over natural resources. OPEC decisions have come to play a prominent role in the global oil market and in international relations. Economists have characterized OPEC as a textbook example of a cartel but one whose consultations may be protected by the doctrine of state immunity under international law.
The Algeria, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, the Republic of the Congo, Saudi Arabia, the United Arab Emirates and Venezuela. The former members are Angola, Ecuador, Indonesia, and Qatar. OPEC+ is a larger group consisting of OPEC members and other oil-producing countries; it was formed in late 2016 to better control the global crude oil market. Canada, Egypt, Norway, and Oman are observer states.

Organization and structure

In a series of steps in the 1960s and 1970s, OPEC restructured the global system of oil production in favor of oil-producing states and away from an oligopoly of dominant Anglo-American oil firms. Coordination among oil-producing states within OPEC made it easier for them to nationalize oil production and structure oil prices in their favor without incurring punishment by Western governments and firms. Prior to the creation of OPEC, individual oil-producing states were punished for taking steps to alter the governing arrangements of oil production within their borders. States were coerced militarily or economically when they acted contrary to the interests of the Seven Sisters and their governments.
The organisational logic that underpins OPEC is that it is in the collective interest of its members to limit the world oil supply in order to reap higher prices. However, the main problem within OPEC is that it is individually rational for members to cheat on commitments and produce as much oil as possible.
Political scientist Jeff Colgan has argued that OPEC has since the 1980s largely failed to achieve its goals. He finds that members have cheated on 96% of their commitments. The analysis spans over the period 1982–2009. To the extent that member states comply with their commitments, it is because the commitments reflect what they would do even if OPEC did not exist. One large reason for the frequent cheating is that OPEC does not punish members for non-compliance with commitments.
In June 2020, all countries participating in the OPEC+ framework collectively agreed to the introduction of a Compensation Mechanism aimed at ensuring full conformity with and adherence to the agreed-upon oil production cuts. This initiative aligns with one of OPEC's stated objectives: to maintain a stable oil market, which, notably, has been relatively more stable than other energy commodities.

Leadership and decision-making

The OPEC Conference is the supreme authority of the organisation, and consists of delegations normally headed by the oil ministers of member countries. The chief executive of the organisation is the OPEC secretary general. The conference ordinarily meets at the Vienna headquarters, at least twice a year and in additional extraordinary sessions when necessary. It generally operates on the principles of unanimity and "one member, one vote", with each country paying an equal membership fee into the annual budget. However, since Saudi Arabia is by far the largest and most-profitable oil exporter in the world, with enough capacity to function as the traditional swing producer to balance the global market, it serves as "OPEC's de facto leader".

International cartel

At various times, OPEC members have displayed apparent anti-competitive cartel behavior through the organisation's agreements about oil production and price levels. Economists often cite OPEC as a textbook example of a cartel that cooperates to reduce market competition, as in this definition from OECD's Glossary of Industrial Organisation Economics and Competition Law:
While OPEC is at times cited as a textbook example of a cartel, various authoritative and academic sources provide a broader perspective on the organization's role. For instance, the US Energy Information Administration's glossary explains OPEC as:
The Oxford Dictionary of Energy Science defines OPEC as:
OPEC members strongly prefer to describe their organisation as a modest force for market stabilisation, rather than a powerful anti-competitive cartel. In its defense, the organisation was founded as a counterweight against the previous "Seven Sisters" cartel of multinational oil companies, and non-OPEC energy suppliers have maintained enough market share for a substantial degree of worldwide competition. Moreover, because of an economic "prisoner's dilemma" that encourages each member nation individually to discount its price and exceed its production quota, widespread cheating within OPEC often erodes its ability to influence global oil prices through collective action. Political scientist Jeff Colgan has challenged the notion that OPEC is a cartel, pointing to endemic cheating in the organization: "A cartel needs to set tough goals and meet them; OPEC sets easy goals and fails to meet even those."
OPEC has not been involved in any disputes related to the competition rules of the World Trade Organization, even though the objectives, actions, and principles of the two organisations diverge considerably. A key US District Court decision held that OPEC consultations are protected as "governmental" acts of state by the Foreign Sovereign Immunities Act, and are therefore beyond the legal reach of US competition law governing "commercial" acts. Despite popular sentiment against OPEC, legislative proposals to limit the organisation's sovereign immunity, such as the NOPEC Act, have so far been unsuccessful.

Conflicts

OPEC often has difficulty agreeing on policy decisions because its member countries differ widely in their oil export capacities, production costs, reserves, geological features, population, economic development, budgetary situations, and political circumstances. Indeed, over the course of market cycles, oil reserves can themselves become a source of serious conflict, instability and imbalances, in what economists call the "natural resource curse". A further complication is that religion-linked conflicts in the Middle East are recurring features of the geopolitical landscape for this oil-rich region. Internationally important conflicts in OPEC's history have included the Six-Day War, Yom Kippur War, a hostage siege directed by Palestinian militants, the Iranian Revolution, the Iran–Iraq War, the Iraqi occupation of Kuwait, the September 11 attacks, the American occupation of Iraq, the conflict in the Niger Delta, the Arab Spring, the Libyan crisis, and the international Embargo against Iran. Although events such as these can temporarily disrupt oil supplies and elevate prices, the frequent disputes and instabilities tend to limit OPEC's long-term cohesion and effectiveness.

History and impact

Post-WWII situation

In 1949, Venezuela initiated the move towards the establishment of what would become OPEC, by inviting Iran, Iraq, Kuwait and Saudi Arabia to exchange views and explore avenues for more regular and closer communication among petroleum-exporting nations as the world recovered from World War II. At the time, some of the world's largest oil fields were just entering production in the Middle East. The United States had established the Interstate Oil Compact Commission to join the Texas Railroad Commission in limiting overproduction. The US was simultaneously the world's largest producer and consumer of oil; the world market was dominated by a group of multinational companies known as the "Seven Sisters", five of which were headquartered in the US following the breakup of John D. Rockefeller's original Standard Oil monopoly. Oil-exporting countries were eventually motivated to form OPEC as a counterweight to this concentration of political and economic power.

1959–1960: Anger from exporting countries

In February 1959, as new supplies were becoming available, the multinational oil companies unilaterally reduced their posted prices for Venezuelan and Middle Eastern crude oil by 10 percent. Weeks later, the Arab League's first Arab Petroleum Congress convened in Cairo, Egypt, where the influential journalist Wanda Jablonski introduced Saudi Arabia's Abdullah Tariki to Venezuela's observer Juan Pablo Pérez Alfonzo, representing the two then-largest oil-producing nations outside the United States and the Soviet Union. Both oil ministers were angered by the price cuts, and the two led their fellow delegates to establish the Maadi Pact or Gentlemen's Agreement, calling for an "Oil Consultation Commission" of exporting countries, to which MOCs should present price-change plans. Jablonski reported a marked hostility toward the West and a growing outcry against "absentee landlordism" of the MOCs, which at the time controlled all oil operations within the exporting countries and wielded enormous political influence. In August 1960, ignoring the warnings, and with the US favoring Canadian and Mexican oil for strategic reasons, the MOCs again unilaterally announced significant cuts in their posted prices for Middle Eastern crude oil.