OPEC's share of world crude oil reserves. Source: OPEC

The Organization of Petroleum Exporting Countries (OPEC) is an international cartel whose members hold a large share of the world's conventional crude oil resources, and who attempt to coordinate oil production and/or pricing decisions. OPEC has been directly involved in two major "energy crises" in 1973-74 and 1980-81, as well as every other major change in the price of crude oil that have had profound impacts on the economic well being of nearly every nation in the world

OPEC was created at the Baghdad Conference on September 10-14, 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The five founding members were later joined by nine other members: Qatar (1961); Indonesia (1962); Libya (1962); United Arab Emirates (1967); Algeria (1969); Nigeria (1971); Ecuador (1973); Gabon (1975) and Angola (2007). Ecuador withdrew in December 1992, and Gabon exited in January 1995. Although Iraq remains a member of OPEC, Iraqi production has not been a part of any OPEC quota agreements since March 1998. OPEC had its headquarters in Geneva, Switzerland, in the first five years of its existence. This was moved to Vienna, Austria, on September 1, 1965.

According to OPEC, its mission is "coordinate & unify the petroleum policies of Member Countries & ensure the stabilization of oil markets in order to secure an efficient, economic & regular supply of petroleum to consumers, a steady income to producers & a fair return on capital to those investing in the petroleum industry."

Analysts at universities and think tanks and political pundits have dissected and debated every aspect of OPEC's behavior since its inception. There is no consensus regarding why OPEC raised production at one point and curtailed it at another. However, there is a well-documented history that provides some insight to the organization.

OPEC was formed as an attempt by the member nations to wrestle control of oil supply and pricing decisions from a group of major international oil companies known as the "Seven Sisters" (Exxon (Esso), Shell, BP, Gulf, Texaco, Mobil, Socal (Chevron)). OPEC announced that the purpose of the organization was to unify the oil policies of member countries so as to safeguard their interests individually and collectively. New oil discoveries in its member nations, expansion from the original five members, and unification of the system by which members collected taxes and royalties from the oil companies.

Exports of crude oil from OPEC countries. Source: OPEC

The 1973 oil crisis transformed OPEC's role in the world oil market and ushered in an era of tremendous energy volatility that had major economic, strategic, and political impacts. In response to U.S. and European support for Israel in the 1973 Arab-Israeli War (the Yom Kippur War), the Arab members of OPEC, plus Egypt and Syria, announced that they would no longer ship oil to the U.S. and its Allies. The resultant drop in supply, in concert by the vigorous efforts of some OPEC members to raise prices, caused oil prices to increase by more than 400% in less than six months.

A second price shock started in the summer of 1979 in the wake of the Ayatollah Khomeini's revolution in Iran, an all-out strike of Iran's petroleum industry, and shortly thereafter, OPEC's decision to add additional price increments.

Both price shocks had far-reaching impacts. High energy prices caused inflation, unemployment and reduced productivity in the major oil consuming nations. Higher prices also stimulated oil production from outside of OPEC (Mexico, North Sea), stimulated improvements in energy end use efficiency, and caused an increase in the use of alternative sources of energy. These forces ultimately combined to diminish OPEC's control of the world oil market.

The heart of OPEC is the Conference, which comprises national delegations, usually at the level of oil minister. The Conference meets twice each year to assign output quotas, which are upper limits on the amount of oil each member is allowed to produce. The Conference may also meet in special sessions when deemed necessary, particularly when downward pressure on prices becomes acute.

Today OPEC maintains a central role in the world oil market, and it is a powerful geopolitical body. Rather than trying to defend a specific price or set of production quotas, OPEC collects price data on a "basket" of crude oils, and uses average prices for these oil streams to develop an reference price to monitor world oil market conditions.

 Sources

• Fadhil J. Chalabi, OPEC, History of. In: Cutler J. Cleveland, Editor(s)-in-Chief, Encyclopedia of Energy, Elsevier, New York, 2004, Pages 753-765, 9780121764807.
• Zycher, Benjamin, "OPEC", The Concise Encyclopedia of Economics. Liberty Fund, Inc. Ed. David R. Henderson. Library of Economics and Liberty. Accessed 15 September 2008.