OPEC (Organization of the Petroleum Exporting Countries) is 57 this year and has come a long way from relatively humble beginnings. Founded in 1960 in Baghdad and initially made up of just five members (Iran, Iraq, Kuwait, Saudi Arabia, Venezuela) the group has been based in Vienna since 1965 and currently comprises 14 members:
- Equatorial Guinea
- Saudi Arabia
- United Arab Emirates
Indonesia is a former member having lapsed its membership in 2008, re-joining in 2016 only to announce another “temporary suspension” at the end of 2016 when OPEC voted for a five percent production cut for all members to bolster falling oil prices.
The 14 current member countries account for approximately 45 percent of global production and over 70 percent of proven global oil reserves. The sheer numbers involved make OPEC decisions a major factor for oil prices around the world. OPEC came about as a direct counter to the various (usually American dominated) oil cartels which dominated the global petroleum industry from the 1940s through to the mid-1970s. The most notorious was the “Consortium for Iran” cartel, commonly referred to as the Seven Sisters, made up of the following companies:
Anglo-Iranian Oil Company
Royal Dutch Shell
Standard Oil Company of California
Standard Oil Company of New Jersey
Standard Oil Company of New York
The formation of OPEC was a direct counterweight to these oil company cartels.
In 1968, a “Declaratory Statement of Petroleum Policy in Member Countries” was endorsed, which stressed the inherent right of each country to exercise continued dominance over their natural resources, in an attempt to boost their development. Upon the implementation of this policy, OPEC welcomed an additional five members: Qatar, Indonesia, Libya, The United Arab Emirates and Algeria.
In the 1970s OPEC’s prominence rose as its members gained authority over their internal petroleum industry and started significantly influencing global crude oil prices. On two separate occasions, there was a steep increase in the value of oil, as a result of the Arab oil embargo in 1973 and the Iranian Revolution in 1979. OPEC’s influence continued to grow with the first Summit of Heads of State and Government in Algiers in 1975, which primarily focused on the plight of poorer nations in an attempt to equalize global stability and development. As a result, 1976 saw the establishment of the OPEC Fund for International Development and Nigeria, Ecuador and Gabon joined as the newest members.
After hitting a record high in the early 1980s, the oil prices slowly began weakening before eventually crashing in 1986. The price crash came about due to an oil oversupply and a consumer shift towards renewable energy, which resulted in less demand for hydrocarbons applying further pressure on prices.
OPEC’s influence in the oil market decreased significantly causing its petroleum revenues to crash to below one-third of previous peaks, leading to extreme economic difficulties for all its members. In the last part of the decade, prices staged modest comebacks and OPEC’s status as a primary influencer, recovered along with production. As a result, environmental concerns materialized on the global energy agenda.
In the early 2000s, OPEC instituted a “price-band” mechanism which facilitated the stabilization of the value of crude. However, what goes up must eventually come down again, and vice versa. This is what happened in 2004, when volatility pushed crude prices up, again, even though supply was sufficient. Prices continued to rise, reaching a record-high in 2008.
OPEC continues to play a significant role in the global oil markets although falling member reserves, new sources outside the group (North American shale production for example) along with the global shift towards renewable energies have taken some of the lustre away.
When you control almost half the global production of oil though, your voice will always be heard, and while it might not last another 57 years, OPEC’s voice will continue to be heard. At least as long as oil reserves and our ongoing reliance on the internal combustion engine endure.
This article is for educational and informative purposes only and should not be considered as investment or trading advice