Organization of the Petroleum Exporting Countries (OPEC)

Introduction

The Organization of the Petroleum Exporting Countries (OPEC) is a cartel of 12 major oil-producing nations that was founded in September 1960. Occasionally, there are economic arrangements whereby several interdependent firms in an industry collude to set prices, output, and market share for their product or products. When this arrangement is established formally and openly, it is called a cartel. While such an agreement would violate antitrust laws in the United States and other countries, because OPEC operates in international petroleum markets it is able to produce and sell oil in this manner, subject to short-term market conditions. OPEC has maintained its world headquarters in Vienna since 1965. Its ability to control international petroleum markets has varied over time, depending on demand, prices, reserve margins, and the perceived or real scarcity of oil. This entry reviews the member states, functions, and operations of the OPEC cartel, along with highlights from its 50-year history. OPEC's long-term stability is also addressed (Moore, 246).

There are several advantages to an oil cartel. These include increased profits to the member countries and their national oil companies, decreased market uncertainty, increased price stability, and the ability to prevent entry by an unwanted competitor. It should be noted, however, that the number of member nations in OPEC has changed several times in the past two decades, and efforts to recruit Mexico and Norway as permanent members have been unsuccessful. Many economists have argued for several decades that the structural conditions of the cartel are inherently unstable, and there is incentive for some members to cheat by secretly lowering their oil price to increase market share. Alternatively, a firm could leave the arrangement and charge less in the open market to accomplish the same goal. While such behavior has occurred among a few OPEC members, especially during the period of low oil prices in the mid to late 1980s, OPEC remains alive and well in the 21st century—its members control two thirds to three fourths of the world's proved oil reserves (though only 35%-40% of production). Moreover, demand growth for oil seems unabated, and many observers have suggested that global oil production will soon peak, if it has not already (Moore, 256).

Discussion

The original members of OPEC were Saudi Arabia, Iran, Iraq, Kuwait, and Venezuela. Between 1961 and 1975, eight other nations joined: Qatar, Indonesia, Libya, United Arab Emirates, Algeria, Nigeria, Ecuador, and Gabon. Saudi Arabia is the largest producer and controls most of the proven reserves (both for OPEC and worldwide). Somewhat consistent with economic theory, membership in the cartel has changed several times: Ecuador and Gabon left in 1992 and 1994, respectively, out of concern over the high membership fee (US$2 million) and to expand their oil production from what was allowed by OPEC; and Indonesia withdrew at the end of 2008, having become a net oil importer and unable to meet its production quota. However, Ecuador rejoined in November 2007, and a new member, Angola, had earlier joined on January 1, ...