Beginners Guide to OPEC and FAQs

Today, while reading about the drastic drop in oil prices throughout the world, I thought it was a good opportunity to discuss about a body which controls a major part of its supply. So here is a concise and helpful guide to OPEC – A powerful cartel of 12 oil producing nations.

 Introduction to OPEC
Post the Second World War, with an increase in the number of independent nations, there was a sharp increase in the number of emerging economies. This coupled with the advent of industrialization, led to an increase in demand for crude oil. Consequently, there was more extraction and production of petroleum and its products by the oil rich countries.

Now, as you know, according to the law of demand and supply, an increase in demand, keeping the supply constant, leads to an increase in price; and increase in the supply, leads to a fall in the prices.

From early Twentieth Century, oil became one of the most important commodities. From households to industries, everyone had become dependent on it in one way or the other. And manipulating its supply would influence the economy of all the major nations in the world. It was with this increasing awareness of the importance of crude oil and the complex economics associated with its price, the world felt the need of a central body that would control the global demand, supply and price of petroleum.

Also, the oil producing nations wanted a mechanism wherein they could fix the price of crude oil, so that they had uniform selling prices.

So what is OPEC?
OPEC stands for Organisation of the Petroleum Exporting Countries. It is a cartel of oil producing nations which hold about 80% of the world’s crude oil reserves. It is a permanent intergovernmental body responsible for ensuring that its member countries supply an optimum level of crude oil to avoid fluctuations which could negatively impact the producers as well as the purchasers.

How was OPEC established?
Before 1949, crude oil pricing was not uniform and it was decided mutually by producer and importer. This led to varied pricing of oil around the globe. In 1949, Kuwait, Saudi Arabia and Iraq were approached by Venezuela and Iran with the idea of having a forum to discuss views and to engage in better communication within the petroleum producing countries, to be at par with each other by having similar crude oil prices.

When was OPEC established?
Finally, OPEC was established in September 1960 in Baghdad, Iraq with 5 member countries – Iran, Iraq, Saudi Arabia, Venezuela and Kuwait. It became operational in January 1961.

Where are the headquarters of OPEC?
In its formative years, OPEC had its headquarters in Geneva, Switzerland. But on September 1, 1965, it moved to Vienna, Austria and it is their current headquarter.

List of countries which are members of OPEC
Since its formation, OPEC has grown and today it has 12 member countries - Algeria, Nigeria, Angola, Ecuador, Venezuela, Libya, Iran, Iraq, Saudi Arabia, UAE, Kuwait and Qatar.

List of OPEC countries, OPEC members
List of OPEC members

Who heads the organization?
Secretary General of the organization heads it and he is appointed by member countries. His term is of three years with a provision of extension for another 3 years. Currently, the Secretary General of OPEC is Abdallah el-Badri. He is a citizen of Libya.

When is the OPEC conference held?
The conference of OPEC member countries is generally held twice a year, in March and September. These are called “Ordinary” conferences, whereas “Extraordinary” conferences are held whenever required.
The most recent conference was held on 27th November 2014 in Vienna, Austria.

What is the role of OPEC?
The mission of the Organization of the Petroleum Exporting Countries (OPEC) is “to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.”

In simple words, OPEC decides the production targets of its member nations according to the trends of the world economy in a way that will help unify and safeguard the interests of all its member nations and give them a decent income from exporting petroleum. At the same time, it strives towards stabilizing oil markets.

Does OPEC decide the price of the crude oil?
No, OPEC doesn’t set or decide the price of crude oil. Its job is to control the fluctuations of the price of crude oil that result in unnecessary disturbance in the world’s economy. However, it can decide the supply of crude oil from its member countries, which in turn is one of the primary factors that affect crude oil prices:
1. Demand and supply
2. Market sentiment
Please note this is very different from setting the price, price of crude oil is set by market forces not OPEC.

How does OPEC functions?
At the conferences of the organisation, the delegates representing the member countries come forward and discuss the current issues and proposals regarding the oil market. Any changes, amendments etc in the current supply and demand policies are discussed and considered.

Each member country has one vote in the decision making process. A decision is taken only when there is a unanimous approval for it.

Even though recent price drop has diminished the revenues of the OPEC nations but it remains a very powerful body on whose decisions economies around the world depend.

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