You might have heard something in the news recently about OPEC or OPEC Plus but you’re not quite sure what people are talking about. Other than the fact that this term is used in the context of oil, namely foreign oil, a large number of people have no idea what OPEC is! Don’t worry because you’re not alone! Let’s dive in:
What is OPEC?
OPEC is an acronym for the Organization of the Petroleum Exporting Countries which is a group of now 13 nations who are the major exporters of oil in the world. The 2020 countries in OPEC are:
- Saudi Arabia
- United Arab Emirates
- Equatorial Guinea
That’s the basic gist of it as far as members, but why was OPEC formed in the first place? What are the benefits of having such an organization in the world? Read below to find out more about OPEC as well as its function, the countries that left, and more!
What You Need to Know About OPEC
OPEC was founded in 1960 as oil demand around the world started to exponentially grow year by year and reaching new heights every decade. The organization was formed at a critical moment as various under-developed and developing nations began to pump and export crude oil and petroleum. This opened up avenues for market manipulation which could have dramatic effects on barrel prices around the world and subsequently financial markets associated with them.
Therefore, OPEC was founded as a measure to implement sound policies and metrics for how much oil can be pumped and sold. Ultimately this allows the world markets to keep a good eye on the petroleum industry as well as to measure aggregate supply and demand. This in turn prevents any dramatic spikes or fluctuations, allowing producers and purchasers to have a solid economic relationship.
The founding members of OPEC include some of the largest oil exporters in the world, including Iran, Kuwait, Iraq, Venezuela, and Saudi Arabia. Throughout the years almost a dozen nations have joined OPEC, of which Qatar was the first non-founding member to join in 1961. Ironically, Qatar is also the first country to leave the organization in an effort to focus more on its huge natural gas potential. This year, Ecuador left as well, leaving just 13 nations in OPEC.
How Does OPEC Work?
The headquarters for the organization is in Vienna Austria as its executive branch carries out the mission which as they describe it 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.”
It’s important to note that OPEC considered itself an intergovernmental structure and based on its slogan, the commitment to consumers, buyers, sellers, producers, and investors is taken into account. Currently being led by Nigeria’s own Mohammad Sanusi Barkindo, the organization is open to new members as long as they share and uphold the same values and frameworks as the other nations. Of course, you also have to be a large oil exporter to be considered as a new member… that kind of goes without saying.
Is OPEC Too Powerful?
There is of course growing concern around the world regarding the motives of OPEC nations as well as the undeniable power the organization has, not only on matters relating to oil export and petroleum production but also overall financial markets and even geopolitical influences around the globe.
According to OPEC’s website, members are in hold of most of the world’s oil reserves, which at the moment constitutes a tearjerking 79%. With oil still the number one source of energy around the world, you have to think to yourself: how much power does the OPEC really have and how far does it extend?
It could easily be argued that OPEC nations can and are motivated to artificially increase the price of a barrel of crude oil to exponentially grow their own profit margins on massive exports. It’s no secret that most of the OPEC nations do not fully embrace democracy and all her values. So it’s not entirely farfetched to assume that the leaders of these nations are highly motivated to control supply by lowering or increasing daily barrel output.
Also, keep in mind that most of these nations were developing or none-developed countries before they started to integrate modern technology and export oil around the world. That being said, their cost per barrel extraction is relatively higher than for instance in the United States or Canada. Therefore, all roads point to a potential mutual interest bordering on conspiracy, or at the very least a highly motivated need to keep oil prices at levels many would consider expensive.
Does this mean that the OPEC is too powerful and that member countries will amass political strength over the next few decades? Not likely. It’s true that up until recently crude oil prices had been steadily rising with prices around $60 per barrel. However, this unprecedented growth was rather short-lived as prices briefly dropped to below zero during the COVID-19 pandemic.
That’s right! Oil prices dropped into negative numbers where suppliers were actually paying buyers to take the stuff off their hands. Still, this sudden drop impacted everyone across the board… not just OPEC countries but the U.S., China, Russia, and Canada as well! The real secret lies in how the oil is pumped.
While most countries pump out oil by drilling vertically, the U.S. uses fracking technology which allows for oil to be extracted horizontally, thus dramatically increasing the amount of oil that can be pumped out. This allows the States to maintain the lowest cost per barrel rate among any country on earth at just $36. At the current crude oil price of around $40, it really only allows the U.S. a small margin of profit, or at least minimize the financial losses.
So even with the majority of the world’s oil reserves, OPEC nations can’t hope to maintain a sustainable economy based on oil production alone, nor can they hedge their bets on becoming a dominant world power without modern fracking technology and consistently high oil prices over the next few decades.
Why Aren’t the U.S., Russia, and China Part of OPEC?
Now you may be wondering why three of the largest oil exporters and producers are not among the OPEC members. While there may be a number of political or ideological reasons for this, the simplest answer is that these countries want to remain independent sources for oil production and export in an effort to control their own supply chain and remain free to conduct business as beneficial to them not to OPEC or the world.
There you have it! Everything you would need to know about the fundamentals of OPEC, what it is, the members, and how they operate around the world. Now keep a close eye on oil prices as the world works through the rest of crazy year!
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