Explainer: What is OPEC?

What do plastics, clothing, fertilizers and medicines have in common? They can all contain petroleum products derived from crude oil.

Oil is better known as a fuel used in transportation and to produce energy. Its many uses have made it one of the most important global commodities and critical to economic well-being. So when the oil price rises or falls, the world listens.

Around 100 countries produce crude oil. However, just five countries account for 51% of the world’s total crude oil production, according to the US Energy Information Administration (EIA). These are the United States, Russia, Saudi Arabia, Canada and Iraq.

Saudi Arabia and Iraq are members of a group called OPEC, while Russia is a member of a larger group called OPEC+. What are these groups, and what do they do?

What is OPEC?

OPEC, which stands for the Organization of the Petroleum Exporting Countries, was formed in Baghdad in 1960 by Iraq, Iran, Kuwait, Saudi Arabia, and Venezuela.

It says its objective is “to coordinate and unify petroleum policies among member countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry”.

Before OPEC formed, the international oil market was dominated by the “seven sisters” group of multinational energy companies. The group was set up at a time of global change, with “extensive decolonization and the birth of many new independent states in the developing world”, it says. In 1968, its Declaratory Statement of Petroleum Policy in Member Countries highlighted “the inalienable right of all countries to exercise permanent sovereignty over their natural resources in the interest of their national development”.

OPEC currently has 13 members, with the five founders having since been joined by Algeria, Angola, Congo, Equatorial Guinea, Gabon, Libya, Nigeria and the United Arab Emirates. Its headquarters is in the Austrian capital Vienna.

In 2016, OPEC formed an alliance with other oil-producing nations to create OPEC+. The 10 countries now in OPEC+ include Russia, Kazakhstan, Azerbaijan, Mexico, and Oman.

The move to create OPEC+ was a response to falling crude oil prices partly caused by a huge increase in US shale oil production since 2011.

How does OPEC influence global oil prices?

OPEC member states produce about 40% of the world’s oil, and their exports make up around 60% of global petroleum trade.

In 2021, OPEC estimated that its member countries accounted for more than 80% of the world’s proven oil reserves.

Because of the group’s large market share, its decisions influence global prices. Its members meet regularly to coordinate how much crude oil to sell collectively on global markets.

“OPEC+ tailors supply and demand to balance the market,” Kate Dourian of UK industry body the Energy Institute told the BBC. “They keep prices high by lowering supplies when the demand for oil slumps.”

The group can also lower prices by pumping more oil into the market.

OPEC and geopolitics

Some of OPEC’s production cuts have had significant knock-on effects for the global economy.

The best known was in 1973, when its Arab members imposed an embargo on the US and other countries that supported Israel during the Yom Kippur War. Sometimes known as the “first oil shock”, it caused oil prices to quadruple within three months, led to fuel shortages in the US and is regarded as one of the causes of a prolonged economic crisis in the US and elsewhere in the 1970s.

Other notable geopolitical developments that have significantly impacted oil prices include the Iran-Iraq war in the 1980s, the Gulf War of 1990-91, the 1997 Asian financial crisis and the 2007-08 global financial crisis.

More recently, crude oil prices crashed in mid-2020 when countries around the world went into lockdown. Following this, OPEC+ members decided to slash production by 10 million barrels a day – about 10% of global production – to try to push prices back up.

OPEC+’s latest move causes controversy

Russia’s war on Ukraine is the latest global crisis to have impacted the oil market. EU and US sanctions on Russia have targeted its crude oil and petroleum product exports. The price of Russian crude has fallen, although it is now selling more of it to countries like China and India, who have not imposed sanctions on Moscow.

OPEC+ in October decided to cut production by 2 million barrels a day – the biggest reduction since April 2020. It says the move is entirely based on “economic factors” and aims to support stability and balance in oil markets. It insists the cut was a unanimous decision by its members.

The United States has strongly criticized the decision. It says the cut will boost Russia’s oil revenues and suggested it was made for political reasons, but OPEC, led by Saudi Arabia, denies this.

The International Energy Agency, whose members include the US and other oil consumer countries, has said the production cut could be the “tipping point” that pushes the world into recession.

Whatever the reasons behind it, OPEC+’s latest move is another example of the group’s ability to affect oil prices and the wider global economy.
Source: World Economic Forum