The Organization of the Petroleum Exporting Countries or OPEC is an intergovernmental organization composed of 13 countries with proven oil reserves and the capacity to extract these reserves for exportation in the global petroleum market.
Five of the 13 member countries are in the middle, while seven are in Africa and one in South America. These are Algeria, Angola, Republic of the Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, the United Arab Emirates, and Venezuela.
What is OPEC and Why is It Important: An Understanding the Purpose, Importance and Influence, and Criticisms and Limitations of the Organization
An Overview of the History of OPEC
It was in 1949 when Iran and Venezuela took the first initiative to establish strong international cooperation among producers and exporters of hydrocarbons. These countries invited Iraq, Kuwait, and Saudi Arabia to tackle the upcoming demand for oil and gas following the recovery of global economies from the Second World War.
The United States was the largest producer and consumer of oil during the 1940s to 1950s. Seven American multinational companies known as the “Seven Sisters” dominated the global market. These companies dictated not only the supply but also the price of oil and gas. Other oil-exporting countries aspired to break the dominance of the U.S.
and Venezuela were two of the largest oil exporters in the world outside the U.S. and the Soviet Union
. The pricing policies of American companies placed these two countries at the losing end. The Arab League subsequently held the first Arab Petroleum Congress in 1959 to discuss the situation. Venezuela was a guest attendee.
Venezuela and Saudi Arabia expressed their resentment over the pricing policies of American companies. This was the initial motivation for establishing the Organization of the Petroleum Exporting Countries. The Arab Petroleum Congress was followed by the Baghdad Congress in September 1960. Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela were the participants.
Note that the Baghdad Congress subsequently resulted in the formal creation of OPEC on 14 September 1960. The stated purpose of the organization read: “Together with Arab and non-Arab producers, Saudi Arabia formed the Organization of Petroleum Export Countries to secure the best price available from the major oil corporations.”
Purpose, Specific Roles, and Responsibilities
The mission statement of OPEC states that it aims 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.”
Fundamentally, to understand the purpose of OPEC better, it is important to note that this organization is technically a cartel. A cartel is generally a group of market participants that collude with each other to dominate a particular market and improve their profits through policies aimed at controlling supplies and prices.
The Organization of Petroleum Export Countries essentially aims to manage and regulate the supply of oil as part of its primary strategy of influencing and indirectly controlling the prices of this commodity in the global market and avoiding fluctuations that can possibly affect the economies of both the producers and consumers of oil.
Regulating how much oil a member country can produce effectively means controlling the supply in the global market. Note that supply and demand are two of the factors affecting oil and gas prices
. Decreasing price trends prompt the organization to limit the production output of its member countries, thus limiting the supply and preventing further price decreases.
The roles and responsibilities of member countries are considerably straightforward: follow the policies of OPEC and uphold time-relevant mandates regarding production output. Of course, to arrive at these mandates, the organization maintains an open dialogue with all of its members to coordinate and align their shared interests and objectives.
It is also important to note that part of the specific responsibilities of OPEC to its member countries is to provide technical and economic assistance. The assistance ranges from technology and knowledge transfer to investments in oil production capabilities and relevant infrastructure. The organization also maintains the so-called OPEC Fund.
The OPEC Fund is the social responsibility program of the organization aimed at partnering with developing countries and the international development community to support sustainable social and economic advancement in low-income and middle-income communities around the world. Member countries contribute to the fund needed to finance projects.
Importance and Influence of the Organization
OPEC has played a central role not only in the global oil market but also in the different facets of international relations
. To understand the depth of its importance, note that its 13 member countries collectively account for more than 40 percent of global oil production and more than 80 percent of the proven oil reserves of the world.
The power of OPEC is undeniable. Because almost half of oil traded and consumed in the world comes from its member countries, any decision concerning the production output volume has a considerable impact on the global oil supply and by extension, the prices of oil in the global market. Remember that this organization is a legalized form of a cartel.
Of course, it has also played several critical roles in notable world events. Member countries have leveraged the organization as part of their respective foreign policies
. For example, during the Yom Kippur War or the Fourth Arab-Israel War, OPEC declared an oil embargo from 1973 to 1974 against the United States and other countries that supported Israel.
The 1973-1974 Oil Embargo had negatively affected the economies of the U.S. and other industrialized countries. The event forced these countries to begin building their national emergency stockpiles to manage the risks that come from oil supply disruptions. It was also prompted the creation of the International Energy Agency in 1974.
OPEC essentially can be used as a political and economic weapon of its member countries. The 1973-1974 Oil Embargo proved how the collective decisions of nations and states can affect the local economies of target countries and the overall landscape of the international community. This is somewhat similar to the collective defense principle of NATO
The importance of OPEC can also be understood further by examining the impacts of localized social and political turmoil. For example, the 1979-1980 Oil Crisis and the 1980s Oil Glut were triggered by the Iranian Revolution and the Iran-Iraq War. These events disrupted not only regional stability but also the global oil supply.
Of course, in several instances, the organization has played a role in stabilizing oil prices in the world. These were exemplified during the 2007-2008 Financial Crisis
, the reopening of economies during the COVID-19 pandemic, and the escalation of the Russia-Ukraine War
in February 2022. OPEC combatted high prices through production quotas.
Notable Criticisms of OPEC and its Limitations
The Organization of the Petroleum Exporting Countries is undeniably one of the most powerful and influential intergovernmental organizations in the world. Its directives and decisions can influence not only the global oil market but also affect economies, international relations and geopolitics
, and the national policies of affected countries.
But it has come under fire not only for its demonstrated power and influence but also for its decisions in the past, as well as its failures and limitations. One of the criticisms of OPEC is that it has been extensively used by some member countries as a tool or avenue for pushing their foreign policy and their agenda in international politics.
The negotiation of national quotas and arriving at a consensus also represents one of the challenges of OPEC. Saudi Arabia had a hard time convincing other member countries to decide on limits in production output. The country responded to this by slashing its production from 1979 to 1981 and further by flooding the market with cheap oil.
It is also important to note that the different economic needs of member countries often affect the internal decision-making processes and debates regarding production quotas. Countries with lower income tend to promote low production volume to increase the price of oil in the global market and increase their revenues from oil exportation.
Saudi Arabia has since attempted to position itself and OPEC as instruments for ensuring stability in global oil prices. The country has argued that lowering the production output of oil producers and exporters can compel other developed or industrial countries to research and develop alternatives to fossil fuels and switch to the post-hydrocarbon era.
A number of countries had also withdrawn from OPEC. Ecuador left the organization in December 1992 because it was unwilling to pay the annual membership contribution of USD 2 million and wanted to produce oil outside the quota mandated by the organization. Indonesia also left OPEC for the same reason that it wanted to have more control over its production output.
Conclusion and Takeaway: A Summary of the Purpose, Importance, and Criticisms of the Organization of the Petroleum Exporting Countries
The Organization of the Petroleum Exporting Countries or OPEC is fundamentally a global cartel composed of oil-exporting countries. These countries use the principle of collective action to influence the prices of oil in the global market through production quotas.
Note that the organization can substantially impact these prices because its member countries collectively supply more than 40 percent of the global oil demand while holding more than 80 percent of the total proven oil reserves of the world.
Hence, the importance of OPEC cannot be denied or disregarded. The power of consensus has also been used by countries such as Saudi Arabia as leverage to advance its foreign policy and its specific political interest in the international scene.
The organization has also demonstrated through numerous occasions that it is willing to work with other countries to mitigate trends in global oil prices. It either agrees to cut down the production volume of its member countries during periods of expensive oil or increases its production during periods of inexpensive oil.
But it seems to have been not as solid. One of the criticisms of OPEC is that it cannot effectively arrive at a consensus because each member state can have different economic interests and goals. Former member countries even left the organization because of the production mandates.