OPEC

The Organization of Petroleum Exporting Countries (OPEC) is a cartel that was formed in 1960 with an initial membership consisting of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The background milieu is that the world was in a state of decolonialisation at the time. The world oil market was dominated by seven major oil companies, all from developed nations, while the OPEC nations were all developing nations. The birth of OPEC, therefore, reflected an interest by oil-producing nations to “exercise permanent sovereignty over their natural resources in the interest of their national development” (OPEC, 2012). Several other nations would join OPEC over the coming years, including Qatar, Indonesia, UAE, Libya, Algeria, Nigeria, Ecuador and Gabon. Angola would also join, much later, while Gabon, Indonesia and Ecuador would later withdraw from the cartel (OPEC, 2012).

The 1970s were a period of growth and maturation for OPEC. The market for oil became much more volatile, and oil became a geopolitical tool for the OPEC nations. Two critical events — the Arab oil embargo and the Iranian Revolution — would characterize this volatility. These crises empowered the OPEC nations. They undertook steps to aid poorer nations and would establish the OPEC Fund for International Development in 1976. The oil embargo lasted for one year during which the price of oil nearly quadrupled. This event also showed to the world the vulnerability of the United States to foreign oil and its weak energy supply chain in general. It also showed OPEC that oil could be used as a political tool (State Department, n.d.). It would later use this in other future conflicts as well.

In the 1980s, oil prices crashed by mid-decade. There was a glut of oil on the market as consumers reduced their fuel consumption in response to the high prices and volatility of the 1970s. In addition, those high prices allowed other nations to get into the oil business, the result being that not only did overall supply increase but OPEC’s share of the world oil market declined. With it came the cartel’s ability to become involved in geopolitics, since Western markets were better able to source oil from elsewhere. Despite a smaller market share, OPEC was better able to manage prices and by the 1990s the cartel was a stabilizing force in the oil market. However, oil prices crashed again in the 1990s especially with the collapse of the Asian Tiger economies. Prices by the late 1990s were very low. In addition, new supply came onto the world market from former Soviet production.

OPEC in the 2000s has benefitting from a long-term rise in the price of oil, powered by strong growth in a variety of emerging economies. However, a number of factors contributed to increased volatility in the market. Oil had become an asset class, subject to speculation that increased the volatility. This presented a challenge to OPEC with respect to managing prices and world supply. By the late 2000s, OPEC adopted resolutions with three guiding themes — stable energy markets, sustainable development and the environment. Today, OPEC continues to control around a third of the world’s oil production, and uses that production to manage the supply and price of oil to the best of its ability, and to the benefit of its members. OPEC remains a vital component of the global energy supply chain.

Works Cited:

OPEC. (2012). Brief history. Organization of Petroleum Exporting Countries. Retrieved December 4, 2012 from http://www.opec.org/opec_web/en/about_us/24.htm

US Department of State. (no date). Milestones 1969-1976. U.S. Department of State. Retrieved December 4, 2012 from http://history.state.gov/milestones/1969-1976/OPEC