US ECONOMY WORLD ECONOMY
OPEC and Its Goals, Members, and History
What Are Its Top Three Goals?
BY KIMBERLY AMADEO
Updated May 07, 2018
The Organization of Petroleum Exporting Countries is an organization of 14 oil-producing
countries. It controls 61 percent of the world's oil exports and holds 80 percent of the world's
proven oil reserves. OPEC's decisions have a significant impact on future oil prices.
OPEC's Three Goals
OPEC's first goal is to keep prices stable. It wants to make sure its members get what a
reasonable price for their oil.
Since oil is a somewhat uniform commodity, most consumers base their buying decisions on
nothing other than price. What's the right price? OPEC has traditionally said it was
between $70 and $80 per barrel. At those prices, OPEC countries have enough oil to last 113
years. If prices drop below that target, OPEC members agree to restrict supply to push prices
higher.
But Iran wants a lower target for prices of $60 a barrel. It believes a lower price would drive
out U.S. shale oil producers, who need a higher margin. Iran's break-even price is just over
$50 a barrel.
Saudi Arabia needs $70 a barrel to break even. That price includes exploration and
administrative costs. Saudi Arabia's flagship oil company, Aramco, can pump the oil at $2 to
$20 a barrel. Saudi Arabia has cash reserves to allow it to operate at lower prices. But it is a
hardship the country would prefer to avoid.
Without this agreement, individual oil-exporting countries would wind up increasing the supply
to make more national revenue.
By competing with each other, they would drive prices even lower. That would stimulate even
more global demand. OPEC countries would run out of their most precious resource that
much faster. Instead, OPEC members agree to produce only enough to keep the price high
for all members.
When prices are higher than $80 a barrel, other countries have the incentive to drill more
expensive oil fields.
Sure enough, once oil prices got closer to $100 a barrel, it became cost-effective for Canada
to explore its shale oil fields. U.S. companies used fracking to open up the Bakken oil fields
for production. As a result, non-OPEC supply increased.
On November 30, 2017, OPEC agreed to continue withholding 2 percent of global oil supply.
That continued the policy OPEC formed on November 30, 2016, when it agreed to cut
production by 1.2 million barrels. Starting January 2017, it will produce 32.5 million barrels per
day. That's still above its average 2015 level of 32.32 mbps. The agreement exempted
Nigeria and Libya. It gave Iraq its first quotas since the 1990s. Russia, not an OPEC
member, voluntarily agreed to cut production.
The cut came a year after OPEC had raised its production quota to 31.5 mbpd on December
4, 2015. OPEC was struggling to maintain market share. Its share fell from 44.5 percent in
2012 to 41.8 percent in 2014. That's because of a 16 percent increase in U.S. shale oil
production. As the oil supply rose, prices fell from $108.54 in April 2012 to $34.72 in
December 2015. That was one of the biggest drops in oil price history.
OPEC waited to cut oil production because it didn't want to see its market share drop further.
It produces oil more cheaply than its U.S. competition. The cartel toughed it out until many of
the shale companies went bankrupt. That created a boom and bust in shale oil.
OPEC's second goal is to reduce oil price volatility. For maximum efficiency, oil extraction
must run 24 hours a day, seven days a week. Closing facilities could physically damage oil
installations and even the fields themselves. Ocean drilling is difficult and expensive to shut
down. It is then in OPEC's best interests to keep world prices stable. A slight modification in
production is usually enough to restore price stability.
For example, in June 2008, oil prices hit an all-time high of $143 per barrel. OPEC responded
by agreeing to produce a little more oil. This move brought prices down. But the global
financial crisis sent oil prices plummeting to $33.73 per barrel in December.
OPEC responded by reducing the supply. Its move helped prices to again stabilize.
OPEC third goal is to adjust the world's oil supply in response to shortages. For example, it
replaced the oil lost during the Gulf Crisis in 1990. Several million barrels of oil per day were
cut off when Saddam Hussein's armies destroyed refineries in Kuwait. OPEC also increased
production in 2011 during the crisis in Libya.
The Oil and Energy Ministers from the OPEC members meet at least twice a year to
coordinate their oil production policies. Each member country abides by an honor system in
which everyone agrees to produce a certain amount. If a nation winds up producing more,
there is no sanction or penalty. Each country is responsible for reporting its own production. In
this scenario, there is room for "cheating." A country won't go too far over its quota though
unless it wants to risk being kicked out of OPEC.
Despite its power, OPEC cannot completely control the price of oil. In some countries,
additional taxes are imposed on gasoline and other oil-based end products to promote
conservation. Oil prices are also set by the oil futures market. Much of the oil price is
determined by commodities traders. That's the underlying reason why oil prices are so high.
OPEC Members
OPEC currently has 14 active members. Indonesia joined in 1962, but left in 2009. It rejoined
in January 2016, but left after the OPEC conference in November 2016. It did not want to cut
oil production.
Oil Produced (mbpd)
OPEC Country Joined Located Comments
2016
Algeria 1969 Africa 1.15
Angola 2007 Africa 1.72
Central
Ecuador 1973 0.55 Left in 1992. Rejoined in 2009.
America
Equitorial
2017 Africa NA Data available in 2019.
Guinea
Gabon 1975 Africa 0.22 Left in 1995. Rejoined in 2016.
Rose by 0.5 mbpd due
Iran 1960 Middle East 3.65
to nuclear treaty.
Increased output to fund Iraq
Iraq 1960 Middle East 4.65
War.
Kuwait 1960 Middle East 2.95
Libya 1962 Middle East 0.39
Nigeria 1971 Africa 1.43
Qatar 1961 Middle East 0.65
Saudi Arabia 1960 Middle East 10.46 Produces one-third of total.
U.A.E 1967 Middle East 3.09
Central
Venezuela 1960 2.37 Funds failing government.
America
TOTAL OPEC 33.28
Saudi Arabia is by far the largest producer, contributing almost one-third of total OPEC oil
production. It is the only member that produces enough alone to impact the world's supply
materially. For this reason, it has more authority and influence than the other countries.
History
In 1960, five OPEC countries allied to regulate the supply and price of oil. These countries
realized they had a nonrenewable resource. If they competed with each other, the price of oil
would drop too far. They would run out of the finite commodity sooner than they would if oil
prices were higher.
OPEC held its first meeting held its first meeting September 10-14, 1960, in Baghdad, Iraq.
The five founding members were Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. OPEC
registered with the United Nations November 6, 1962.
OPEC didn't flex its muscle until the 1973 oil embargo. It responded to a sudden drop in
the U.S. dollar's value after President Nixon abandoned the gold standard. Since oil contracts
are priced in dollars, the revenues of oil exporters fell when the dollar fell. In response to the
embargo, the United States created the Strategic Petroleum Reserve.
Non-OPEC Oil-Producing Countries
Many non-OPEC members also voluntarily adjust their oil production in response to OPEC's
decisions. In the 1990s, they increased production to take advantage of OPEC's restraints.
That resulted in low oil prices and profits for everyone. These cooperating non-OPEC
members are Mexico, Norway, Oman, and Russia.
Oil shale producers did not learn that lesson. They kept pumping oil, sending prices
plummeting in 2014. As a result, many went below their break-even price of $65 a barrel.
OPEC did not step in to lower its production. Instead, it allowed prices to fall to maintain its
own market share. That's because the break-even price is much lower for most of its
members.
