Organization of the Petroleum Exporting Countries (OPEC)

The Organization of the Petroleum Exporting Countries (OPEC) is a cartel of 12 major oil-producing nations that was founded in September 1960. Occasionally, there are economic arrangements whereby several interdependent firms in an industry collude to set prices, output, and market share for their product or products. When this arrangement is established formally and openly, it is called a cartel. While such an agreement would violate antitrust laws in the United States and other countries, because OPEC operates in international petroleum markets it is able to produce and sell oil in this manner, subject to short-term market conditions. OPEC has maintained its world headquarters in Vienna since 1965. Its ability to control international petroleum markets has varied over time, depending on demand, prices, reserve margins, and the perceived or real scarcity of oil. This entry reviews the member states, functions, and operations of the OPEC cartel, along with highlights from its 50-year history. OPEC's long-term stability is also addressed.

There are several advantages to an oil cartel. These include increased profits to the member countries and their national oil companies, decreased market uncertainty, increased price stability, and the ability to prevent entry by an unwanted competitor. It should be noted, however, that the number of member nations in OPEC has changed several times in the past two decades, and efforts to recruit Mexico and Norway as permanent members have been unsuccessful. Many economists have argued for several decades that the structural conditions of the cartel are inherently unstable, and there is incentive for some members to cheat by secretly lowering their oil [Page 2098]price to increase market share. Alternatively, a firm could leave the arrangement and charge less in the open market to accomplish the same goal. While such behavior has occurred among a few OPEC members, especially during the period of low oil prices in the mid to late 1980s, OPEC remains alive and well in the 21st century—its members control two thirds to three fourths of the world's proved oil reserves (though only 35%–40% of production). Moreover, demand growth for oil seems unabated, and many observers have suggested that global oil production will soon peak, if it has not already.