Organization of the Petroleum Exporting Countries

The Organization of the Petroleum Exporting Countries (OPEC) was founded by the Baghdad Conference in September 1960. It is an intergovernmental agency that aims to coordinate oil policies among its members and to ensure a stable, yet regulated, supply of oil to the international market.

OPEC was founded in the wake of the nationalization of oil-producing companies in several developing countries following their political independence. These countries wanted to counter the hegemony of large multinational companies (commonly referred to as the “Seven Sisters”) that controlled the oil market and set the international prices of petroleum.

Starting with five founding states, OPEC has continually expanded and currently holds eleven members that control over two-thirds of the global oil reserves. Despite the fact that non-OPEC countries supply over half of the oil traded on the international market, the organization still yields a major influence over the direction of oil prices and is by far the largest regulatory agency in the field of oil production.

The influence of OPEC was dramatically felt during the oil embargo imposed on several Western nations during the 1973 Arab-Israeli War. The embargo, implemented by the Arab member states against countries seen as supporting Israel in the conflict, caused a major supply crisis and a sharp increase in the world's oil prices. Since then, OPEC has played a mitigating role in the oil market by increasing production in the face of high demand and limiting it during periods of oversupply. OPEC policies were remarkably successful in avoiding energy crises and price fluctuations during phases of instability that occurred in oil-producing regions. OPEC stepped in to compensate for the loss of production resulting from the Iran-Iraq War (1980 to 1988), the Second Gulf War (1990), and the American-led invasion of Iraq in 2003.

The major tool used by OPEC to regulate its members' production is through the use of production quotas. Member delegations meet twice a year and set future production policies based on forecasts of global demand and supply. Every OPEC conference sets new production levels that are divided proportionately among the member states.

Commitment to production quotas has not always been consistent, and several OPEC members regularly exceed their quota limitations, especially the smaller producers. Large OPEC members, especially Saudi Arabia, have tended to cut their production in order to compensate for the excessive supply by other members. Crashes in oil prices in the mid-1980s and late 1990s were attributed to the lack of commitment to the quota system.

OPEC members were not always in agreement as to the oil-production and pricing strategies, and disagreements among members often reflected larger political differences. For example, since the 1979 Islamic revolution, Iran has been continually calling for higher prices, which have been resisted by Saudi Arabia and other pro-Western member states. Iraq's invasion of Kuwait in 1990 was partially motivated by Iraq's dissatisfaction with Kuwait's overproduction, which contributed to lowering the international prices of petroleum.