OPEC (Organization of Petroleum Exporting Countries)

Intergovernmental organization formed to coordinate the petroleum policies of oil-producing nations with a view toward economic stability in the oil market. The Organization of Petroleum Exporting Countries (OPEC) exerts a tremendous influence over world oil supplies and prices. This influence makes it a significant force in shaping the foreign policy of the United States, which imports most of its oil.

In the late 1950s, global oil supplies greatly exceeded the worldwide demand for oil. Prices fell accordingly, and petroleum-producing nations began [Page 553]losing revenue. In 1959, a group of oil-producing countries met in Cairo, Egypt, to find ways to stabilize prices and guarantee steady oil revenues. The following year, five of the nations represented at the meeting—Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela—formed OPEC to obtain for its members the “best possible terms within the postwar petroleum order.” By 1971, OPEC had expanded to include Algeria, Indonesia, Libya, Qatar, Nigeria, and the United Arab Emirates.

OPEC engages in collective bargaining in order to stabilize oil production and revenues, and to ensure the highest possible prices for oil. Collective bargaining prevents a “race to the bottom” among producers who might otherwise drop prices to compete for clients. The cartel likewise permits member countries to coordinate their petroleum policies to prevent political conflicts that could cause splits within OPEC. This scheduling and forecasting is important, as OPEC countries possess more than 75% of the world's proven petroleum reserves and produce 55% of all internationally traded oil.

OPEC is governed by a Conference that meets every March and September but that may convene additional meetings as needed. The Conference is advised by a Board of Governors and is supported by a Secretariat, an Economic Commission, and the Ministerial Monitoring Committee. Delegates to the Conference are typically oil, mining, or energy ministers from the member countries. The governing principle of the organization stresses unanimity, and the Conference operates on a one-member, one-vote basis. OPEC members establish quotas to coordinate oil production, but they retain their sovereignty in production matters. Beyond strict oil-production matters, members have established an OPEC Fund for International Development that issues grants and loans to non-OPEC countries.

The stated goal of OPEC is “to promote stability and harmony in the oil market,” but this aim is sometimes overridden by political considerations. One of the most prominent examples of this was the Arab oil embargo imposed on the United States after the 1973 Arab–Israeli war. The Arab members of OPEC also substantially decreased exports to other countries, hoping those nations would pressure Israel to return land it captured from Egypt and Syria during the war.

As a result of the embargo, world oil prices nearly quadrupled, affecting vulnerable markets and causing economic hardship. Even today, critics complain that OPEC's domination of the oil market means that prices are linked to politics rather than to supply and that the cartel's market power represents a risk for other oil producers as well as consumers.