Organization of Petroleum Exporting Countries (OPEC) was founded in 1960 in Iraq. The organization that is made up of the biggest oil exporting countries was created with the goal of ensuring price stability and a united voice on the world’s most important commodity.
Almost 60 years after being founded, the organization has continued to spew failure after failure.
What is OPEC?
OPEC is an organization made up of some of the leading oil-exporting countries. The organization has 15 members. Saudi Arabia has become the biggest members of the OPEC cartel because of the volume of oil it pumps every day. The country produces over 12 million barrels per day and exports most of it.
The other top OPEC members are United Arab Emirates (UAE), Venezuela, Iraq, and Iran. Other members are Nigeria, Algeria, Libya, and Qatar among others.
In the past few years, OPEC members have formed what is known as OPEC+. OPEC+ was formed in 2016 to coordinate oil production. The most important member of this cartel is Russia, the third-biggest oil producer in the world.
The other non-OPEC members of OPEC+ are Azerbaijan, South Sudan, Sudan, Mexico, Malaysia, Brunei, and Bahrain.
Role of OPEC
OPEC has an important role in the oil market. Its goal is to ensure that oil prices are stable in order to support its members’ economies.
In most cases, when oil prices decline sharply, OPEC members usually intervene with coordinated supply cuts (supply and demand are fundamental in this asset as well). For example, when the Covid-19 pandemic hit, these countries decided to slash oil production dramatically. As a result, prices rose from a negative level to over $130 in less than 2 years.
At the same time, OPEC members can at times make measures to reduce oil prices. In some cases, when oil prices reach certain levels, demand could wane. Therefore, OPEC’s role is to ensure that prices are not all that high or sharply lower.
A proper market would not function effectively without an organization like OPEC. This explains why most cocoa producers are mostly poor.
Ghana and Ivory Coast are the biggest producers of cocoa, which should give them more leverage. However, since they do not coordinate production, cocoa price has remained under pressure for years.
For example, in 1973, the organization placed an oil embargo on Western countries that supported Israel. This embargo meant that the countries could not export oil to these countries, which included the UK and the US.
This led the price to more than double!
While these countries were punished, it increased their resolve to independence.
Another failure happened more than ten years ago after the United States increased its investments in the hydraulic fracturing industry. In a meeting in Vienna, the countries decided to flood the market with crude oil.
By doing this, they expected the companies doing the fracking to get out of business. This is because with the prices so low, the companies would not continue drilling. What they did not seem to understand was that the interest rates in the US were at historic lows.
This made it possible for the countries to borrow heavily and invest in technology. This means that even with crude oil at historic lows, the companies were able to operate profitably.
When OPEC abandoned its oversupply of crude oil, it was a gift to American producers.
These producers were able to increase production at higher oil prices which led to improved profitability.
→ 4 Steps to really Improve Crude Oil Trading
Opec Failures in recent years
In the past years, the US has become the biggest oil producer in the world and it became a net exporter for the first time. This means that the country exports more crude than it imports.
The improved role of the United States has changed the calculus in the oil industry. For one, it has led to a unity between OPEC and Russia in what is now known as OPEC+.
At the beginning of December (2018), the members met at the annual meeting that takes place in Vienna. This meeting was complicated from the start.
This is because two months earlier, Saudi Arabia – the de facto leader – killed a dissident in Turkey. This exposed the country to retaliatory actions from the United States.
The US supported the kingdom because he did not want the country to lose the military orders. It also did not want higher prices. It did not want to lose a key ally against Iran.
Therefore, with this gift, it was impossible for Saudi to try to offend the president of the United States, one of its closest allies.
On the other hand, Russia had bones to chew with the United States. This is because the US had canceled a meeting between Trump and Putin in Argentina after the clashes in Ukraine. Russia supported more production.
Regardless of all this, oil prices continued to decline because the proposed supply cuts will not move the middle.
It is also a testament of the ongoing weakness of OPEC at a time when the world is faced with challenges. Amidst all these, the key beneficiaries will be the emerging market countries which make the biggest oil importers in the world.
→ Analyze and Make Decisions on Crude Oil as a Trader
As mentioned above, OPEC has made some mistakes in the past few years. However, the cartel has had its fair share of successes. The most important success was what happened during the Covid pandemic.
As shown below, the price of Brent declined to $16 in March 2020. It then surged to a high of $133 in 2022, which was a 756% increase. This happened as OPEC+ members decided to gradually slash production. Without OPEC’s coordination, oil prices would be sharply lower.
OPEC is one of the most powerful organizations globally because of the strong importance of crude oil in the world. In this article, we have looked at some of the roles of OPEC and some of the top mistakes and successes that the organization has had over the years.
External resource about failures of OPEC
- OPEC and Its Goals, Members, and History - The Balance