History and Membership

OPEC, in full Organization of the Petroleum Exporting Countries,

multinational organization that was established to coordinate the
petroleum policies of its members and to provide member states
with technical and economic aid.
OPEC was established at a conference held in Baghdad Sept. 1014,
1960, and was formally constituted in January 1961 by five
countries: Saudi Arabia, Iran, Iraq, Kuwait, and Venezuela. Members
admitted afterward include Qatar (1961), Indonesia and Libya
(1962), Ab ab (1967), Algeria (1969), Nigeria (1971), Ecuador
(1973), and Angola (2007). The United Arab Emirateswhich
includes Ab ab (the largest of the emirates), Dubayy, Ajmn, AlShriqah, Umm al-Qaywayn, Ras al-Khaymah, and Al-Fujayrah
assumed Ab abs membership in the 1970s. Gabon, which had
joined in 1975, withdrew in January 1995, but it had relatively
insignificant oil reserves. Ecuador suspended its membership from
OPEC from December 1992 until October 2007, while Indonesia
suspended its membership beginning in January 2009.
Ownership
OPEC members collectively own about two-thirds of the worlds
proven petroleum reserves and account for two-fifths of world oil
production. Members differ in a variety of ways, including the size of
oil reserves, geography, religion, and economic and political
interests. Four membersKuwait, Qatar, Saudi Arabia, and the
United Arab Emirateshave very large per capita oil reserves; they
also are relatively strong financially and thus have considerable
flexibility in adjusting their production. Saudi Arabia, which has the
largest reserves and a relatively small (but fast-growing) population,
has traditionally played a dominant role in determining overall
production and prices.
Debate
Because OPEC has been beset by numerous conflicts throughout its
history, some experts have concluded that it is not a cartelor at
least not an effective oneand that it has little, if any, influence
over the amount of oil produced or its price. Other experts believe
that OPEC is an effective cartel, though it has not been equally
effective at all times. The debate largely centers on semantics and
the definition of what constitutes a cartel. Those who argue that
OPEC is not a cartel, emphasize the sovereignty of each member
country, the inherent problems of coordinating price and production
policies, and the tendency of countries to renege on prior
agreements at ministerial meetings. Those who claim that OPEC is a
cartel argue that production costs in the Persian Gulf are generally
less than 10 percent of the price charged and that prices would
decline toward those costs in the absence of coordination by OPEC.
Role played by members

The influence of individual OPEC members on the organization and

on the oil market usually depends on their levels of reserves and
production. Saudi Arabia, which controls about one-third of OPECs
total oil reserves, plays a leading role in the organization. Other
important members are Iran, Iraq, Kuwait, and the United Arab
Emirates, whose combined reserves are significantly greater than
those of Saudi Arabia. Kuwait, which has a very small population,
has shown a willingness to cut production relative to the size of its
reserves, whereas Iran and Iraq, both with large and growing
populations, have generally produced at high levels relative to
reserves. Revolutions and wars have impaired the ability of some
OPEC members to maintain high levels of production.
OPEC is not that strong
OPEC maintains control over the oil market and is actually getting
much stronger. In contrast to the non-OPEC producing nations, OPEC
members present a unified voice through the cartel, and are able to
exert a disproportionate level of influence over the global market. It
is true that their share of global oil production does not constitute a
majority hold over the market. In 2007, OPECs share was 42%,
while non-OPEC oil production comprised 58% of the global market.
These numbers represent a decline in OPECs proportional
production: in 1973, OPEC production constituted 53%, while the
non-OPEC share stood at 47%. This decline in global share, however,
should not be interpreted as a decline in power. Over the last 35
years, OPECs production has never exceeded initial levels (32.5
million barrels a day), while global demand for oil, has more than
doubled. In the face of this growing demand, OPECs refusal to
expand its production has allowed it to effectively constrict the
worlds oil supply and force elevations in prices.
However, OPECs strength extends beyond its ability to manipulate
prices. The cost of extracting crude oil is generally far less for OPEC
members than it is for the non-OPEC suppliers who have entered the
global market to fill the supply void. One barrel of Saudi oil costs
$1.80 to produce, exploration costs included, whereas the
production cost for a barrel of oil from the former Soviet Union is
$21. It is important to also note that as the non-OPEC powers exploit
their cheapest oil much more rapidly than OPEC, OPEC will soon be
left with a near monopoly on low-cost oil supplies. As such, OPEC
members profits have skyrocketed, allowing them to amass huge
monetary reserves. Furthermore, as the price of oil rises, the value
of the OPEC oil reserves in the ground (70% of the worlds oil
reserves) increases in proportion. The added value gives the OPEC
powers additional financial assets.
As a result of these factors, OPEC will soon be in a position to cut
production as radically as they choose, sending oil prices to levels
that could force the industrial world into economic depression. While

this hardship would not escape OPEC nations, they would be able to
use their ample petro-wealth to absorb the financial shock. These
oil rich nations could then use their sovereign wealth funds to take
control of the major global industries. Even today, when the global
economy has been moderately slowed by high oil prices, an oil rich
emirate like Abu Dhabi, which controls 90% of the UAE oil reserve, is
able to buy a $7.5 billion stake in Citigroup (4.9% share) to add to its
estimated $875 billion in assets. It now surpasses Saudi Prince Al
Waleed bin Talal as Citigroup's largest shareholder. But it doesnt
stop there. In March of this year, the UAE and Saudi Arabia set up a
$2 billion global acquisition fund to further develop their
international financial interests. The amount and size of such
acquisitions are likely to increase in step with rising oil prices.
How to counter OPEC
Unfortunately, conservation will not solve our oil dependency on its
own. Over the years, Congress has attempted to conserve our oil
consumption in the transportation sector through Corporate Average
Fuel Efficiency (CAFE) standards. In 1975, Congress more than
doubled the efficiency standard for passenger cars from 12.9 mpg in
1974 to 27.5 by 1985. The fuel economy for light duty trucks was
increased to 22.2 mpg by 2007. Recently, the CAFE standard was
bolstered again, to a 35 mpg for passenger cars by 2020.
However, a conservation-based energy policy has limitations.
Domestically, the quantity of cars on American roads is expected to
grow significantly as a result of population growth, and other
demographic and economic factors. Analysts have argued that the
increase in demand for oilcaused by the increase in carswould
exceed the rate of conservation. As such, the current CAFE
standards will only limit the expected growth in demand for oil in the
U.S.not end it. Internationally, the problem is more extreme as
worldwide oil consumption is set to burst. From 2001 to 2006, global
consumption increased by 11.4%. China and India alone are
expected to double their demand for oil over the next 20 years in
order to keep pace with their rapid economic growth. However,
OPEC projects that it will increase its production by only 30 million
barrels a day by 2030far less than global demand is expected to
rise. The likely outcome will be skyrocketing oil prices that will dwarf
any of Americas efficiency gains.
Conservation can have a positive impact and should not be
discounted from any energy security policy. The recent technological
advancements though plug-in hybrids and electric cars are
impressive and have increased fuel efficiency by phenomenal
numbers. They have not, however, ended our dependence on oil,
and will not do so in the short-term.
How to beat OPEC
Increasing our supply of domestic oil will reduce our dependence on
foreign oil, but it will not end it. The Department of Energy estimate

of the number of barrels in ANWR ranges anywhere from as little as

5.7 billion to as high as 16 billion. The U.S. currently consumes
approximately 7.5 billion barrels of oil each year5 billion of which
are imported. Hypothetically, if the reserves in ANWR were to
become available immediately, they would at best provide 2 years
worth of oil consumption. However, immediate production is
impossible. The economic relief that oil from ANWR could provide
would be staggered over the course of a number of years, and thus
minimized. As such, the Energy Information Administration
estimates that ANWR exploration will likely only cut crude oil prices
by 75 cents per barrel by 2025.
In terms of the global market, U.S. domestic drilling will not reduce
OPECs ability to dictate oil prices. To date, the U.S. has
approximately 30 billion barrels of proven oil reserves. By contrast,
Saudi Arabia, Iran, Iraq, the UAE, and Kuwait have more than 700
billion barrels of oil. The U.S. does have about 22 billion barrels of oil
available in its continental shelves. However, continental exploration
is a prolonged and expensive process that, even long term, would
not increase Americas share in the global marketwhich would
grow from 10 percent to 11 percent. Even if OPECs global share
stayed stagnant at 42%, they would still have a controlling interest
in the market and the ability to manipulate prices at will.
So, OPEC wins. There is no solution that offers significant
short-term gains and will end our oil dependency.
Fact: No, we dont have to accept that at all. OPECs power is simply
a product of their monopoly over the primary fuel source currently
used by almost every vehicle. If we make our vehicles compatible
with fuels derived from non-petroleum sources, there will be less
demand for oil and OPECs power will dissipate.
To achieve this goal of oil independence, Congress should establish
an open fuel standard that all new cars sold in the America be able
to run on any mix of alcohol-based fuelsethanol or methanol.
Based on the current advancements in research and development,
alcohol-based fuels provide the most immediate solution as an
alternate to fossil fuels. While not immediate, an open fuel standard
can achieve significant short-term achievements, and potentially put
over 50 million FFV vehicle on our roads by 2015.
Of course, it cannot happen overnight. There are currently a
number of car companies in America producing FFVs, but the overall
market share is minimal (about 4.4 million). This lack of demand for
FFVs has resulted in a limited supply of alcohol-based fuels at the
pumps. Indeed, there are very few such stations that are accessible
to the public outside of Minnesota and Illinois. The reluctance to
install alcohol fuel pumps is understandable since a very small
percentage of vehicles on the road are today able to utilize those
pumps. The significant growth of the FFV market though an open

fuel standard will serve as a financial incentive for independent and

small fuel suppliers to convert their pumps to support flex fuel
sources.
But starting in 2005, global oil markets sensed that OPEC was only
able to influence the price of oil in one direction: higher, by lowering
output. OPECs ability to lower prices started to crack, break up, and
generally fail as the first phase of oils repricing headed into 2008.
Indeed, OPEC raised production several times in the 2004-2008
period, attempting to restrain oil prices as it moved to protect the
global economy from an oil shock. However, the oil market, which
was going through a fundamental transition at the time, as it
reoriented itself towards insatiable, price-insensitive demand from
Asia -- paid little attention.
Instead, supply disruptions at small producers and in small regions
had a greater influence on oil price (pushing it higher) than OPEC's
influence on attempting to push the price lower.
Its actually not clear that OPEC has had any measurable influence
on restraining oil prices for years. Summer hurricanes in the Gulf of
Mexico, unrest and outages in the Niger Delta, and various strikes
presented greater upward pressure on oil prices than upward OPEC
supply changes.

Non-OPEC is the domain of private oil companies, and has managed

to increase its market share over the past 30 years through
competition and through the use of technology.

OPECs market share has stagnated, possibly due to the

predominance of state-run oil companies and the interference of
political structures.
Non-OPEC has the pricing power, due to its larger market share.
Or perhaps OPEC still retains the pricing power, due to its greater
quantity of spare capacity.
Many also believe that both OPEC and non-OPEC could be producing
a lot more oil. In the case of OPEC, many harbor the view that staterun producers and governments are sitting on massive, hidden
spare capacity and retaining it as a cartel to manipulate oil prices
higher. In the case of non-OPEC, many believe that
environmentalists, regulations, and other limits placed by
democratically-elected governments are suppressing a wall of
supply that could come to market easily if only the oil is set free.
These views, however, are not only extreme but shaky. They are
typical of the kind of grand claims that fit peoples worries and
suspicions, rather than fitting any empirical data. The fact is that
OPEC spare capacity has been under pressure for some time despite
persistent belief to the contrary, with estimates running below 3
mbpd, or even below 2 mbpd. (For recent commentary on OPEC
spare capacity, see A Model of Oil Prices by Chris Nelder). The case
for hidden, held-back oil capacity in OPEC is weak, especially as
domestic populations in the Gulf have dramatically increased the
consumption of their own oil.
Meanwhile, non-OPEC large producers like Russia have significantly
increased production this past decade. And regions like North
America have been able to slow declines. Western oil companies -which dominate non-OPEC production -- have scoured the globe
looking to replace their reserves, but largely to no avail. This is why
ExxonMobil and ConocoPhilips eventually gave up, capitulated, and
bought natural gas assets instead. By doing so, they followed in the
steps of Royal Dutch Shell, which had taken the natural gas pathway
years earlier.
Therefore, a fact about non-OPEC production that was unknown
even to the industry ten years ago is now very plain: There just isnt
a vast quantity of new oil that can come online easily and
inexpensively outside of OPEC-controlled regions. Only Russia, the
largest non-OPEC producer and now the largest single country
producer in the world -- eclipsing even Saudi Arabia -- was able to
significantly increase production.