Sylvie Willis
The Organization of the Petroleum Exporting Countries (OPEC) produces about 40% of the world's crude oil, and its members' exports make up around 60% of global petroleum trade. OPEC was formed in 1960 by developing country exporters to assert control over their domestic production and global supply. The five founding members were Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. OPEC's production targets and its members' compliance with them influence oil prices. Saudi Arabia, OPEC's largest producer and exporter, has played a dominant role in the organization. OPEC's ability to respond to demand and price increases is limited by its spare production capacity, which was low during 2003-2008, leading to rising oil prices. OPEC's actions have had significant knock-on effects on the global economy, such as the 1973 oil embargo that caused fuel shortages in the US.
| Characteristics | Values |
|---|---|
| OPEC's share of world crude oil production | 40% |
| OPEC's share of global petroleum trade | 60% |
| Number of OPEC members | 12 or 13 |
| Founding members | Iran, Iraq, Kuwait, Saudi Arabia, Venezuela |
| Other members | Algeria, Angola, Congo, Equatorial Guinea, Gabon, Libya, Nigeria, UAE |
| OPEC+ members | Russia, Kazakhstan, Azerbaijan, Mexico, Oman, and 5 others |
| Largest producer and exporter | Saudi Arabia |
| Saudi Arabia's share of OPEC's output in 2023 | 35% |
| Second-largest producer | Iraq |
| Year of OPEC's formation | 1960 |
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What You'll Learn
OPEC's influence on oil prices
OPEC, or the Organisation of the Petroleum Exporting Countries, was founded in 1960 in Baghdad by Iraq, Iran, Kuwait, Saudi Arabia, and Venezuela. The group aims to regulate global oil prices by coordinating on reductions or increases in production. OPEC produces about 40% of the world's crude oil, and its members' exports make up around 60% of the global petroleum trade.
OPEC's large market share means that its decisions can affect global oil prices. The group's members meet regularly to decide how much oil to sell on the global market. When they lower supply in response to falling demand, oil prices tend to rise. Prices tend to fall when the group decides to supply more oil to the market.
OPEC adjusts member countries' production targets based on current and expected future supply and demand. Estimating future supply and demand is challenging when market conditions are uncertain and changing rapidly. There can be significant lags in OPEC production target adjustments in response to market conditions, which can impact prices.
OPEC's spare capacity, or the volume of production that can be brought online within 30 days and sustained for at least 90 days, is often used as an indicator of the tightness of global oil markets and the extent to which OPEC is exerting upward influence on prices. Saudi Arabia, the largest oil producer within OPEC and the world's largest oil exporter, has historically had the greatest spare capacity.
OPEC+ is a broader coalition of OPEC and 10 of the world's leading non-OPEC oil exporters, including Russia, Mexico, and Oman. OPEC+ aims to regulate the supply of oil to set the price on the world market. The group has a dominant market position and exerts considerable influence over the global market price of oil.
OPEC+ members collectively agree on how much oil to produce, directly affecting the supply of crude oil in the global market. They can coordinate supply cuts when prices are deemed too low and increase supply when they believe prices are too high. If OPEC+ countries are unsatisfied with the price of oil, they will cut the supply of oil so that prices rise.
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OPEC's spare production capacity
OPEC, the Organisation of the Petroleum Exporting Countries, produces about 40% of the world's crude oil and its members' exports make up around 60% of global petroleum trade. OPEC's actions can and do influence international oil prices.
OPEC spare production capacity is an important factor that affects oil prices. The extent to which OPEC member countries utilise their available production capacity is often used as an indicator of the tightness of global oil markets, as well as an indicator of the extent to which OPEC is exerting upward influence on prices. EIA defines spare capacity as the volume of production that can be brought online within 30 days and sustained for at least 90 days. Saudi Arabia, the largest oil producer within OPEC and the world's largest oil exporter, has historically had the greatest spare capacity, usually keeping more than 1.5-2 million barrels per day of spare capacity for market management.
OPEC spare capacity provides an indicator of the world oil market's ability to respond to potential crises that reduce oil supplies. For example, during 2003-2008, OPEC's total spare capacity remained near or below 2 million barrels per day (less than 3% of global supply), which limited its ability to respond to demand and price increases. Oil prices increased during this period due to very strong economic and oil demand growth, slow supply growth, and tight spare capacity.
On the other hand, high spare capacity indicates a withholding of production for price management purposes. OPEC's policy has aimed to maintain ample production and sufficient spare capacity to benefit producers and consumers and enhance stability. For instance, in 1999 and 2002, large levels of idle capacity were attributed mainly to rising non-OPEC supply, especially in Russia. Despite some ongoing geopolitical tensions, OPEC's spare capacity levels have improved since 2004.
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Saudi Arabia's dominant role in OPEC
The Organization of the Petroleum Exporting Countries (OPEC) is a group that enables cooperation between leading oil-producing and oil-dependent countries to collectively influence the global oil market and maximize profits. OPEC produces about 40% of the world’s crude oil, and its members’ exports make up around 60% of the global petroleum trade. OPEC was founded on 14 September 1960 in Baghdad by its first five members: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela.
Saudi Arabia is by far the largest and most profitable oil exporter in the world, with enough capacity to function as the traditional swing producer to balance the global market. It is OPEC's de facto leader. Saudi Arabia possesses around 17% of the world’s proven petroleum reserves. It has historically played a significant role in the global oil market as a swing producer, with the ability to significantly influence global oil prices by adjusting its production levels. Saudi Arabia has usually kept more than 1.5 - 2 million barrels per day of spare capacity on hand for market management.
Saudi Arabia's OPEC+ strategy supports Vision 2030 by balancing oil production cuts and economic diversification. Vision 2030 is a comprehensive strategy to change Saudi Arabia's economy by diversifying its revenue streams and reducing its reliance on oil. One of the major techniques behind this concept is the strategic control of oil production. Saudi Arabia hopes to balance oil supply and global demand by leading the OPEC+ alliance in production cutbacks, keeping oil prices stable and supporting its economic reforms.
Saudi Arabia's calculated approach balances traditional oil dominance with the necessity of fostering non-oil revenue streams for future economic stability. By leading the coalition, Saudi Arabia can negotiate favourable terms with other major producers and consumers, thus securing its strategic interests. The recent agreement by OPEC+ to extend cuts of 2.2 million barrels per day into mid-2024, with Russia also reducing its production and exports, further consolidates Saudi Arabia's influence.
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OPEC's impact on the global economy
OPEC, or the Organisation of the Petroleum Exporting Countries, produces about 40% of the world's crude oil, and its members' exports make up around 60% of global petroleum trade. OPEC's actions can and do influence international oil prices. Oil is used in transportation and to produce energy, and it is also used to make plastics, clothing, fertilisers, and medicines. As a critical global commodity, when oil prices rise or fall, the world listens.
OPEC's ability to influence oil prices has had significant knock-on effects for the global economy. For example, in 1973, its Arab members imposed an embargo on the US and other countries that supported Israel during the Yom Kippur War. This caused oil prices to quadruple within three months, led to fuel shortages in the US, and is considered one of the causes of a prolonged economic crisis in the US and elsewhere in the 1970s. More recently, in 2020, OPEC+ members cut production by 10% of global production to push prices back up after they crashed during the global lockdowns.
OPEC's spare production capacity is often used as an indicator of the tightness of global oil markets and OPEC's influence on prices. When OPEC's spare capacity levels were low from 2003 to 2008, oil prices increased. Saudi Arabia, OPEC's largest producer and exporter, usually keeps a significant amount of spare capacity for market management. OPEC's production targets are based on current and expected future supply and demand, but there can be lags in adjustments to market conditions, impacting prices.
OPEC's rivalry with the US has been a significant dynamic in the global oil market. Unlike OPEC, US companies are subject to antitrust provisions that prevent them from coordinating supply plans. US crude oil production is expected to peak in 2030, while OPEC production is projected to continue rising through 2050, particularly as developing Asian countries increase their demand for petroleum liquids.
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OPEC's coordination with non-OPEC countries
The Organization of the Petroleum Exporting Countries, or OPEC, was formed in 1960 to coordinate petroleum policies among its member countries. The group aims to regulate global oil prices by coordinating production increases or decreases. OPEC produces about 40% of the world's crude oil, and its members' exports make up around 60% of the global petroleum trade.
In 2016, OPEC formed an alliance with other oil-producing nations to create OPEC+, in response to falling oil prices driven by significant increases in U.S. shale oil output. The 10 countries now in OPEC+ include Russia, Kazakhstan, Azerbaijan, Mexico, and Oman. OPEC+ members also engage in further cooperative efforts through the Charter of Cooperation (CoC), which provides a platform for long-term collaboration and facilitates dialogue and the exchange of views on global oil and energy market conditions. The overarching goal of the CoC is to ensure a secure energy supply and foster stability that benefits producers, consumers, investors, and the global economy.
The collaboration among OPEC+ member countries has led to the establishment of the Declaration of Cooperation (DoC), which serves as a framework for cooperation and coordination between OPEC and non-OPEC countries. The DoC was formed in 2016 and has since been extended multiple times due to its success. The DoC provides a platform for cooperation and dialogue among 23 oil-producing countries, with the objective of supporting sustainable stability in the global oil market.
OPEC and OPEC+ countries combined produced about 59% of global oil production in 2022, influencing global oil market balances and prices. The actions of OPEC+ are largely driven by coordination between OPEC and Russia, as Russia's oil output and market influence are greater than those of other OPEC+ countries. OPEC+ meetings have focused on reducing oil production to stabilize prices after the COVID-19 pandemic, which dramatically reduced demand. In April 2023, OPEC+ members agreed to cut oil production by 1.2 million barrels per day until the end of the year, in addition to existing production cuts.
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Frequently asked questions
OPEC produces about 40% of the world’s crude oil.
OPEC currently has 13 members.
The Organization of the Petroleum Exporting Countries (OPEC) seeks to actively manage oil production in its member countries by setting production targets.
OPEC+ was formed to coordinate crude oil supply with non-OPEC countries.
OPEC adjusts member countries' production targets based on current and future supply and demand. Oil prices tend to increase when OPEC production targets are reduced.
