OPEC Explained: Key Insights into Its Operations and Impact on Global Oil Markets for Investors
The OPEC oil cartel has historically aimed to influence oil prices through control of a significant portion of the world’s crude supply. However, its power has diminished over the years, and it faced another setback this week when the United Arab Emirates announced it would exit OPEC by the end of the week. Prior to the recent U.S.-Israeli conflict with Iran, OPEC countries provided over a quarter of the world’s oil; this change will reduce their share to just above 20%.
What is OPEC?
Founded in 1960, the Organization of the Petroleum Exporting Countries (OPEC) was established to manage oil prices and stabilize global markets. Currently, it comprises 12 members, including the UAE and Saudi Arabia, along with Algeria, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, and Venezuela. These countries coordinate production quotas and can adjust oil output in response to market fluctuations.
In response to the ongoing war’s disruption of global supply and energy infrastructure, OPEC announced plans to increase oil production quotas by 206,000 barrels per day starting in May. However, this move is unlikely to result in significant change, as the Strait of Hormuz, a crucial oil shipping corridor, remains effectively shut down. By mid-March, Gulf nations had reportedly removed about 10 million barrels of oil per day from the market, representing 10% of global supplies, according to the International Energy Agency.
Why Was OPEC Founded?
Before OPEC’s establishment, the global oil market was largely dominated by a cartel known as the “Seven Sisters,” which included the predecessors of major companies like BP, Chevron, Exxon Mobil, and Shell. These companies held substantial control over the world’s oil reserves, often leading oil-producing nations to feel shortchanged in their dealings.
In September 1960, Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela formed OPEC to reclaim some of this power. Initially, the organization had limited economic impact, but its influence would soon grow.
OPEC’s Shifting Power
The 1970s marked a peak in OPEC’s dominance. In October 1973, several member countries initiated an oil embargo against the U.S. and other nations that supported Israel during the Yom Kippur War, leading to soaring oil prices and a global energy crisis. While OPEC successfully increased oil prices during this period, it soon realized that it could not fully control oil pricing as effectively as the Seven Sisters had.
The embargo targeted around 7% of global consumption and only affected a select few nations. Moreover, OPEC leaders have struggled to ensure compliance with established quotas among their members. Their influence tends to peak during times of tight supply and high demand—such as the current situation.
During the COVID-19 pandemic, oil prices plummeted, with U.S. crude prices even entering negative territory at one point. OPEC, in collaboration with other oil-producing countries, managed to restrict production enough to facilitate a recovery in global prices.
Members and Expansion
OPEC’s membership has seen various changes over the years. Qatar, one of the founding members, left the organization in 2019 amid frustrations over Saudi Arabia’s dominance. Other countries, including Angola, Ecuador, and Indonesia, have also left or temporarily suspended their memberships. The organization has also witnessed nations withdraw only to later rejoin.
Following the U.S. shale boom in 2016, which flooded global markets with oil and drove prices down, OPEC sought to re-establish its footing by collaborating with non-OPEC oil-producing countries, including Russia. This alliance, known as OPEC+, aimed at coordinated production cuts to stabilize oil prices and revenues.
According to Pavel Molchanov, an industry analyst at Raymond James, OPEC’s market share has significantly declined since its peak in the 1970s, when it controlled over half of global oil supply.
What’s Next?
The current closure of the Strait of Hormuz presents a unique situation in the energy market, as supply changes have minimal effect on prices while a substantial portion of the world’s oil remains inaccessible. Even with the UAE’s withdrawal, OPEC will continue to produce a significant share of the world’s oil.
Molchanov suggests that it is premature to predict OPEC’s long-term influence. “First, we need to focus on reopening the Strait of Hormuz, then we can consider the long-term ramifications of recent events.”
This article originally appeared in The New York Times.
Special Analysis by Omanet | Navigate Oman’s Market
The recent departure of the UAE from OPEC signals a critical shift in the dynamics of global oil supply, potentially diminishing the cartel’s control over prices and creating uncertainty for businesses in Oman. As oil prices may become more volatile, investors should explore alternative energy sources and diversify their portfolios to mitigate risks. Smart entrepreneurs should consider leveraging local partnerships and investing in technologies that enhance energy efficiency to capitalize on these market changes.
