OPEC in the Modern Era

Founded in 1960, the Organization of the Petroleum Exporting Countries (“OPEC”) is a coalition currently comprised of 12 member countries predominately located in the Middle East. OPEC’s stated mission is to provide “steady income to producers and a fair return on capital.” This mission has historically been accomplished through production restrictions.

Founding members Saudi Arabia, Iran, Iraq, Kuwait and Venezuela carry the greatest influence within OPEC. As a result, in the mid-1970s, OPEC cut production to drive up world oil prices in retaliation for US aid to Israel during the Yom Kippur War.

In response to falling demand in the early 1980s, OPEC nations cut production again to boost oil prices and cure economic hardship among member states. It is widely believed that Saudi Arabia intentionally collapsed the price of crude in 1985-86 by increasing production as prices fell. The unstated goals of this unilateral move were to punish fellow OPEC members who were cheating on their quotas and to collapse the US oil industry.

By the late 1990s, owing to significant economic declines in Southeast Asia and growing conservation among consumers, lack of demand for crude caused crude prices to fall below $10 a barrel. OPEC responded by cutting production until prices corrected.

Even internal moves within OPEC impact prices. For example, in November 2007, oil prices responded drastically as member countries talked openly about converting cash reserves and the reference pricing of crude oil from the US Dollar to the Euro.

As of 2013, OPEC claims to hold 81% of global crude oil reserves. While this number is likely inflated, the US Energy Information Administration (“EIA”) projects that OPEC member countries produce about 40% of the world’s crude oil and that OPEC oil exports represent approximately 60% of the total petroleum traded internationally.

With respect to total OPEC exports, Saudi Arabia has the greatest concentration of control. Currently Saudi Arabia and Iran are locked in a price war over market share in China. Both countries are competing for what they perceive to be the next big oil import market as the US reduces its imports and achieves greater energy self-sufficiency.

However, OPEC has not given up on the US market. In early November, Saudi Arabia slashed prices specifically for the US. The target: US energy producers. Some commentators have dubbed these moves an “oil price Cold War.” As the US’s second-largest source of imported oil behind Canada, Saudi Arabia is likely taking bold steps to shore up US market share by undercutting US production. By dropping prices near or below break-even points for shale producers, Saudi Arabia seeks to force US companies to take their rigs offline and reduce supply, thus securing Saudi Arabia’s position.

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