The power of the OPEC oil cartel has been enormous for more than sixty years. By turning the oil tap, the small group of countries de facto determines the global oil price. Yet the United Arab Emirates suddenly decided on Tuesday to leave the cartel as of May 1. What is OPEC? Why is it so widely accepted that a small group of countries determine the price of oil? And how exceptional is the UAE’s move? Five questions about one of the most powerful economic partnerships in the world.
1Why was OPEC founded?
OPEC (Organization of the Petroleum Exporting Countries) was founded in 1960 during a conference in the Iraqi capital Baghdad. At the time, the organization consisted of five countries: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. OPEC was an answer to another cartel, that of the ‘Seven Sisters’. These seven major oil companies – including Texaco, Gulf and the descendants of Standard Oil (all now merged into the four global behemoths Shell, BP, Chevron and ExxonMobil) – dominated the market in the first half of the twentieth century. After World War II, they controlled approximately 92 percent of estimated crude oil reserves and were responsible for more than half of global crude oil production.
The oil countries wanted to break that dominant position. They had the largest oil reserves in the world, but their oil revenues were determined by the agreements between the seven companies. The establishment of the partnership in 1960 put an end to the omnipotence of the companies.
Especially during the 1970s, in the aftermath of conflicts in the Middle East, OPEC’s importance in the international oil market increased. The cartel imposed an oil boycott on the US and other Western countries that supported Israel in the Yom Kippur War. It led to an oil price explosion. The organization grew to thirteen countries during that period.
According to the organization itself OPEC’s goals include “coordinating and standardizing petroleum policies among member states, thereby ensuring fair and stable prices for petroleum producers.” Conversely, OPEC would ensure a regular supply of oil to consuming countries.
For the first five years of its existence, OPEC was based in the Swiss city of Geneva, but in 1965 its headquarters moved to the Austrian capital Vienna.
If OPEC does what it promises, many people will not be so dissatisfied at all
2Who is in OPEC and OPEC+?
OPEC currently consists of twelve countries. As of May 1, if the United Arab Emirates withdraws from the cartel as announced, there will still be eleven. This concerns Congo, Equatorial Guinea, Gabon, Venezuela, Algeria, Iran, Iraq, Kuwait, Libya, Nigeria and Saudi Arabia. Over the decades, countries joined, but also countries left. Indonesia, Qatar, Angola and Ecuador, among others, were members of the cartel for a time. Including the UAE, OPEC countries were responsible for between 35 and 38 percent of global oil production in recent years. The OPEC countries control 80 percent of the currently proven oil reserves.
Many other oil-producing countries, such as the United States, Canada and China, continued to determine the extent of their own production. Oil production in the US in particular increased steadily (from 14 million barrels per day in 2014 to 23 million barrels per day now), partly thanks to the rise of shale oil, extracted from rock layers. The influence of the OPEC countries on the global oil price therefore decreased over the past decade.
In response to the American shale revolution, the OPEC countries joined in 2016 another group of oil producing countries and they form the somewhat looser OPEC+ partnership. This also includes Russia, Azerbaijan, Kazakhstan, Bahrain, Brunei, Malaysia, Mexico, Oman, South Sudan and Sudan. OPEC+ accounts for about 55 percent of global oil production. OPEC and OPEC+ are still trying to regulate oil production and therefore the price through mutual agreements. Many economies of the member countries are largely dependent on oil revenues. An oil price that is too low would seriously damage those economies.
OPEC and OPEC+ do not always operate in harmony. In 2020, a price war raged between Saudi Arabia and Russia. Due to the Covid-19 pandemic, demand for oil had fallen sharply and the two countries could not agree on measures to prop up the oil price. “Russia left the consultation, after which Saudi Arabia showed its muscles and opened the oil tap,” says Hans van Cleef, head of energy research at research agency EqoLibrium. “The oil price then fell dramatically. An agreement was reached later that year.”
3How is OPEC organized?
There is a formal and an informal answer. Formal OPEC consists of three parts: the secretariat, the conference and the board of directors. The Secretariat, headed by the Secretary General (currently the Kuwaiti Haitham Al Ghais), is elected by the conference and implements policies established by the other two bodies during their three-year terms.
Decisions about oil production are made at so-called ministerial meetings, where ministers of the participating countries meet. Production ceilings are agreed there.
Formally, the Secretary General is the boss of OPEC, but in practice the countries in the Gulf region determine the course of the cartel. They account for about 60 percent of total OPEC production. Saudi Arabia is the largest and therefore most important player. For OPEC+, Russia plays a determining role in the course of that partnership.
4How do the OPEC member states keep each other in line?
OPEC’s main instrument to control oil prices is to impose quotas on member states, a pump ceiling. There is no fixed distribution key for this maximum oil production, the quotas are the result of negotiations. Some countries are reluctantly agreeing. The fact that the United Arab Emirates is now leaving OPEC is partly the result of years of dissatisfaction. “The country invested in production capacity but was not allowed to use that of OPEC,” says Van Cleef. “Countries outside OPEC were growing their production, and OPEC wanted to prevent oil prices from falling too far.”
The power of the wealthy and militarily and geopolitically influential Saudi Arabia in the region is very decisive in this regard. “Some of the OPEC countries are dependent on Saudi Arabia,” says Van Cleef. “They therefore quickly agree with what Saudi Arabia wants in the OPEC meeting.”
The quotas are ‘just’ an agreement. There is no institution that imposes penalties if a Member State does not comply with the pump ceiling. “There are also regularly countries that produce too much, especially the smaller production countries,” says Van Cleef. “Then there is some friction, or then there is a warning and then they say sorry.”
Saudi Arabia comes closest to being an enforcer. This is also because the country plays the role of ‘swing producer’ can take on. “They are prepared to adapt their production to the circumstances,” says Van Cleef. “If the price is too low, they scale back their production. If the price is too high, they open the tap a little further. Because the country has deep pockets, they can produce a little less for a year without much damage. Other countries cannot do that so easily.”
5Why is it so accepted that a cartel determines the oil price?
Cartel formation is prohibited in Western countries because it disrupts market forces and disadvantages consumers, who are offered higher prices than necessary. The OPEC cartel makes no secret of the fact that it wants to influence prices through mutual policy, but no one can stop the group.
The desire is there in some places. For example, the Americans came up with ‘NOPEC’. The idea behind this bill is that OPEC countries in America can be prosecuted under American competition law. The proposal was first put to the vote in 2007 and has since appeared in many forms. In 2024, the law was again not passed, mainly because the American oil sector is concerned about repercussions.
There are also regular calls to tackle the oil cartel through the World Trade Organization (WTO). This also proves difficult. OPEC as an organization does not fall under the jurisdiction of the WTO, and a more technical question is also being debated: is the WTO even about natural resources, or is the trade organization about products?
“If OPEC does what it promises, many people are not so dissatisfied at all,” says Van Cleef. “The customer does not pay the top price, and producers can manage the oil price well. The oil price is quite stable. There have been a few moments when OPEC has turned the oil tap firmly on or off, then it becomes clear how excessive the price fluctuations can be and consumers are not happy with that either.”
OPEC’s clout is declining, and so is the impact of the price agreements. “The rise of American shale gas meant that OPEC received significantly less market share. Now that the Emirates are also choosing their own path, there will be even more market forces.”
