OPEC

The Organization of the Petroleum Exporting Countries (OPEC) comprises countries that have organized for the purpose of negotiating with oil companies on matters of petroleum production, prices, and future concession rights. Founded September 14th, 1960 at a Baghdad conference, OPEC originally only contained 5 countries, but has since expanded to include several others. The members of OPEC, which constitute a cartel, agree on the quantity and the prices of the oil exported. The OPEC headquarters is situated in Vienna, Austria. OPEC seeks to regulate oil production, and thereby manage oil prices, in a coordinated effort among the member countries, especially through setting quotas for its members. Member countries hold about 75% of the world's oil reserves, and supply about 40% of the world's oil.

Since worldwide oil sales are denominated in U.S. dollars, changes in the value of the dollar against other world currencies affect OPEC's decisions on how much oil to produce. For example, when the dollar falls relative to the other currencies, OPEC-member states receive smaller revenues in other currencies for their oil, in turn causing substantial cuts to their purchasing power, because they continue to sell oil in the U.S. dollar.

OPEC decisions have a large influence on world price of oil. A good example of this in action was the oil shock following the Yom Kippur War which led to fourfold increases in the price which lasted five months, starting on October 17, 1973 and ending on March 18, 1974. Also, OPEC nations agreed on January 7, 1975 to raise crude oil prices by 10%.

Unlike many other cartels, OPEC has been successful at increasing the price of oil for extended periods. Much of the success of OPEC comes from the willingness of Saudi Arabia to tolerate cheating on the part of other cartel members and to cut its own production when other members go over theirs. This actually gives them good leverage, since with most members at full production, the Saudis are the only ones with spare capacity and the ability to increase supply if needed.

The policy has been successful in the past, causing the prices of oil to rise to levels that otherwise are not reached by raw materials, but only by industry products. However, OPEC's ability to raise prices has some limits. An increase in oil prices decreases consumption and could cause a net decrease in revenue. Further an extended rise in price can encourage systematic behavior changes such as the use of alternative energy solutions or increased conservation.

Leading up to the 1990-91 Gulf War, Iraqi President Saddam Hussein advocated that OPEC push world oil prices up, thereby helping Iraq and other member states service debts.

As of August 2004, OPEC has been communicating that its members have little excess pumping capacity, thereby indicating that the cartel is becoming unable to influence prices for crude oil.