What Is OPEC and Why Does It Matter?

Since the start of the COVID-19 pandemic, news around the world has reported countless times on the state of the economy, especially in relation to global oil prices and demands. But who decides those oil prices? And why does it matter so much?

OPEC stands for the Organization of Petroleum Exporting Countries and is an intergovernmental organization. An agreement was signed in 1960, by five nations: Iran, the Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. These five countries became the founding members of OPEC.

Since 1960 the number of OPEC members worldwide has grown to a total of 13. Since 1960, the number of OPEC members worldwide has grown to a total of 13. The United States is not a member and never has been, though it has applied for membership countless times. 

The statute of OPEC states that “any country with a substantial net export of crude petroleum, which has fundamentally similar interests to those of member countries, may become a full member of the Organization...”. For an applicant to be accepted, there must be a three-fourths majority acceptance by member countries in OPEC and that majority must include all of the founding nations. In consideration of the international foreign policies and the U.S.’s ever-changing relationships with the founding nations of OPEC, it is no surprise that the United States has remained separate from OPEC for the 60 years since its founding.

Although the United States has maintained various international relations, it has not been a major producer or exporter of oil since the mid-20th century. However, in 2018, the United States surpassed both Russia and Saudi Arabia in oil production and became the world’s largest crude oil producer. It is also the largest oil consumer worldwide, using more than the entire European Union. In 2019, the U.S. produced about 19.33 million barrels of petroleum per day and consumed about 20.46 million barrels a day.

Back in the 20th century, the U.S. had complete control over oil prices as a major producer and exporter; however, as “ownership” of the oil industry changed hands over the years, so did this control.

OPEC is a cartel, but that doesn’t mean they have to do with anything crime. While they can be compared to drug cartels on a structural level, it is not a criminal organization. The word “cartel” refers to an agreement between major producers of a good or service that allows them to regulate supply and control the price of the good or service.

black and white photo of an oil rigSince its formation in 1960, OPEC has been the world’s leading oil producer and price-regulator concerning petroleum. In 2016, OPEC took this a step further by allying with other top oil-producing countries that are not members of OPEC. This alliance is referred to as OPEC+ (OPEC Plus). The focus of OPEC+ is to gain complete control over crude oil. “Crude oil” and “petroleum” are often used interchangeably, but they are not synonymous. Crude oil refers to the form the oil is in when it exists in the ground as part of geologic formations. Petroleum is much broader and refers to crude oil products and petroleum products, which are produced by processing crude oil. Simply put, OPEC+ hopes to control the majority of the oil in a form that can be converted into specific products for different uses.  It is important to note that the U.S. is not a part of this alliance despite being the world's largest crude oil producer.

The agenda of OPEC+ is not an evil one. Although, it may often favor countries that are involved in OPEC or the OPEC+ alliance. OPEC+ already controls about 50% of the world's oil supply and 90% of its proven oil reserves, giving it major influence. This control is exactly what allows it significant influence in determining oil prices. However, the influence is affected by the different goals and incentives of individuals nations. 

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The increasing number of cases of COVID-19 since December of 2019, when it was first reported to the WHO (World Health Organization) by the Chinese, and the world's response to the pandemic has greatly affected the world trade industry and thereby, the economy. Both of these rely heavily on the oil industry. As populations were asked to remain at home and decrease contact, demand for widely used products dramatically decreased, oil being one of the most notable of these products. As demand from a population decreases, nations are less pressed to buy. As sales decrease, so do prices. Countries such as the United States, Russia and Saudi Arabia have “economic cushions” to fall back on. However, many countries do not and are suffering because of how strongly their economies, and therefore their populations, rely on oil production and exports. The economic shock of COVID-19 was compounded by some failure in OPEC discussion and led to a collapse in oil prices.

In March, OPEC proposed production cuts but was promptly rejected by Russia. This rejection encouraged Saudi Arabia to increase production to full capacity. Except, a combination of an increase in production and a decrease in demand requires prices to be dropped so that the market remains lucrative and profitable. In this instance, Saudi Arabia offered a 20% discount which led to a 30% drop in other prices. The drop has continued since then as nations also being forced to cut production.

This may seem like an odd article to find on Her Campus. But with increasing opportunities and involvement of women in world politics, global crises and more, I believe young women must have access to information about things of extreme modern-day relevance from comfortable and familiar sources. Explaining and simplifying some of the more drawn out or convoluted information given by the news allows more people to ask questions and have them answered in a familiar setting.

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