What is... | June 23, 2011

What is OPEC?

With the oil price influencing the cost of transport, food and more, OPEC has been a topic of conversation for the last five decades – not just because the acronym is easy to say but also due to its impact on household finances.

This month, for example oil prices surged after OPEC talks about increasing output collapsed. Before the global financial crisis crude oil prices hit highs nearing $150 a barrel before crashing to $33. With the oil price influencing the cost of transport, food and more, OPEC is highly influential.

In crude terms
The letters OPEC stand for the Organization of the Petroleum Exporting Countries, a body of 12 oil producing and exporting states in Asia, Africa and the Americas. OPEC’s members make up a large share of both total reserves and annual global supply of oil. At the end of 2009, OPEC members held 79.6% of the world’s known oil reserves. Last year, they produced 42% of the 82 million barrels of oil pumped out every day last year, according to the BP Statistical Review of World Energy. Meanwhile, the figures show the OECD group of the 34 wealthiest – mainly oil importing – countries consumed 53% of the 87 million barrels of oil used every day.

Troubled waters
Ministers from the OPEC nations meet typically at the organisation’s Vienna headquarters in March and December each year to coordinate policies. They also hold extraordinary meetings when required. Usually these conferences set targets for each member’s production, raising or lowering them in line with their view of whether prices are too high or too low. However the most recent meeting, the 159th held on 08 June 2011, reportedly ended in disarray without an expected agreement to increase crude output. Production quotas have now remained unchanged since 2009.

Upstream, downstream
OPEC’s role in the market has created fierce debate. In the early 1970s, it was blamed for causing a recession by refusing to ship oil to western countries that supported Israel in the Yom Kippur War. Oil prices quadrupled in 1974 and two years later it voted to raise oil prices by 10%.
However in the 1980s prices fell sharply. 
One study claimed OPEC acted like a cartel in the 1980s to prevent prices falling further by rationing output but concluded that in the 1970s it simply took advantage of market conditions. OPEC says it ensures stability in the oil market and wider economy by restricting supply when prices fall to levels that undermine producers’ financial health and opening the taps when high prices threaten the global economy.

Midnight oil
Oil prices have swung wildly in the last few years. Crude oil hit almost $150 a barrel in 2008 before the global financial crisis sent it back down to $33. At the start of June 2011 it was $116. Oil price rises affect households’ finances as they tend to lead to an increase in the cost of petrol – or gasoline as it is sometimes called. Price hikes eat into families’ budgets via higher costs of filling up a petrol tank. It can have an indirect effect if the prices of goods rise because of higher delivery costs. The effect goes into reverse when crude prices fall. However, prices at the pump rise and fall by much smaller margins because of the high rates of taxation on petrol.


Phil Thornton
Phil Thornton

Lead consultant at Clariti Economics