What Is OPEC? Its Members and History

Why Hasn't OPEC Raised Oil Prices?

A citizen walks along a waterfront oil refinery plant in Saudi Arabia.. Photo by Liaison / Getty Images

Definition: OPEC stands for The Organization of Petroleum Exporting Countries. It is an organization of twelve oil-producing countries that control 61%of the world's oil exports and hold 80% of the world's proven oil reserves. OPEC's share of oil production declined in 2014 thanks to a 16% increase in U.S. shale oil production. OPEC's share dropped from 44.5% in 2012 to 41.8% in 2014. During this period, oil prices fell from $108.54 in April 2012 to $34.72 in December 2015.

OPEC hasn't cut production because it doesn't want to see its market share drop. In fact, on December 4, 2015, it raised its production quota to 31.5 million barrels per day (MBPD). It produces oil more cheaply than its U.S. competition. It intends to tough it out until the shale companies go bankrupt. (Source: "OPEC and Oil: Who's in Charge?" WSJ, December 5, 2015.)

What Does OPEC Do?

OPEC's goal is to manage the world's supply of oil to keep prices stable. It makes sure its members get what they consider a good price for their oil. Since oil is a fairly uniform commodity, most consumers base their buying decisions on nothing other than price.

What's a good price? OPEC has traditionally said it was around $70-$80 per barrel. If prices drop below that target, OPEC members normally agree to restrict supply to send prices higher. Without this agreement, individual oil-exporting countries would wind up increasing the supply to make more national revenue.

By competing with each other, they would drive prices even lower. This would stimulate even more global demand, and OPEC countries would run out of their most precious resource that much faster. Instead, OPEC members agree to produce only enough to keep the price high for all members.

Furthermore, when prices are too much higher than $80 a barrel, then other countries have the incentive to drill more expensive oil fields.

Sure enough, once oil prices got closer to $100 a barrel, it became cost effective for Canada to explore its shale oil fields. It's also made it profitable for the U.S. to use fracking to open up the Bakken oil fields for production. As a result, non-OPEC supply has increased.

OPEC's second goal is to reduce oil price volatility. That's because, at current prices and rates of production, OPEC countries have enough oil to last 113 years. Furthermore, oil is expensive to produce. For maximum efficiency, oil extraction must run 24 hours a day, seven days a week. In addition, closing facilities could physically damage oil installations and even the fields themselves. Ocean drilling is especially difficult and expensive to shut down. Therefore, it's in OPEC's best interests to keep world prices stable.

For example, in June 2008, oil prices hit an all-time high of $143/barrel. OPEC responded by agreeing to produce a little more oil, which brought prices down. However, the global financial crisis sent oil prices plummeting to $33.73/barrel in December.

OPEC responded by reducing the supply, helping prices to again stabilize. A slight modification is usually enough to restore price stability.

OPEC also adjusts the world's oil supply in response to crises and shortages. For example, it replaced the oil lost during the Gulf Crisis in 1990. Several million barrels of oil per day were cut off when Saddam Hussein armies destroyed refineries in Kuwait. OPEC also increased production in 2011 during the crisis in Libya.

The Oil and Energy Ministers from the OPEC members meet twice a year, or more if needed, to coordinate their oil production policies. Each member country abides by an honor system, agreeing to only produce a certain amount. However, if a country winds up producing more, there really is no sanction or penalty. Furthermore, each country is responsible for reporting its own production. Therefore, there is room for "cheating." On the other hand, a country won't go too far over its quota, since it doesn't want to risk being kicked out of OPEC.

Despite its power, OPEC cannot completely control the price of oil. In some countries, additional taxes are imposed on gasoline and other oil-based end products to promote conservation. More importantly, oil prices are actually set by the oil futures market. Much of the oil price is determined by these commodities traders. For more on this, see Why Are Oil Prices So High?

OPEC Members

OPEC currently has twelve active members. Ecuador suspended its membership in 1992, and reactivated it in 2009. 

OPEC CountryJoinedLocatedOil Produced (MBPD) 2014Comments
Algeria1969Africa    1.193 
Angola2007Africa    1.654 
Ecuador1973Central America    0.557 
Gabon (Terminated)1975Africa    NA 
Indonesia (Suspended)1962Asia    NA 
Iran1960Middle East    3.117Will rise by.5 mbpd due to nuclear treaty
Iraq1960Middle East    3.110 
Kuwait1960Middle East    2.867 
Libya1962Middle East    0.480 
Nigeria1971Africa    1.807 
Qatar1961Middle East    0.709 
Saudi Arabia1960Middle East    9.713 
United Arab Emirates1967Middle East    2.794 
Venezuela1960Central America    2.683 
TOTAL OPEC    30.683 


Saudi Arabia is by far the largest producer, contributing nearly one-third of total OPEC oil production. It is really the only member that produces enough alone to materially impact the world's supply. For this reason, it really has more authority and influence than the other countries. Here's a ranking of production by member:  (Source: OPEC Annual Statistical Bulletin 2015)

Why Was OPEC Formed?

In 1960, five OPEC countries formed an alliance to regulate the supply, and to some extent, the price of oil. These countries realized they had a non-renewable resource. If they competed with each other, the price of oil would be so low that they would run out sooner than if oil prices were higher.

This first meeting was held September 10-14 1960 in Baghdad, Iraq. The five founding members were Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. OPEC was registered with the UN on November 6, 1962. (Source: OPEC Brief History)

OPEC didn't flex its muscle until the 1973 oil embargo. It was responding to a sudden drop in the U.S. dollar that occurred after President Nixon abandoned the gold standard. As the dollar fell, so did the revenues of oil exporters, since oil contracts are priced in dollars. In response to the embargo, the United States created the Strategic Petroleum Reserve. For more, see Gold Standard History.

Non-OPEC Oil-Producing Countries 

Many non-OPEC members also voluntarily adjust their oil production in response to OPEC's decisions. In the 1990s. they learned the hard way that if they increased their own production to take advantage of OPEC's restraints, it resulted in low oil prices, and profits, for everyone. These cooperating non-OPEC members include Mexico, Norway, Oman, and Russia.

Oil shale producers did not learn that lesson. They kept pumping oil, sending prices plummeting in 2014. As a result, many went below their break-even price of around $65 a barrel. OPEC did not step in to lower its production. Instead, it allowed prices to fall to maintain its own market share. That's because the break-even price is much lower for most of its members. It's $7 a barrel for Saudi Arabia, and $13 a barrel for Iraq. (Source: "The Oil Glut: From Dallas to Siberia," WSJ, June 5, 2015). For more on today's oil prices see Oil Price Forecast

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