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Organization of Petroleum Exporting Countries (OPEC): History & Purpose

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  • 0:02 OPEC - Definition & Purpose
  • 2:13 History
  • 3:22 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
Oil is an indispensable and scarce commodity required for energy and modern products. A world without it would look drastically different. In this lesson, you'll learn about the Organization of Petroleum Exporting Countries, including its history and purpose.

OPEC - Definition & Purpose

There is probably not another commodity more essential to our modern, industrialized and technologically advanced society than petroleum—oil. Unfortunately, it's a rather scarce nonrenewable resource. This makes it a source of great power and potential conflict, as those states that are fortunate enough to possess oil reserves know. In fact, some oil producing states have teamed up by forming the Organization of Petroleum Exporting Countries, commonly referred to as OPEC. OPEC is a 12-member-state intergovernmental organization of petroleum oil producing states that is currently headquartered in Vienna, Austria. Its members consist of states in Africa, the Middle East, Southeast Asia and South America.

OPEC is considered a cartel. A cartel is an organization of producers of goods or services that collectively agree to regulate their respective output in an attempt to control the price of the good or service. Reducing the supply of oil, for example, tends to increase its price, while increasing the supply will tend to reduce its price.

As you might have guessed by now, the primary purposes of OPEC is to try to control the market price of oil by controlling the supply offered to the market. OPEC believes engaging in this coordinated activity helps ensure:

  • Stable oil prices
  • A regular supply of oil to consumers that is both efficient and economic
  • A steady income to producers of oil
  • A fair return for investors in the industry

Of course, states dependent on oil imports tend to disagree that price-fixing helps everyone. Since up to 75% of the world's proven oil reserves are found in OPEC countries, its policies have had a significant effect on the oil market. While many countries, including the United States, view cartels as anticompetitive, there's not much they can do about it from a legal standpoint, since OPEC operates in the international market. For example, OPEC is not subject to U.S. antitrust laws because it operates in the international market instead of the U.S. domestic market.

History

OPEC was established in 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela at the Baghdad Conference and currently has a total of 12-member-states. During the 1960s, OPEC was focused on trying to get a larger share of oil profits that were created in their territories by private oil companies.

The focus changed in the 1970s to about 1986 when OPEC began to focus on coordinating its members' actions in an attempt to halt declining oil prices, which was the primary basis of tax revenue and wealth for many of the countries. It is during this time that OPEC wielded the most power. For example, OPEC imposed an oil embargo on the U.S. for its support of Israel in the Yom Kippur War in 1973, leading to the 1973 energy crisis.

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