As the value of oil became glaring, the oil producers realised that they need to form a body, and in 1960, the Organisation of Petroleum Exporting Countries (OPEC) was born with its headquarters in Geneva (Switzerland).
OPEC is made up of all the oil producing Third World countries namely, Saudi Arabia, Iran, Libya, Algeria, Kuwait, Ecuador, Quatar, Venezuela, Nigeria, Iraq, United Arab Emirates, etc. Saudi Arabia is the largest producer of petroleum within the OPEC.
The OPEC is a selling syndicate and exerts monopoly pressure on the world oil market. It fixes prices and output of petroleum and it acts as a cartel, though its members do not distribute the profits, as in the case of the business of a true cartel.
lts Role in the Oil Business
The role of OPEC is in line with its aims and objectives, which include the following:
(i) Determination of the total output of oil to be produced and sold in the international oil market:
OPEC controls the total output offered for sale in order to avoid excess supply in the world market. To achieve this objective, OPEC makes sure that member-nations acquire fifty-one per cent (51%) participation in crude oil exploration and sales.
(ii) Fixing of oil prices and control:
In the 1950s, international oil companies controlled a major portion of the world’s oil supply. These companies, although often attacked for acting as a cartel, frequently engaged in active price competition. In an attempt to stop such price competition, the Arab governments, along with a few non-Arab government formed OPEC in 1960. At first OPEC enjoyed little success, but things changed for the better in 1973, as the Arab – Israeli war heated up, the Arab countries came together to jack up the price of oil, and used it as a weapon of war against western countries that were supporting Israel. The price of oil, on January 1, 1973 was $2.12 per barrel; of this $1.52 went to the governments involved. By January 1, 1974, the price was raised to $7.61, with 7.01 going to the government. By January 1975, the price was about $10,5. By 1982, the price had risen to $35.00. In 1983 – 1984, a decade after its first success, grades started to appear in the cartel. The price began to fall. In January 1984, spot price of oil was $29 per barrel, down from 1982 high of $35. At present, oil sells for $22.00 per barrel.
(iii) Formation of a common front for a strong bargaining power:
The formation of OPEC is also aimed at giving members a stronger voice in the international oil circle. This will reduce unhealthy competition among oil producers and thereby, strengthen their bargaining power in the world oil market.