What is OPEC?
A day doesn’t go by without OPEC mentioned in the news. So let’s learn. OPEC is the Organization of the Petroleum Exporting Countries. It’s mission, per its website, is to “coordinate and unify the petroleum prices of Member Countries and ensure the stabilization of oil markets in order to secure an efficient economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital to those investing in the petroleum industry.” Basically, it’s a cartel, or in economic terms an oligopoly - a small number of producers with a homogeneous product who collude to fix prices, industry output, allocation to customers, etc, to weed out competition.
OPEC was created in 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Qatar, Indonesia, Libya, United Arab Emirates, Algeria, Nigeria, Ecuador, and Angola have since joined.
So what do you hear about OPEC lately? Perhaps that it is looking to cut output on oil at its March 5 meeting in Vienna, despite China and India’s increasing oil demand. And perhaps that it is responsible for the return of the $100 oil (with Chavez’s power struggle, Nigeria’s political unrest, the explosion at a Texas refinery last week, and the cold weather in the northeast as culprits as well, of course.)
What don’t you hear about OPEC lately? Perhaps that its meetings are conducted in a small windowless bunker in Vienna, where a highly scientific method of determining oil prices take place: the oil ministers from each country gather with bottles of whiskey and cigarettes where a maelstrom of haggling, forming and breaking alliances with each other, and striking deals occurs until a consensus on a production quota is made. Great line from a book I’m reading: “Whenever gasoline prices rise.. American consumers blame greedy Big Oil and Europeans grouse about government taxes. Just imagine how much more outraged they would be in they realized that the price hikes are really due to such deals struck in the Bunker.”
Perhaps you also have not heard that
- OPEC fuels (literally) about 40% of the world’s oil demand with its production of 36M bpd (numbers as of 2006).
- The US takes about 12 of those barrels every day to continue imbibing in 21M barrels per day (25% of total world consumption).
- Meanwhile, the US produces only 8M bpd.
- Keep in mind that US oil reserves, which basically is oil that exists and can be recovered, represent less than 2% of the world’s reserves.
- What does it all mean? We use a lot of oil and pretty soon none of it will be our own.
