What Is Opec?

What is OPEC?

It is Organization of the Petroleum Exporting Countries. It was created in 1960 to unify and protect the interests of oil-producing countries. The original members of OPEC included Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. OPEC has since expanded to include seven more countries (Algeria, Angola, Indonesia, Libya, Nigeria, Qatar, and United Arab Emirates) making a total membership of 12. OPEC allows oil-producing countries to guarantee their income by coordinating policies and prices among them. OPEC was created primarily in response to the efforts of Western oil companies to drive oil prices down. These 12 countries control 40% of the world's crude oil supply. This puts OPEC in the unique position of having a lot of influence on the price of gas around the world.

OPEC represents a considerable political and economical force. Two-thirds of the oil reserves in the world belong to OPEC members; likewise, OPEC members are responsible for half of the world's oil exports. The fact that OPEC controls the availability of a substance so universally sought after by modern society renders the organization a force to be reckoned with.

How OPEC controls oil prices:

OPEC controls gas prices by either increasing or decreasing the amount of oil available. If the amount available goes down, the prices go up. This is the law of supply and demand. OPEC may choose to lower their available inventory by slowing down production or by putting more of the oil produced into reserves. To increase the amount of oil available, the members of OPEC would begin to produce more oil, or open up their reserves as inventory.

This increase or decrease in supply by OPEC can affect the cost of oil in indirect ways as well. If the amount of oil is decreased, the price of crude oil not only increases due to the amount of oil available. Gas production companies, the companies responsible for refining and then selling the oil, may get nervous over a decrease in crude oil coming from OPEC. To protect their profits from further decreases, they may raise gas prices even more. Just the threat of decreases in oil production can raise gas prices. The cost of crude oil controls more than just the price of gasoline; heating costs are also affected. Higher gas prices also influence the cost of travel. If gas prices are high, car buyers are more likely to buy smaller, more gas efficient vehicles. Fewer families can afford to travel, decreasing the money brought into the economy by tourism.

The purpose of OPEC is to try preventing any sudden, extreme changes in gas prices. If one country is not producing as much oil as normal, they have other countries pick up the slack to stabilize the market. They are responsible for keeping the gas prices from falling too low, normally trying to avoid prices of below $50 US Dollars a barrel.

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