Did You Know? The Birth of OPEC

  • 5 Jul 2018
  • By Dave Lerman
  • Topics: Energy

No organization, corporation or country has caused such a pronounced effect on the world geopolitical landscape as The Organization of Petroleum Exporting Countries (OPEC). The history of OPEC is fascinating and worth knowing as OPEC’s influence on world petroleum markets (and other markets too) is substantial.

Moreover, oil prices affect more than just our gasoline prices since crude oil and its byproducts encompass plastics, synthetic materials, chemicals and a host of other items we take for granted. Any energy trader will always keep an eye on OPEC meetings and announcements.

In 1960 five countries, Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, established OPEC. The organization was open to any country with a substantial net export of crude oil and had fundamentally similar interests to other member countries. Soon thereafter, more countries joined OPEC (Qatar, Indonesia, Libya, United Arab Emirates, Algeria, Nigeria, Ecuador and Gabon). Currently 15 countries are members of OPEC.

Following World War II, a group of seven large integrated oil companies controlled 85% of global oil production. These seven companies were known as the Seven Sisters and included:

  • Algeria
  • Anglo Persian Oil Company (now British Petroleum)
  • Congo
  • Ecuador
  • Equatorial Guinea
  • Gabon
  • Iran
  • Iraq
  • Kuwait
  • Libya
  • Nigeria
  • Qatar
  • Saudi Arabia
  • United Arab Emirates
  • Venezuela

Around the 1970s, OPEC wanted a greater share of the profits from oil extracted from countries forming the seven sisters[RM1] . OPEC continued to flex its muscles and in 1973, the organization punished nations that supported Israel in the Arab-Israeli war in 1973. The resulting embargo caused prices to skyrocket from about $3 a barrel to $12.

While OPEC tried to keep oil prices stable over the years, massive supply and demand changes, such as hydraulic fracking in the United States, led to major sources of new supply and a significant drop in prices over the past few years. WTI has been as low as $9 a barrel over the past few decades and as high as $150/bbl.

Clearly, traders need to watch OPEC’s every move as their influence on oil is significant. However, other nations, such as Russia and the United States, now exert considerable influence on world oil markets.

 

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