OPEC in a Changing World
Backgrounder

OPEC in a Changing World

Western leaders have long criticized OPEC’s power to raise oil prices, and the bloc continues to influence the global market even as U.S. oil production has soared and alternative energies have come to the fore.  
Russian and Emirati energy ministers speak alongside the OPEC secretary-general in Vienna.
Russian and Emirati energy ministers speak alongside the OPEC secretary-general in Vienna. Joe Klamar/AFP/Getty Images
Summary
  • The Organization of the Petroleum Exporting Countries (OPEC) is a group of oil-rich countries that together control nearly 40 percent of the world’s oil supply.
  • Russia’s war in Ukraine has caused global oil prices to surge, giving the bloc more leverage. 
  • However, as the world shifts away from fossil fuels, OPEC’s power could diminish.

The Organization of the Petroleum Exporting Countries (OPEC) is a bloc of thirteen oil-rich member states spanning the Middle East, Africa, and South America. Combined, the group controls close to forty percent of world oil production. This dominant market position has at times allowed OPEC to act as a cartel, coordinating production levels among members to manipulate global oil prices. As a result, U.S. presidents from Gerald Ford to Donald Trump have railed against the oil cartel as a threat to the U.S. economy.

More From Our Experts

In recent years, several challenges to OPEC’s influence have come to the fore, including divisions within its membership, the emergence of the United States as a major oil exporter, and the global shift to cleaner energy sources. The bloc has adapted by forming the so-called OPEC+ coalition with Russia and other countries, but disruptions caused by the COVID-19 pandemic have undermined those efforts. In 2022, Russia’s war in Ukraine and the resulting surge in global oil prices refocused attention on OPEC.

OPEC Is Born

More on:

Oil and Petroleum Products

OPEC (Organization of the Petroleum Exporting Countries)

Saudi Arabia

Geopolitics of Energy

Russia

OPEC was established in 1960 by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela; its membership has expanded and contracted over the years. The original five sought to build a united front to respond to oil price cuts imposed by the multinational oil companies that controlled most petroleum imports into Western countries, as well as U.S. government import caps that depressed prices of foreign oil in the 1950s. OPEC’s founding members not only set out to negotiate higher global posted prices for oil but also pursued greater control over their own resources through the nationalization of international oil company concessions. Most OPEC nations now own all of their oil reserves.

Member states coordinate policies on oil prices and production levels at regular and emergency meetings around the world, often at OPEC’s Vienna headquarters. Delegations are usually led by the oil ministers of each member country, and a secretary-general appointed by the bloc is entrusted with the day-to-day management of the organization.

Age of Influence

OPEC burst onto the world stage in 1973. Late that year, Egypt and Syria launched a surprise attack against Israel, and the United States responded with a $2.2 billion military aid package to the Israelis. Led by the Arab oil ministers, OPEC retaliated with an embargo against the United States and a few other allies of Israel and began to cut production. Consumers panicked and markets tightened. U.S. President Richard Nixon instituted price controls on gasoline, which exacerbated the situation and led to long lines at the pump. Secretary of State Henry Kissinger hurriedly began to negotiate an end to the war and to OPEC’s embargo.

More From Our Experts

At first, OPEC profited handsomely. From 1972 to 1977, the combined petroleum earnings of its members more than sextupled, from $23 billion to $140 billion. Meanwhile, in the West, higher oil prices caused recessions. U.S. gross domestic product (GDP) fell 6 percent from 1973 to 1975, while unemployment doubled. As former CFR Senior Fellow Amy Myers Jaffe and economist Edward Morse write, OPEC’s embargo was “hailed at the time as the first major victory of ‘Third World’ powers to bring the West to its knees.”

The OPEC of the 1970s was both celebrated and feared for its ability to impose economic pain on the West, a reputation it has clung to even as events in the decades since have dented its market power. Brown University’s Jeff D. Colgan explains, “OPEC perpetuates the myth that it regularly manages the world oil market. That reputation means its members receive more diplomatic attention than they otherwise would.”

More on:

Oil and Petroleum Products

OPEC (Organization of the Petroleum Exporting Countries)

Saudi Arabia

Geopolitics of Energy

Russia

The Rifts Within

OPEC’s power has waned amid divisions within the group. Some of these were driven by regional power struggles. Others were spurred by differences in opinion over strategy and target prices for the cartel.

In the 1980s, OPEC conferences were typically characterized by disagreements between so-called price doves, who pushed for higher output and lower prices, versus price hawks, typically from member states with large populations and strained budgets. Historically, the doves have been OPEC’s wealthier countries that are willing to tolerate lower prices if it helps preserve their dominant position in oil markets—Saudi Arabia, the United Arab Emirates (UAE), and Kuwait—while the hawks have included Iran in the 1980s, Iraq under Saddam Hussein, and Libya.

In recent years, cartel politics have been further complicated by swelling budgets in some wealthy member states, which have raised their break-even oil price, or the price at which they remain solvent.

Squabbles among OPEC members have occasionally metastasized into conflicts. For example, Iran and Iraq waged an eight-year-long war that led to hundreds of thousands of deaths. While Iran accused its Arab neighbors of holding oil prices artificially low to help Iraq, neither Iraq nor Iran left OPEC, which remained officially neutral.

OPEC’s worst-ever crisis, according to energy expert Daniel H. Yergin, was Iraq’s 1990 invasion of Kuwait. In his book The Prize, Yergin writes that for the first time “sovereignty and national survival and not merely the price of oil” were at stake. The invasion removed four million barrels of oil from the world market and caused prices to jump. Other member states feared that Iraq would soon invade Saudi Arabia and leapt into action, rather than remain neutral as they had during the Iran-Iraq War. As a military coalition came together, most of OPEC’s remaining members increased production to compensate for lost output from Kuwaiti and Iraqi oil fields.

Analysts say that such a swift reaction underlines a truth about OPEC: within the membership, Saudi Arabia is first among equals; it produces roughly one-third of the group’s overall crude oil. For that reason, the Saudi leadership encouraged the Trump administration’s withdrawal from the 2015 agreement on Iran’s nuclear program and the reimposition of sanctions on Iranian oil. The Joe Biden administration is in talks with Tehran to revive the nuclear deal and lift those sanctions.

Saudi Arabia’s disproportionate output has stirred discussion of how much influence OPEC’s other members really have, as well as the overall power of the cartel itself, but economic research generally finds that oil prices would be lower if OPEC didn’t exist.

Tensions With the United States

Since 1973, OPEC has often had a rocky relationship with the United States. Every U.S. president since Nixon has advocated for energy independence, though economists continue to debate the merits of such a goal. Proponents say that less reliance on OPEC oil reduces the trade deficit and makes the U.S. economy more resilient in the face of oil price swings. Some say that at the very least it will allow the United States to shift its focus away from the Middle East.

Still, OPEC continues to serve as a useful foil. President Jimmy Carter tried to raise the specter of OPEC to encourage Americans to reduce fuel consumption. Trump was more explicit, calling OPEC a monopoly and demanding that the cartel reduce prices—a common refrain from presidents who view lower gasoline prices as a sort of tax cut for American drivers. Additionally, Congress has threatened to allow antitrust lawsuits against OPEC and its member states. President Biden has also blamed OPEC for not increasing production fast enough in response to surging oil prices that have contributed to record inflation in the United States.

For OPEC members who see the bloc as more of a political club than an economic cartel, U.S. scaremongering about OPEC serves a purpose: it maintains the myth of OPEC’s importance and keeps Western diplomats and policymakers focused on it.

The Challenge of Alternatives

Most OPEC members view high oil prices as a short-term boon. However, those same high prices can spur importing countries to make investments in alternative fuel sources, a dynamic that is already underway.

The most prominent challenge to OPEC today comes from unconventional oils, such as shale-based energies, that have become available through recent technological advancements. In 2009, after a nearly forty-year decline in U.S. crude oil production, shale and sand-based oil extraction helped ramp up output. In the decade since, U.S. production has more than doubled.

The shale revolution appears to have taken the group by surprise. In 2015, OPEC reacted to the hydraulic fracturing movement by driving prices down, assuming that shale production would no longer be economically viable. But new technologies have allowed American producers to tap into previously trapped oil at decreasing cost, leading the United States to become the world’s largest oil producer in recent years. Production fell in 2020, as measures to contain the COVID-19 pandemic reduced oil demand, but it has since rebounded. And although Biden has pledged to prohibit new drilling on federal lands, his administration has continued to approve permits at a record pace.

To counter this, OPEC partnered with Russia and several other major exporters to coordinate production and stabilize prices. In July 2019, they formalized this new OPEC+ coalition despite U.S. objections, as Washington worried the arrangement would increase Moscow’s influence over global oil markets. The partnership has also created new tensions for U.S. allies in the cartel, who now find themselves juggling competing demands from Washington and Moscow.

Indeed, friction between Russia and Saudi Arabia came to a head at the onset of the pandemic in 2020. Saudi Arabia pushed for OPEC+ members to reduce production at a meeting in Vienna in early March. Russia, leery of a reduced market share and frustrated by U.S. sanctions targeting its flagship oil company Rosneft, refused. In response, Riyadh initiated a price war by ramping up production—a strategy it has employed successfully in the past—to force Moscow back to the table, Jaffe explains. Trump, expressing concern about the damage rock-bottom oil prices would inflict on the U.S. industry, stepped in and tried to broker a truce, and by early April the OPEC+ countries had tentatively agreed to cut production by as much as 20 million barrels a day.

Longer term, the advent of electric vehicles that run on renewable energy resources represents an existential threat to OPEC. Jaffe and Morse write that rising fossil fuel costs coupled with government subsidies for renewables have spurred investments in the sector. In the United States, Biden has called for massive investments in clean energy production. And as climate change concerns take center stage in the coming years, OPEC could take a hit.

Looking to the Future

Vast reserves of U.S. shale oil have not completely insulated American consumers from OPEC-induced price swings. Changes in U.S. production levels are the result of dozens of private energy companies’ independent decisions, and it can take months before consumers feel any adjustments. That means when there are sudden changes in market conditions, OPEC can gain substantial, if brief, market power to influence prices.

The 2020 Russian-Saudi price war demonstrated the vulnerability of U.S. producers. As the price of oil fell to its lowest point in nearly two decades, it further stressed a U.S. industry already grappling with the effects of the pandemic; at least one major U.S. shale producer, Whiting Petroleum, declared bankruptcy. OPEC members with relatively high breakeven prices, such as Algeria, are also more exposed to sustained low oil prices than Russia or Saudi Arabia, which both have low breakeven prices and significant foreign exchange reserves.

In 2022, Russia’s invasion of Ukraine and harsh sanctions imposed by the West in response have caused global oil prices to surge and renewed attention on OPEC’s role. That March, Biden announced a ban on Russian oil imports, while the European Union (EU) said it will work to reduce its dependence on Russian energy. By that time, global oil prices spiked to their highest level since 2008, at more than $130 per barrel of Brent crude, an international benchmark. 

Many Republican lawmakers, and some Democrats, have therefore called for the United States to ramp up drilling. Still, analysts say that U.S. shale production, which collapsed during the pandemic-induced price slump, will take months to significantly increase. Some experts and politicians say the recent price hikes underscore the need for the United States to transition away from fossil fuels and toward renewable forms of energy, but this too will take time, and the United States could be forced to turn to OPEC for oil. Biden has reportedly been mulling a visit to Saudi Arabia, and in March, senior U.S. officials made their first trip to Venezuela since Washington cut diplomatic ties with Caracas in 2019. 

Meanwhile, divisions within OPEC are likely to persist. In 2019, for example, Qatar officially withdrew from OPEC, signaling its disapproval of Saudi Arabia’s dominance over the organization and a Saudi-led blockade of the country. Though the blockade ended in 2021, Qatar has said it will not move to rejoin the bloc. If Riyadh continues to pursue a more assertive foreign policy, it could be a challenge for the cartel to remain cohesive. For OPEC and its newfound partner Russia, this possibility, combined with the rise of shale oil, increasing U.S. energy independence, and global efforts to fight climate change, portend a prolonged period of uncertainty.

Recommended Resources

This CFR timeline looks at the history of U.S. oil dependence and its impact on American foreign policy.

Daniel H. Yergin’s books The Prize and The Quest look at the modern history of the oil and gas industries and their intersection with international politics.

OPEC’s Annual Statistical Bulletin contains over a hundred pages of tables, charts, and graphs on all things oil and gas.

CNBC lays out all of President Trump’s tweets about OPEC in 2018 and his growing frustration with the cartel’s price manipulation.

Creative Commons
Creative Commons: Some rights reserved.
Close
This work is licensed under Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International (CC BY-NC-ND 4.0) License.
View License Detail
For media inquiries on this topic, please reach out to [email protected].
Close

Top Stories on CFR

Russia

Russia’s moves to mobilize thousands more troops and to annex more of Ukraine’s territory signal a new, potentially more dangerous phase of the war.

China

More than a million Muslims have been arbitrarily detained in China’s Xinjiang region. The reeducation camps are just one part of the government’s crackdown on Uyghurs.

Brazil

Brazil has long sought a greater role on the world stage, but political upheaval and other enduring challenges have complicated its efforts.