Inside This Section:
OPEC Overview
Before OPEC
OPEC's Rise to Power
OPEC Price Fixing
OPEC - U.S. Sovereign Status Part 1
OPEC - U.S. Sovereign Status Part 2: Challenges
OPEC's Influence on the U.S.
Throughout the 1970s and 1980s, OPEC had gained so much power that they were openly engaged in fixing the price of crude oil; consequently its member nations were making incredible sums of wealth much to the dismay of countries in the West, which were quick to vilify the organization.
By the 1990s OPEC’s ability to fix prices diminished thanks to a sea-change in the international market , and today oil prices are no longer quite at the mercy of OPEC. Rather, they are regulated in accord with three international exchanges, namely the:
New York Mercantile Exchange
International Petroleum Exchange (London)
Singapore International Monetary Exchange
However, OPEC still has a tremendous amount of influence over the price of crude oil because those three markets operate on the fundamental economic system of supply and demand. Thus, if OPEC collectively agrees to restrict their production of oil they can influence prices, but they are limited in this regard by their own profit margins. In other words, if they choose to restrict production, oil prices will go up—but such a decision can be contrary to their interests, since the consequence will affect their bottom line. In short, the less oil they sell, even at higher prices, they less profits they are likely to see.
This highlights one of the main shortcomings of cartels in general, and OPEC specifically: chiefly that its member nations do not all contribute the same amount of oil to the world market. In fact, Saudi Arabia far and away is the biggest producer of oil—within OPEC and in the world. Thus, restricting output doesn’t hurt Saudi Arabia because it contributes so much more than the other member nations.
It can though hurt some of OPEC’s smaller countries who produce substantially less oil. For this reason, one of OPEC’s biggest problems is trying to prevent those smaller nations from ‘cheating’ by disobeying the organization and secretly producing more oil than the organization had agreed upon, effectively mitigating some of OPEC’s influence. This occurs with some regularity.
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