As intelligent people, we often read the news to figure out how to best navigate through the days, weeks, months and years. Lately, we have been reading a lot about OPEC. Most recently OPEC has been causing a stir with the latest round of rhetoric about freezing production. Now might be a good time to dig a little deeper into the basic facts about OPEC.
Question 1: Who belongs to OPEC?
The member countries of OPEC are Algeria, Angola, Ecuador, Gabon, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE, and Venezuela.
Question 2: What does OPEC do?
According to the OPEC Statute, “the mission of the Organization of the Petroleum Exporting Countries (OPEC) is to coordinate and unify the petroleum policies of its 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 for those investing in the petroleum industry.” In layman’s terms OPEC is a global cartel that coordinates pricing and world supply of crude and its finished products.
Question 3: Why do we care?
According to the EIA, OPEC member countries produce roughly 40 percent of the world’s crude supply, and 60 percent of the petroleum traded internationally. These numbers are very important considering OPEC makes its moves unilaterally, which theoretically means that all members behave in the same manner. By doing so, OPEC can manipulate world prices to the point that it no longer becomes economic to produce and export into global markets. Nationally we have seen the effects of these manipulations in the shale markets. As domestic supply from shale increased, OPEC flooded the global market with product, driving prices down to the point that it no longer made economic sense for many U.S. producers to drill.
Question 4: What comes next?
This has been a question the United States has been grappling with for quite some time. The simple answer is to increase domestic production. There has been a concerted effort to increase shale production and national refining capacity to offset global manipulations of the market. As for OPEC itself, there is a meeting scheduled for November 30th in Austria to discuss supply cuts to help restore the supply/ demand balance globally.