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Energy Investing: Understand OPEC and Geopolitics

Because of its importance to the world oil market, energy investors need to understand how OPEC operates. More than half a century ago, in 1960 to be exact, a few oil-exporting countries decided to band together and form an organization. Today, you know these countries as the Organization of the Petroleum Exporting Countries, or OPEC. When it was first founded, OPEC had five member nations:

  • Iran

  • Iraq

  • Kuwait

  • Saudi Arabia

  • Venezuela

Over the past 40 years, countries have joined and vacated the organization. Currently, it has 12 members, including those in the preceding list plus the following:

  • Qatar (joined 1961)

  • Libya (joined 1962)

  • United Arab Emirates (joined 1967)

  • Algeria (joined 1969)

  • Nigeria (joined 1971)

  • Ecuador (joined 1973; vacated 1992–2007)

  • Angola (joined 2007)

Together, these countries produced 29.8 million barrels of oil per day in 2011. That equates to just over 34 percent of total world oil production. Proven reserves of OPEC nations total 1.2 trillion barrels, or some 85 percent of the world’s 1.3 trillion barrels.

Because OPEC produces more than a third of the world’s oil and possesses such a large portion of total reserves, knowing why it exists and how it operates should be compulsory knowledge for energy investors.

OPEC’s mission 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.”

To do this, the member nations meet twice a year at the OPEC Conference to discuss the global economic picture and determine production quotas that are in their best interest. They consider economic growth rates, oil supply-and-demand scenarios, and other factors when deciding how much oil the organization needs to produce to maintain stable prices and steady supplies to oil consumers.

OPEC doesn’t control the oil market or oil prices. It produces 34 percent of the world’s oil and 19 percent of its natural gas. But because its members consume less oil than developed nations, it’s responsible for about 60 percent of the crude oil traded internationally. As such, it has a large, but not controlling, influence on the oil market.

From the early 1970s through the mid-1980s, OPEC did set oil prices. However, this is no longer the case. Today, the free market determines the price of oil, as indicated by the three major international exchanges on which it’s traded.

You can find out more about OPEC, its member nations, production rates, and more at the OPEC website.

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