3/13/22, 5:49 PM OPEC in a Changing World | Council on Foreign Relations

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.
 

WRITTEN BY
Anshu Siripurapu and
Andrew Chatzky

UPDATED
Last updated March 9, 2022 2:25 pm (EST)

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.

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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
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.

OPEC Membership, 2022

Iraq Iran
Algeria Libya Saudi Kuwait
Arabia United Arab
Emirates

Venezuela Nigeria

Equatorial Guinea Republic of Congo

Gabon

Angola

Source: 
OPEC.

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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.

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.”

The Rifts Within

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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.

OPEC Members’ Oil Production

Production of petroleum and other liquids, 2020 (barrels per day)

Kuwait
Iraq Iran

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Algeria
Libya
United Arab
Emirates

Nigeria Saudi Arabia

Venezuela

10M
Equatorial Guinea
5M Gabon Republic of Congo

0.5M
Angola

Note: “Other liquids” includes biodiesel, ethanol, and additional liquids produced from coal, gas, and oil shale.
Source: 
U.S. Energy Information Administration.

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.

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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.

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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.

Top Oil Producers

Largest producers of petroleum and other liquids, 2020 (barrels per day)

OPEC members
0 5M 10M 15M 20M
United States
Saudi Arabia
Russia
Canada
China
Iraq
United Arab Emirates
Brazil
Iran
Kuwait
Norway
Mexico
Nigeria
Kazakhstan
Qatar
Algeria
Angola
United Kingdom
Oman
Indonesia

Note: “Other liquids” includes biodiesel, ethanol, and additional liquids produced from coal, gas, and oil shale.

Source: 
U.S. Energy Information Administration.

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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.

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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. 

Petroleum Production and the Price of Oil

Production of 50M
petroleum and
other liquids Non-OPEC
(barrels per day) 40M

30M
OPEC
20M

10M

Price of crude oil $100

per barrel (adjusted
for inflation) $50

$0
1960 1970 1980 1990 2000 2010 2020
Yo Ira Iraq U CO
Ara m Ki nian R V
ii bo .S. frac pand ID-19
b o ppu evo of Kunvasio om ki em
il e r W Glo beg ng ic
mb ar lution wait n bal ins
arg
o crisfinanc
is ial

Notes: Annual price data is available through 2021 and is an average of Brent crude, WTI crude, and Dubai crude in
2010 dollars. In March 2022, the price per barrel of Brent crude reached $129 in current dollars. Production data for
2021 is not yet available. “Other liquids” includes biodiesel, ethanol, and additional liquids produced from coal, gas,
and oil shale.

Sources: 
OPEC; World Bank; Bloomberg.

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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.

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