INDEPTH: OIL
OPEC: FAQs
CBC News Online | May 14, 2004
What is it?
OPEC, the Organization of Petroleum Exporting Countries, is made up of 11 of the world's biggest exporters of oil. Those countries are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela.
Membership is open to any country that is a substantial net exporter of oil. As well, each member country depends heavily on the income it earns from the export of oil.
The OPEC countries supply about 40 per cent of the world's daily demand for oil - and control about 75 per cent of the world's known reserves of crude oil.
Can any oil producing country join OPEC?
In theory, yes. As long as the applicant is a net exporter of crude oil products and has fundamentally similar interests to member states. The applicant must also be approved by the five nations that founded the organization in 1960: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.
The last new member to join was Nigeria, in 1971. Before then, the United States produced enough oil that it could determine pricing. As OPEC reached 11 members, the balance had shifted to that organization.
How does OPEC set prices?
The organization meets twice a year - or more if the situation warrants. Officially, OPEC says its goal is to "pursue stability and harmony in the petroleum market for the benefit of both oil producers and consumers."
In reality, the sale of oil is the main source of revenue for each member country, so the more they can charge for their oil, the better for them.
OPEC tries to maintain a minimum price for its oil by setting production quotas for each member country. If the world price of oil is softening, OPEC may decide to reduce production so there is less oil on the market. Less oil may increase demand, putting upward pressure on prices.
In theory, OPEC can also boost production to prevent a sudden rise in prices.
What other factors determine the price of oil?
Mainly, it's the economy. But there are several other factors.
When the world economy is weak - as it was through much of the 1990s - there is much less demand for oil, and the price may fall substantially, no matter what steps OPEC takes.
Mild winter weather in northern countries will also limit demand for oil. Colder than normal weather, though, can substantially increase demand.
Demand for oil in several parts of the world is key to OPEC's fortunes. For instance, Western Europe and Japan are heavily dependant on imported oil, as those regions produce very little of their own. The United States consumes more oil per capita than any other nation on earth, but that country produces much of what it needs at home.
Canada is a net exporter of oil. It produces more than enough to meet domestic demand.
Another factor that may affect the price of oil is the value of the U.S. dollar. The American dollar fell substantially against most other world currencies in the first few years of the new millennium. That means oil revenue for OPEC nations wasn't going as far. Rising prices help offset that loss.
In addition, not all OPEC members adhere to production quotas all the time. OPEC says its quotas are agreed upon by unanimous vote. In good economic times when demand for oil is strong, OPEC tends to have an easier time sticking to those quotas. But a variety of factors can sometimes come into play to persuade a member nation to increase its production.
What happens when the price of oil spikes?
Sometimes, nothing. Sometimes, lots.
If high oil prices are temporary, the effect on the world economy is usually negligible. But if high prices persist, the fallout can be serious.
In the wake of the Arab-Israeli war of October 1973, Arab nations refused to sell oil to countries that had supported Israel. The embargo lasted until November 1974. It was the first time oil had been used as a weapon. The consequences were severe. In the United States, there were long lineups for gasoline - and some stations ran out of fuel. The price of oil tripled overnight, causing the rate of inflation to spike.
The economy stumbled - and the combination of a stagnant economy and soaring inflation came to be known as "stagflation."
In Canada, it led to wage and price controls in 1975. And in 1980, the government of Prime Minister Pierre Trudeau set up the national energy program, which aimed to bring more Canadian ownership and control of the energy industry. It also set out to control prices. The NEP is still reviled in Western Canada - especially Alberta - as it was seen as a benefit to central Canada, an intrusion on provincial jurisdiction and an attempt to drain money from Alberta's coffers.
The escalating cost of oil changed consumption patterns as well. Legislation forced automakers to produce cars that were more fuel-efficient. Homeowners also made their homes more energy efficient. Demand for oil began falling and by the early 1980s, OPEC's attempts to keep oil prices high failed.
So for OPEC, maintaining the price of oil can be a delicate balancing act. If prices go too high, the global economy runs the risk of going into recession, which means less demand for oil. And if demand falls too much, prices can tumble.
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